UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 2007.
|__| 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 001-14907
IMMTECH PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1523370
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
One North End Avenue
New York, New York 10282
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (847) 573-0033
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Common Stock, par value $0.01 per share
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(Title of class)
Securities registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934:
None
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act of 1933. Yes |__| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes |__| No |X|
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 past 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Securities Exchange
Act of 1934.
Large Accelerated Filer |__| Accelerated Filer |X| Non-accelerated Filer |__|
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of 1934. Yes |__| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the last price at which the common
equity was last sold as of the last business day of the registrant's most
recently completed second fiscal quarter was $65,867,314.
As of June 9, 2007, the total number of shares of the registrant's common stock
outstanding was 15,374,334 shares.
Documents incorporated by reference. None.
IMMTECH PHARMACEUTICALS, INC.
TABLE OF CONTENTS
Page
PART I.
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES.....................................................49
ITEM 3. LEGAL PROCEEDINGS..............................................49
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............50
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................51
ITEM 6. SELECTED FINANCIAL DATA........................................54
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................56
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK....................................................67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................67
ITEM 9A CONTROLS AND PROCEDURES........................................67
ITEM 9B OTHER INFORMATION..............................................68
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............69
ITEM 11. EXECUTIVE COMPENSATION.........................................73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................88
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................88
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................89
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "may," "intends," "plans," "believes," "anticipates" or
"expects" or similar words and may include statements concerning our strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this annual report,
the following: (i) we are in an early stage of product development, (ii) the
possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our drug candidates not to
be viable, (v) uncertainties as to the requirement that a drug product be found
to be safe and effective after extensive clinical trials and the possibility
that the results of such trials, if completed, will not establish the safety or
efficacy of our drug candidates, (vi) risks relating to requirements for
approvals by governmental agencies, such as the United States Food and Drug
Administration (the "FDA"), before products can be marketed and the possibility
that such approvals will not be obtained in a timely manner or at all or will be
conditioned in a manner that would impair our ability to market our drug
candidates successfully, (vii) the risk that our patents could be invalidated or
narrowed in scope by judicial actions or that our technology could infringe upon
the patent or other intellectual property rights of third parties, (viii) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of commercializing a successful product or that
future financing will be completed on unfavorable terms, (ix) the possibility
that any products successfully developed by us will not achieve market
acceptance and (x) other risks and uncertainties that may not be described
herein. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PART I.
ITEM 1. BUSINESS
A. Business Overview
Immtech Pharmaceuticals, Inc. (the "Registrant") is focused on
developing and commercializing drugs for infectious diseases. We target diseases
with significant unmet medical needs and well-defined endpoints that can be
evaluated in clinical trials of relatively short duration. Our strategy is to
develop and commercialize a pipeline of new drugs to treat infectious diseases
and other disorders. Infectious diseases in the global population have increased
significantly during the past 20 years and, according to the World Health
Organization ("WHO"), are the most common cause of death worldwide. Relatively
few new drugs for the treatment of infectious diseases have been brought to
market during the past two decades. New
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drugs are needed to overcome the health risks of multi-drug resistant strains
and the increasing number of new pathogens that are causing serious illnesses or
deaths.
Our first drug candidate, pafuramidine maleate ("pafuramidine"), is
currently in two Phase III clinical trials, and two Phase II clinical trials.
One of our Phase III clinical trials is for the treatment of Pneumocystis
pneumonia ("PCP") in patients with HIV/AIDS, the other is for the treatment of
human African trypanosomiasis ("African sleeping sickness"). Our Phase II
clinical trials include a challenge study to assess the efficacy and safety of
pafuramidine for malaria prevention (prophylaxis) and a Phase IIb study in
malaria treatment.
Our Phase III clinical trials are based on Proof-of-Concept Phase II
clinical trials, which demonstrated pafuramidine's initial tolerability and
efficacy to treat PCP and African sleeping sickness. The design and planned
analyses for each of our Phase III clinical trials were reviewed and accepted by
the FDA under Special Protocol Assessments.
Pafuramidine has been granted orphan drug status by the FDA for the
treatment of PCP.
Our development program for pafuramidine for treating African sleeping
sickness has been designated "fast-track" by the FDA and is sponsored in full
through grants from The Bill and Melinda Gates Foundation (the "Foundation") to
the scientific consortium of universities, other research groups and scientists
with whom we collaborate and from whom we have rights to commercialize
technology discovered or developed by them. During the coming year, we plan to
initiate a Phase IIIb expanded access clinical trial for African sleeping
sickness. This expanded access clinical trial will study the effectiveness of
pafuramidine for treatment of African sleeping sickness in the usual care
settings in Africa.
Our current Phase II challenge clinical trial is designed to assess
whether pafuramidine prevents malaria infection in the liver, and thus prevents
later development of the disease in the bloodstream. In a challenge clinical
trial, healthy volunteers are exposed to mosquitoes infected with a
well-characterized strain of malaria. The strain of malaria used in this trial
can readily be treated with chloroquine. The volunteers are administered
pafuramidine or a placebo prior to being exposed to the mosquitoes and monitored
for symptoms of malaria (for more details on the challenge clinical trial, see
"Pafuramidine for Malaria Prophylaxis" below).
A new Phase IIb malaria treatment clinical trial is also in progress.
The main objective of this study is to determine the optimum dosing regimen
(total daily dose, frequency of dosing, and duration of treatment) that can
subsequently be studied in a Phase III clinical trial. Subsequent studies with
respect to the efficacy of pafuramidine in the prevention and treatment of
malaria will be designed by the Company using data from the ongoing Phase II
studies.
We have finalized the chemistry process for the synthesis of
pafuramidine and have demonstrated the process at the commercial scale. We have
completed the scale-up to commercial production at a contract Good Manufacturing
Practices ("GMP") manufacturing plant and the process has been validated. The
pafuramidine tablet formulation that is in use in our current two Phase III
clinical trials is presently undergoing process optimization and scale up for
commercial use.
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In addition to pafuramidine, Immtech has the worldwide exclusive
licenses to develop and commercialize an expanding library of compounds, some of
which are in early stages of research targeting fungal infections, the Hepatitis
C virus ("HCV"), drug resistant Gram positive bacteria and other serious
diseases. Our initial in vitro and in vivo assessments have identified several
potential lead compound candidates for each of these diseases. We continue to
test compounds to identify optimum lead candidates to move into preclinical
testing and subsequent human clinical and commercial development.
Immtech maximizes its research spending by collaborating with its
research partners and designing cost effective clinical trials targeting
indications amenable to shorter duration treatments with well-defined endpoints.
Our first drug candidate, pafuramidine, and several compounds for our discovery
programs in fungal diseases, bacterial infections, HCV and mycobacterium
tuberculosis ("TB"), were synthesized and initially evaluated by our research
partners at The University of North Carolina at Chapel Hill ("UNC-CH") and
Georgia State University ("Georgia State"). We have exclusive worldwide licenses
to develop and commercialize compounds discovered and patented by scientists at
these universities, and we have access to their large library of compounds. We
call these scientists, and others from whom we have rights to commercialize
technology discovered or developed by them, our consortium scientists. Our
license rights include 150 issued domestic U.S. and foreign patents that cover
many classes of novel chemical compounds.
A predecessor of the Registrant was incorporated under the laws of the
State of Wisconsin on October 15, 1984, and subsequently merged with and into
the Registrant on April 1, 1993. We began the development of drugs to treat
infectious disease in 1997. Our executive offices are located at One North End
Avenue, New York, New York 10282, telephone number (212) 791-2911 or toll-free
(877) 898-8038. Our common stock (the "Common Stock") is listed on The American
Stock Exchange ("AMEX") under the ticker symbol "IMM." Trading on the AMEX
commenced on August 11, 2003.
For the fiscal year ended March 31, 2007, we had revenues of
approximately $4.3 million and a net loss of approximately $11.1 million which
included non-cash compensation expenses of approximately $3.0 million related to
the vesting of Common Stock options and issuance of Common Stock during the
year. Our management believes we have sufficient capital for our planned
operations through our next fiscal year. The Company is a development stage
pharmaceutical company that operates as one segment.
We file annual, quarterly and current reports, proxy statements and
other documents with the United States Securities and Exchange Commission (the
"SEC"), under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). You may read and copy any materials that we file with the SEC at the
SEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Our reports, proxy statements and other documents
filed electronically with the SEC are available at the website maintained by the
SEC at http://www.sec.gov. We also make available free of charge on or through
our Internet website, http://www.immtechpharma.com, the annual, quarterly and
current reports, and, if applicable, amendments to those reports, filed or
furnished pursuant to Section 13(a) of the
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Exchange Act, as soon as reasonably practicable after we electronically file
such reports with the SEC. Information on our website is not a part of this
report.
When we use the words the "Company" or "Immtech" in this report, we are
referring to the Registrant and its subsidiaries. When we use the word "we,"
"our" or "us," we are referring to the Registrant and its subsidiaries or solely
the Registrant as the context requires.
B. Products and Programs
We are advancing pafuramidine in two Phase III pivotal clinical trials
and two Phase II clinical trials. In addition, a Phase IIIb expanded access
clinical trial in African sleeping sickness will be initiated in the coming year
to study the use of pafuramidine in the usual care setting. Additional Phase I
trials to support the New Drug Application ("NDA") submissions are also planned.
We have several other laboratory discovery programs in progress in which we are
testing the safety and potential effectiveness of compounds in vitro and in
animal models for various indications, including fungal diseases, bacterial
infections, HCV and TB.
1. Pafuramidine for PCP in HIV/AIDS Patients
PCP is a fungus that overgrows the air sacs in the lungs of people whose
immune systems have been significantly suppressed. PCP can cause
life-threatening pneumonia. PCP was previously known as Pneumocystis carinii
pneumonia and is now called Pneumocystis jiroveci pneumonia. PCP is one of the
most common opportunistic infections affecting HIV/AIDS patients. Other
populations susceptible to PCP include patients on chemotherapy, organ
transplant recipients, and infants with congenital immunosuppression. According
to Frost & Sullivan, in a 2005 report, an estimated 1 million adults and
children are afflicted with PCP worldwide, and every year approximately 5
million more need prophylaxis against the infection.
i. Pivotal Phase III Clinical Trial
Our Phase III pivotal clinical trial of pafuramidine to treat PCP in
patients with HIV/AIDS is being conducted under an Investigational New Drug
("IND") application filed with the FDA. Our Phase III clinical trial is ongoing
in the United States and in five Latin American countries. This is a comparative
clinical trial versus the current standard of care,
trimethoprim-sulfamethoxazole ("TMP-SMX"). The main objective of this Phase III
clinical trial is to determine whether the efficacy of pafuramidine is
comparable to the efficacy of TMP-SMX. The study will also compare the safety
and tolerability of pafuramidine and TMP-SMX, with the expectation that
pafuramidine may be better tolerated.
Our Phase III pivotal clinical trial protocol to study pafuramidine for
treatment of PCP was established under a Special Protocol Assessment filed with
the FDA. A Special Protocol Assessment means that the clinical trial's design
and analysis plan of the clinical trial has been reviewed and agreed to by the
FDA prior to the start of the clinical trial. The clinical trial design is set
forth below:
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Clinical Trial Trial Design / Phase End Points Sites/Size
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o Pafuramidine o Phase III pivotal o Primary efficacy - o Argentina,
for treatment of PCP Clinical success of pafuramidine Chile, Colombia,
o Randomized and double-blind compared to TMP-SMX at Mexico, Peru,
Day 22 United States
o Oral pafuramidine dosed twice o Safety and tolerability of
daily (100 mg) for 14 days pafuramidine compared to o Approximately
TMP-SMX 270 patients
o Compared to TMP-SMX dosed 3 o Improvement in clinical
times daily for 21 days signs and symptoms
o After completion of treatment,
all patients are put on TMP-SMX for
PCP prophylaxis for another 21 days
We plan to submit a NDA to the FDA (and similar applications with
regulatory agencies in other countries) for approval of pafuramidine to treat
PCP in patients with HIV/AIDS. Upon receipt of appropriate regulatory approvals,
we plan to sell pafuramidine for the treatment of PCP in the United States,
Africa, India and other countries where patients are afflicted with the disease.
We are also considering additional studies to evaluate pafuramidine as a
potential drug for PCP prophylaxis. Patients who have completed treatment for
PCP or who have been identified to be at risk for PCP are recommended to receive
prophylaxis for as long as they remain at risk for PCP. We are currently
conducting a study in animals to assess the efficacy of pafuramidine versus
TMP-SMX in preventing PCP. Upon completion of the animal study, we plan to
initiate a pilot study of PCP prophylaxis with pafuramidine in patients with
HIV. Patients who have completed treatment for PCP in our Phase III clinical
trial would be eligible to participate in this study of PCP prophylaxis.
ii. Earlier PCP Clinical Trials
Our Phase III pivotal clinical trial is based on Phase II clinical trial
results which we believe demonstrate an acceptable safety profile and efficacy
of pafuramidine in treating PCP in HIV/AIDS patients. In 2002, we received
approval from the FDA and the Ministry of Health in Peru to commence a pilot
Phase II clinical trial of pafuramidine to treat PCP. All clinical patients had
AIDS and had failed or were intolerant of standard therapy for PCP prior to
enrollment in the trial. Two dosing regimens were studied in this trial. The
first 8 patients received 50 mg of pafuramidine twice per day for 21 days and,
subsequently, 27 patients received 100 mg of pafuramidine twice per day for 21
days.
Results of the Phase II clinical trial demonstrated that the clinical
signs and symptoms of PCP improved in all patients treated with pafuramidine,
and pafuramidine was well tolerated, with no significant adverse events reported
other than those determined by the principal investigator to not be related to
the administration of pafuramidine. No patient was given further treatment for
PCP during the trial, which included a 3 week follow-up period after completing
the 21 day pafuramidine treatment. Patients treated with the higher dosage
regimen generally showed faster symptom improvement and required a shorter time
to achieve a steady state of
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drug concentration in the blood. Results of this study were presented in
abstract form at the European Congress of Clinical Microbiology and Infectious
Diseases, Copenhagen, April 2005.
2. Pafuramidine for African Sleeping Sickness Treatment
African sleeping sickness is a parasitic disease that is spread by
tsetse flies in sub-Saharan Africa. Doctors Without Borders estimates that the
geographical range in sub-Sahara Africa where African sleeping sickness occurs
encompasses 36 countries, where more than 60 million people are at risk of
contracting the disease. The WHO estimates that there are 50,000 to 70,000
active cases of African sleeping sickness in central Africa. A current WHO
survey reports that an "epidemic situation" for African sleeping sickness exists
in the sub-Saharan region of Africa which includes the countries of Angola,
Sudan, and the Democratic Republic of the Congo ("DRC"). Existing treatments for
African sleeping sickness can be highly toxic and cannot be administered orally.
African sleeping sickness is fatal if not treated.
i. Pivotal Phase III Clinical Trial
Pafuramidine is currently in a Phase III clinical trial for first stage
African sleeping sickness caused by Trypanosoma brucei gambiense, the West
African form of sleeping sickness ("West African sleeping sickness"). If
regulatory approval is obtained, pafuramidine would be the first oral therapy
for this disease. Pafuramidine is expected to be available in a stable and
convenient oral formulation that we expect will allow for treatment to reach
more patients than can be reached with currently available injectable drugs.
We are conducting the Phase III clinical trial for the treatment of
first stage African sleeping sickness in six clinical sites in DRC, Angola, and
Sudan. First stage means the parasite has not reached the patient's central
nervous system. We have completed enrollment of 274 patients, including 16
adolescents, 13 pregnant women, and 55 women who were nursing infants; 2 women
were both pregnant and nursing infants. Patients in the study were administered
a study drug, which was either pafuramidine or pentamidine (a dicationic drug on
the market that is the current standard of care for first stage African sleeping
sickness). Follow up visits are in progress and patients will be followed until
24 months after their treatment has elapsed. No patient has prematurely
discontinued study drug treatment due to an adverse event, and no serious
adverse events considered related to the study drug have been reported. Three
patients have died during follow up in this trial in the past year; none of
these deaths were related to African sleeping sickness or to receiving the study
drug. In addition, three serious adverse events of death were observed in
children of nursing mothers who are patients in this study (all not related to
the study drug): a 29 month old child died 11 months after the mother's last
dose of the study drug due to probable measles; a 22 month old child died 11
months after the mother's last dose of the study drug due to severe malnutrition
of the marasmus type; and a 3 day old newborn infant died 77 days after the
mother's last dose of the study drug due to neonatal sepsis presumably
contracted from non-sterile material at the time of birth. Immtech is blinded
from information about whether a patient received pafuramidine or pentamidine
while the trial is ongoing.
The independent Data Safety Monitoring Board ("DSMB") has reviewed the
safety data from this clinical trial twice during the past year, as specified in
the DSMB's charter. The DSMB
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will also conduct the formal, protocol-specified interim analysis of the
efficacy and safety of pafuramidine compared to pentamidine when approximately
125 patients have completed the 12 month follow up visits.
Our goals for the coming year are to complete the interim analysis,
which is planned for the second half of 2007, and to complete 12 month follow up
visits of all patients enrolled in the trial by mid-year 2008. A NDA submission
to the FDA will then be prepared, assuming that the results of the interim
analysis are favorable for the study to continue, the rate of participation in
follow up evaluations is adequate to provide the database required to meet the
primary endpoint for the study, and the political situation in the countries
where the study is hosted allows for continued monitoring of the investigator
sites. We believe that this study will provide the adequate efficacy and safety
data required to support regulatory approval for the use of pafuramidine to
treat first stage African sleeping sickness.
Our Phase III pivotal clinical trial design was established under a
Special Protocol Assessment with the FDA. The FDA has agreed to review our trial
data after patient 12 month follow up visits have been completed, and to
consider "accelerated approval" at that time. Under the FDA's accelerated
approval regulations, the FDA is authorized to approve drugs that have been
studied for their safety and efficacy in treating serious or life-threatening
illnesses and that provide meaningful therapeutic benefit to patients over
existing treatments based upon either a surrogate endpoint that is reasonably
likely to predict clinical benefit or on the basis of an effect on a clinical
endpoint other than patient survival (see also "Governmental Regulation" below).
Final regulatory approval for the indication requires submission of patients' 24
month follow up data as validation of the surrogate endpoint used in the trial
(12 month follow up based on clinical and parasitological endpoints). The trial
design is set forth below:
Clinical Trial Trial Design / Phase End Points Sites/Size
------------------------ ------------------------------------ --------------------------------------- -----------------------
o Pafuramidine o Phase III pivotal o Primary efficacy - o Democratic Republic
for the treatment of Clinical and parasitological of the Congo,
first stage African o Randomized, sponsor blinded cure (absence of parasite in Angola and Sudan
sleeping sickness to treatment regimen blood, lymph nodes and CSF) 12
months after treatment o Approximately 250
o Oral pafuramidine dosed patients, including
twice daily (100 mg) for 10 days o Secondary - Clinical cure pregnant women, nursing
24 months after treatment mothers and adolescents
o Compared to intramuscular 12 years and older
pentamidine dosed once daily for o Safety and tolerability of
7 days pafuramidine compared to
pentamidine
Our clinical trials of pafuramidine to treat African sleeping sickness
are being conducted under an IND application filed with the FDA. The trials are
financially supported by a grant to UNC-CH from the Foundation under a Clinical
Research Sub-contract (defined in "Funding for African sleeping sickness
Research and Clinical Trials" below). On April 23, 2004, the FDA granted
fast-track drug development designation to use pafuramidine to treat African
sleeping sickness.
We plan to submit a NDA to the FDA (or similar applications with
regulatory agencies in foreign countries) for accelerated approval of
pafuramidine to treat African sleeping sickness, if we meet the designated end
points in our Phase III pivotal clinical trial as outlined above.
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Additional studies, including a Phase IV clinical trial, may also be required.
(See "Governmental Regulation" in this section below.)
If our NDA for pafuramidine to treat African sleeping sickness receives
approval from the FDA or similar recognized government regulatory agencies in
foreign countries (pursuant to accelerated approval or otherwise), we intend to
apply to the WHO to have pafuramidine listed as a WHO Recommended Drug, and
eventually to be included on their Essential Medicines List. We believe
inclusion of pafuramidine as a WHO Recommended Drug will enable us to sell
pafuramidine to treat African sleeping sickness, while continuing to perform any
required post-approval studies. The WHO generally accepts marketing approvals
from regulatory agencies in the United States, European Union and Japan, as well
as other countries with established regulatory agencies. In addition to becoming
a WHO Recommended Drug, the distribution of pharmaceutical drugs in sub-Saharan
Africa requires individual approval from each country where the drugs are sold.
We anticipate a six to nine month lead time to manufacture, receive export
clearance and deliver our first drug shipment after receipt of a purchase order
pursuant to the above plan, although there could be delays that result in longer
lead times.
ii. Phase IIIb Expanded Access African Sleeping Sickness Clinical
Trial
We plan to initiate a Phase IIIb clinical trial for African sleeping
sickness trial in approximately 6 countries in sub-Saharan Africa. This study
will evaluate the safety, tolerability and effectiveness of pafuramidine in the
usual care setting for African sleeping sickness. The study will assessment of
the outcomes of treatment in settings where African sleeping sickness is
currently treated (national sleeping sickness hospitals and clinics) and also in
the public health clinics that do not currently treat African sleeping sickness
patients. The study is a key component to the Global Access Plan for making
pafuramidine available for distribution and treatment in the specific health
centers of countries where African sleeping sickness is endemic. The Global
Access Plan and the clinical study plan include strategies for education of
health care workers in the diagnosis of African sleeping sickness and treatment
with oral pafuramidine. In addition, the study will evaluate the proposed
commercial packaging for the drug. Up to 1,000 patients will be treated with
pafuramidine. This study would provide continued access to pafuramidine oral
treatment for first stage African sleeping sickness until the drug is approved
for use and distributed as commercial product in the country(ies) of study. The
study will be initiated in the second half of 2007, after the study protocol and
informed consent forms have been reviewed and approved by the respective
independent Institutional Review Boards and Ethics Committees.
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Clinical Trial Trial Design / Phase End Points Sites/Size
------------------------ ------------------------------------- ----------------------------------- ------------------------
o Pafuramidine o Phase IIIb o Primary efficacy - o Democratic
for the treatment of Clinical cure (absence of Republic of the Congo,
first stage African o Oral pafuramidine dosed parasite in blood, lymph nodes Republic of Congo,
sleeping sickness twice daily (100 mg) for 10 days and CSF) 12 months after Uganda, and others
treatment
o Drug may be administered in o Secondary - Clinical cure o Up to 1000
the hospital setting or taken 24 months after treatment; patients, including
under direct supervision in the compliance with treatment in the pregnant women, nursing
outpatient setting outpatient setting; feasibility mothers and adolescents
of treatment in currently 12 years and older
existing clinics and with
currently available diagnostic
tools
o Safety and tolerability of
pafuramidine
iii. Earlier Phase II African Sleeping Sickness Clinical Trials
In September 2002, we completed an open-label, non-controlled Phase IIa
study of pafuramidine in the DRC to treat African sleeping sickness. Initial
results showed that the compound was well tolerated with no significant adverse
side-effects and 93% of the patients (27 of 29) treated were cleared of the
African sleeping sickness parasite (blood and lymph node samples taken 2 days
after completion of treatment were parasite free). Clearance of the parasite at
the end of treatment testing was the primary endpoint for this study. Patients
evaluated at three and six months after treatment remained parasite free;
subsequently, however, five relapses were detected. Follow-up testing for this
trial was completed in March 2005, with 76% of the patients at 24 months after
treatment (the secondary endpoint for the study) remaining clear of the African
sleeping sickness parasite.
In April 2003, we commenced the first phase of a multi-phase, multi-site
Phase II/III randomized, open-label, clinical trial to treat African sleeping
sickness with pafuramidine, initially designed to enroll 350 people. The first
part of the study included 81 patients who were randomized to receive either
twice daily dosing of 100 mg of pafuramidine for five days or pentamidine
intramuscular injections for seven days, the current standard first line therapy
for African sleeping sickness. The clinical trial was conducted in two sites,
Maluku and Vanga, in the DRC. In February 2004, treatment of the first 81
patients was completed. The results from the initial 81 patients continued to
show pafuramidine to be well tolerated with a favorable safety profile. Five
patients treated with pafuramidine for 5 days did not clear the parasite from
their lymph nodes and received additional treatment. The patients have
subsequently completed the 24 month follow-up testing. The cure rate (the
patients are alive and have no evidence of parasites from blood, lymph nodes and
cerebrospinal fluid ("CSF") surrounding the brain and spinal cord) at the end of
the study (24 months after completion of treatment) for pafuramidine
administered for 5 days was 85% and the "cure rate" for pentamidine was 98%.
Based on the data from the 5-day treatment study with pafuramidine, 30
patients were enrolled into the second part of the trial and were administered
pafuramidine 100 mg twice daily
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for 10 days in an open-label design. All 30 patients cleared the African
sleeping sickness parasite from blood, lymph nodes and CSF at the end of the
treatment period and those returning for testing at the 3-month follow-up, which
is the primary endpoint for the trial, remained disease free. No significant
adverse events were reported. Based on these results, we began the Phase III
clinical trial in July 2005. Subsequently, 3 relapses have been reported, with a
current "cure rate" of 90%. During the past year, one of these patients died
from second stage African sleeping sickness. This patient initially declined
rescue treatment and subsequently failed treatment with melarsoprol after the
disease had progressed. All subjects have now completed the 24 month follow up
evaluations and collection of the data is currently in progress.
Results of the Phase II studies were presented in abstract form at the
international meeting of Medicine and Health in the Tropics, Marseille, France,
in September 2005.
iv. Funding for African Sleeping Sickness Research and Clinical
Trials
Our development of pafuramidine for treating African sleeping sickness
has been supported financially by a grant to UNC-CH from the Foundation. To
date, the Foundation has granted to UNC-CH approximately $40 million for the
development of pafuramidine to treat this disease. This total includes a grant
to UNC-CH for $22.6 million in 2006 to complete the Phase III clinical trial and
commercial development of pafuramidine to treat African sleeping sickness,
initiate a Phase IIIb expanded access clinical trial, develop a pediatric
formulation for use by infants and children, and test pafuramidine in a pilot
program for the East African form of African sleeping sickness caused by West
African sleeping sickness. Pursuant to the Clinical Research Subcontract and
Amended and Restated Clinical Research Subcontract (as defined below), Immtech
has received approximately $17.3 million of the approximately $40 million
granted to UNC-CH by the Foundation. During the past year, epidemiological data
have demonstrated that very few infants and children under the age of six years
are diagnosed with first stage African sleeping sickness. Thus, the pediatric
formulation development is currently on hold. A separate study of children ages
6-12 years, who will be treated with pafuramidine tablets, is in the planning
stages.
In November 2000, the Foundation awarded a $15.1 million grant to a
research group led by UNC-CH to develop new drugs to treat African sleeping
sickness and leishmaniasis. The research group led by UNC-CH includes Immtech
and, in addition to UNC-CH, five other universities and research centers around
the world that collectively employ scientists and physicians considered to be
the foremost experts in one or both of these diseases.
On March 29, 2001, we entered into a clinical research subcontract
("Clinical Research Subcontract") with UNC-CH to advance the work funded by the
Foundation's $15.1 million grant. Under the terms of the Clinical Research
Subcontract, we are responsible for the oversight of Phase II and Phase III
clinical trials of the drug candidate pafuramidine for African sleeping
sickness. The terms of the Clinical Research Subcontract require us to segregate
the Clinical Research Subcontract funds from our other funds and to use the
proceeds only for developing a drug to treat African sleeping sickness.
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In June 2003, the Foundation awarded an additional $2.7 million grant to
the UNC-CH led research group to (i) expand the Phase IIb trial of pafuramidine
to treat African sleeping sickness into the pivotal multi-phase, multi-site
Phase II/III randomized clinical trial described below, (ii) implement an
improved method of synthesizing pafuramidine to reduce drug manufacturing costs
and (iii) improve the formulation of pafuramidine to facilitate increased drug
absorption into blood circulation. Under the Clinical Research Subcontract,
approximately $1.0 million of the additional grant was paid to us in June 2003
and approximately $1.4 million was paid to us on March 14, 2005 (approximately
$1.4 million of the $3.0 million March 14, 2005 payment described below was
attributable to our services under the additional grant).
Effective March 28, 2006, we amended and restated the Clinical Research
Subcontract (the "Amended and Restated Clinical Research Subcontract") to
continue the ongoing Phase III clinical trial of pafuramidine to treat African
sleeping sickness and to prepare the drug for commercialization, conduct an
expanded access trial, develop a pediatric formulation for infants and children,
and test pafuramidine in a pilot study of the East African form of African
sleeping sickness.
Under the Amended and Restated Clinical Research Subcontract, we
received from the UNC-CH led consortium a five year funding commitment of
approximately $13.6 million to support the Phase III trial and development of
the drug for commercialization, and to conduct the additional research. To date,
we have received $5.6 million of the approximately $13.6 million for the first
year of funding.
In the aggregate, we have received the following under the Clinical
Research Subcontract: (a) $4.3 million paid to us in fiscal year 2001 to fund
Phase II clinical trials to test the safety/tolerability and efficacy of
pafuramidine against African sleeping sickness in approximately 30 patients; (b)
approximately $1.4 million paid to us in September 2002 upon the successful
completion of our Phase IIa clinical trial; (c) approximately $2.0 million paid
to us in December 2002 upon the delivery of the final Phase IIa report in
respect of the Phase II clinical trial; (d) approximately $1.0 million paid to
us in June 2003 relating to the additional grant for improving drug synthesis
and formulation; (e) approximately $3.0 million paid to us on March 14, 2005 (a
portion of which was from the additional acceleration grant described above) to
fund Phase IIb and Phase III clinical trials to test the efficacy and
safety/tolerability of pafuramidine against African sleeping sickness in a
larger, more diverse group of patients in calendar year 2005; and (f)
approximately $5.6 million paid to us in May 2006, with a commitment for an
additional approximately $8 million over the next four years to fund completion
of the Phase III clinical trial, development of pafuramidine for
commercialization and new research activities.
3. Pafuramidine for Malaria Prophylaxis (Prevention)
According to the WHO, malaria is endemic in over 100 countries. Those
countries are visited by more than 125 million international travelers every
year. International travelers are especially at risk of contracting malaria
because their immunity to malaria is not as developed as people who live in
endemic areas and the disease is often diagnosed incorrectly or late after
travelers' return home.
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Based on in vitro and clinical trial data, we believe pafuramidine is a
promising drug for prevention of malaria for travelers. In clinical studies to
date, pafuramidine did not cause the significant neurological, gastrointestinal,
photosensitivity-related side effects or psychotic episodes that are associated
with other therapies currently used in malaria prophylaxis.
We have initiated a Phase II malaria challenge clinical trial in healthy
volunteers. In this study, volunteers are exposed to mosquitoes infected with a
well-characterized strain of malaria that is readily treated with chloroquine,
as the malaria parasite used in this study is highly sensitive to chloroquine.
Nineteen volunteers are participating in this study, which includes a screening
period, a dosing period and a period following exposure to the mosquitoes in
which subjects are monitored for the development of disease due to malaria. The
subjects are randomized to receive one of three treatments prior to mosquito
exposure: (a) one pafuramidine 100 mg tablet is administered on Day 8 (8 days
before challenge with the malaria-infected mosquitoes), (b) one pafuramidine 100
mg tablet is administered on Day 1 (the day prior to challenge), or (c) a
placebo is administered on both days. Clinical trial volunteers are regularly
monitored for up to 3 months after the exposure, including assessment of fever
or other clinical symptoms of malaria, and also by regular blood sampling to
detect the presence of malaria parasites. The volunteers who show any signs or
symptoms of malaria are promptly treated with chloroquine and carefully
monitored until they are determined to be free of disease. Pafuramidine will be
considered an appropriate candidate for additional prophylaxis studies if none
of the volunteers in at least one of the pafuramidine treatment groups develops
malaria during the study. The results of this study are expected to be available
by end of the calendar third quarter 2007.
If the results of this trial are favorable, Immtech will design Phase
III pivotal trials and request an end-of-Phase II meeting with regulators to
discuss the registration program for malaria prophylaxis. Alternatively, Immtech
may study other prophylaxis regimens in Phase II trials before entering into a
Phase III program.
4. Pafuramidine for Malaria Treatment
Malaria is the second most common infectious disease in the world and is
a significant threat to over 2.6 billion people exposed to this mosquito-borne
disease. Each year an estimated 300 to 500 million new clinical cases of malaria
occur globally that result in 1.5 to 2.0 million deaths. The WHO estimates that
over a million children infected with malaria die in Africa every year; one
child dies every 30 seconds. Many of the available therapies for treating
malaria have high failure rates because the parasites that cause malaria have
developed resistance to older drugs. Malaria is a significant cause of severe
disease and death in infants, small children and pregnant women, and some of the
currently used drugs are not recommended for use in these populations.
Pafuramidine is in use in our Phase III clinical trial to treat pregnant women
and adolescents for African sleeping sickness. Studies of pafuramidine in
juvenile rats and reproductive adult rats and rabbits have not identified any
risks to these vulnerable populations. We believe pafuramidine will be
demonstrated to be a safe and well-tolerated treatment of malaria in pregnant
women and infants.
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i. Phase IIb Trial
In April 2007, we commenced enrollment in a new Phase IIb clinical trial
of pafuramidine in the treatment of uncomplicated malaria. The study is being
conducted in Thailand and will include up to 140 patients. The study is a
partial factorial design and comprised of 2 stages. The first stage will
randomize 60 patients (15 per group) to evaluate the variable components in
dosing of pafuramidine tablets, including total daily dose (400 mg vs 600 mg),
dosing frequency (once daily vs divided twice daily), and in combination with
artesunate (Yes vs No). A full factorial design would test all 8 possible
combinations of these 3 factors; the partial factorial design will test 4 of the
possible combinations (see Study Design below) and then be evaluated with
statistical methods. The Independent Data Monitoring Committee, sponsor and
principal investigator will review the results from the first stage and
determine which regimens from the possibilities in the full factorial design
should be further studied with up to an additional 80 patients in stage 2. The
study is designed such that if none of the 3 day regimens is considered
acceptable, the stage 2 treatments will be administered for 5 days. All patients
in stage 1 will provide blood samples for analysis of concentrations of
pafuramidine and DB75, the active drug produced from the prodrug pafuramidine.
All patients will be treated and monitored for 28 days, which is the primary
endpoint for the study.
Patients' blood samples will be evaluated for parasites prior to
enrollment in the study to establish a baseline and checked at regular times
during the therapy, and then periodically until 28 days after commencement of
the study. For purposes of this study, patients will be considered "cured" if
the malaria parasites were eliminated 7 days after the start of therapy and did
not recur within 28 days after the start of treatment.
Clinical Trial Trial Design / Phase End Points Sites/Size
------------------------------------------------------------------------------------------------------------------------------
o Pafuramidine o Phase IIb o Primary efficacy - o Single site in
with or without Clinical cure (absence of Thailand
artesunate for the o Stage 1: treatment for 3 days parasite in blood and no
treatment of symptoms of disease) 28 days
uncomplicated - Pafuramidine 600 mg QD post dosing o Up to 140
malaria patients, 60 patients
- Pafuramidine 200 mg BID o Secondary - Clinical cure in stage 1; up to 80
7 days after dosing patients in stage 2
- Pafuramidine 400 mg QD plus
artesunate o Safety and tolerability of
pafuramidine
- Pafuramidine 300 mg BID plus
artesunate o Pharmacokinetic data of
pafuramidine and DB75
o Stage 2: treatment for 3 of concentrations in blood
5 days
- Regimens to be determined at
completion of stage 1
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Data from this trial will be used to design the Phase III treatment
trial of pafuramidine to support the indication of malaria prophylaxis. In
addition, if the data are favorable, we may pursue the indication of malaria
treatment, which will require at least 2 pivotal trials with the regiment that
would be expected to be registered for this indication.
ii. Phase IIb Trial
In May 2005, we commenced enrollment in a Phase IIb clinical trial of
pafuramidine to treat uncomplicated P. falciparum malaria. This study was
conducted in Thailand and included 120 patients. The study was designed to
compare the efficacy of three-day regimens of pafuramidine given alone (as
mono-therapy) and in combination with artesunate (a drug for treating malaria
that is derived from the artemisia plant). For comparison purposes, a separate
control group received a combination of the drugs artesunate and mefloquine,
which is a standard treatment for malaria in Thailand. All patients were treated
and then monitored for 28 days.
The patients who participated in the malaria trial were randomly
assigned to groups, each of which were treated for 3 days using different dose
regimens of pafuramidine; patients received either 200 mg of pafuramidine
capsules once per day, either alone or in combination with artesunate, or 100 mg
of pafuramidine capsules twice per day. Patients' blood samples were evaluated
for parasites prior to enrollment in the study to establish a baseline and
checked at regular times during the 3 days of therapy, and then periodically
until 28 days after commencement of the study. For purposes of this study,
patients were considered "cured" if the malaria parasites were eliminated 7 days
after the start of therapy and did not recur within 28 days after the start of
treatment. A control group received a standard combination therapy regimen and
the results from that group were compared to the patients treated with
pafuramidine.
Study results showed a greater than 90% clearance of the parasite from
the blood for patients receiving pafuramidine at 7 days. However, at 28 days,
patients receiving pafuramidine had rates of recurrence of disease exceeding
that of standard therapy. The study established the minimally effective dose of
pafuramidine to be 100 mg BID for 3 days, which yielded a clinical cure rate of
65%. The combination of pafuramidine 200 mg once daily in combination with
artesunate was also minimally effective, with a clinical cure rate of 74%.
Determining the minimally effective dose is one of the objectives of a Phase IIb
study. The study also identified a minimum blood concentration of DB75, the
active drug produced from the prodrug pafuramidine, which was associated with 28
day clinical cure in patients achieving that blood concentration. These data are
critical for understanding the activity of pafuramidine, and for design of
subsequent malaria treatment studies.
It was found that average and minimum blood concentrations of DB75, the
active drug produced from the prodrug pafuramidine, in these patients were lower
than previously predicted from studies in healthy adults (see related Phase I
study, below). The pharmacokinetics of DB75 in healthy volunteers appears to be
different from that of patients with acute malaria. Overall, the Phase IIb study
demonstrated that the tested 3 day dosing regimens of pafuramidine alone and in
combination with artesunate were not appropriate for treatment of acute
uncomplicated malaria.
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iii. Earlier Malaria Treatment and Supporting Clinical Trials
In December 2003, we reported results of our Phase IIa malaria trial
that was conducted in Thailand. The patients who participated in this malaria
trial were treated with 100 mg capsules of pafuramidine twice per day for 5
consecutive days. For purposes of this study, patients were considered to be
"cured" if patients remained free of malaria parasites at 28 days after the
start of treatment. All patients were monitored for 28 days after the start of
treatment to ensure that the malaria parasite had been eliminated.
Of the 32 patients in the Phase IIa malaria trial, nine were infected
with Plasmodium vivax and 23 were infected with Plasmodium falciparum (the most
deadly form of malaria contracted by humans). The P. falciparum patients were
treated with pafuramidine as a monotherapy (not in combination with any other
drugs). Ninety-six percent of patients (22 of 23) treated for P. falciparum were
considered to be cured at the end of the study. Blood samples taken from two of
the patients prior to 28 days after the start of treatment contained malaria
parasites but, after more extensive testing of the genetics of the parasites, an
independent third party concluded that one of the two failed patients had
cleared the original malaria parasite and had acquired a new malaria infection.
The nine P. vivax patients were treated with pafuramidine for five days; eight
of them subsequently received oral primaquine (a drug used as standard therapy
for P. vivax treatment) and were considered cured at Day 28. One patient
experienced a relapse of P. vivax prior to receiving the scheduled primaquine
treatment and was given alternative therapy with a successful outcome.
Pafuramidine was well tolerated with no significant adverse side-effects
reported. The results of this study have been published in the Journal of
Infectious Diseases, 2005; Vol. 192: pp. 319-22.
A related Phase I study conducted in late 2004 in Paris, France
evaluated the potential for dosing of pafuramidine for three days. The
pharmacokinetics of pafuramidine in different dosing regimens was evaluated in
54 healthy volunteers (pharmacokinetics is the study of the uptake, distribution
and rate of movement of a drug in the body from the time it is absorbed until it
is eliminated). We enrolled people from African, Asian and Caucasian populations
to evaluate the differences between once per day and twice per day dosing, with
doses ranging from 200 mg to 600 mg per day for three days. The data from this
trial indicated that pafuramidine dosed at 200 mg once per day reached blood
levels that were expected to have a therapeutic effect in treating malaria in
three days. This shortened treatment period (3 days vs 5 days) and once daily
dosing was expected to increase compliance with a prescribed treatment regimen
by malaria patients. However, as noted above, the results in healthy volunteers
did not accurately predict the pharmacokinetics of pafuramidine or DB75, the
active drug, in patients with acute malaria.
iv. Funding for Malaria Research and Clinical Trials
On November 26, 2003, we entered into a testing agreement (the "MMV
Testing Agreement") with the Medicines For Malaria Venture ("MMV"), a foundation
established in Switzerland, and UNC-CH, pursuant to which we, with the support
of MMV and UNC-CH, began studying pafuramidine as a treatment for malaria. The
Phase I study, Phase IIa study, and Phase IIb study referenced above were
sponsored in full by MMV. Additional support was also received for
pharmaceutical drug development and animal toxicology studies. In the twelve
month period ended March 31, 2006, we received approximately $2.6 million from
MMV. The 3
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day therapy cure rates in the first Phase IIb study did not meet the MMV product
target profile, and MMV funding for pafuramidine for malaria treatment was
discontinued.
5. AQ13 Product for Malaria Treatment
In February 2006, Tulane University granted to us an exclusive license
to develop, manufacture and commercialize a group of 4-aminoquinoline drugs for
treatment, prophylaxis and diagnosis of infectious diseases (the "Tulane License
Agreement"). These compounds have similar chemical structure and mechanisms of
action to chloroquine, which was the mainstay of malaria treatment for the later
half of the twentieth century. The project has been put on hold because the
documents requested from Tulane University to continue with the FDA were not
provided.
6. Drug Discovery and Development Programs
i. Antifungal Program
We have identified several aromatic cationic compounds with the
potential to treat both Candida and Aspergillus infections, which account for a
significant percentage of morbidity and mortality in hospitalized patients. In
vitro studies conducted by our consortium scientists and an independent
laboratory have identified several compounds that display broad based antifungal
activity against Candida, Aspergillus and Cryptococcus fungi. From these
studies, we have identified a lead group of compounds that display significant
in vitro activity against both drug-sensitive and drug-resistant strains of
fungi. We are currently optimizing the lead compounds and are testing them in in
vivo models of pharmacokinetics, efficacy, and safety. Predefined development
criteria will be used to select one or more of the new analogues to advance as
pre-clinical development candidates.
The market for an effective antifungal drug was estimated by DataMonitor
in 2003-04 to be approximately $4.0 billion annually and growing due to the
increasing number of patients who are susceptible to fungal diseases, such as
patients undergoing cancer chemotherapy, patients with HIV and those who have
undergone organ transplants. In addition, the frequency of nosocomial infection
(infection acquired while a patient in a hospital) caused by fungi is now the
third most common cause of sepsis, replacing Escherichia coli (E. coli). Sepsis
is an uncommon but serious consequence of an infection that quickly overwhelms
the immune system and can rapidly lead to death. Recently, strains of fungi
resistant to currently available treatments have developed. There is a
significant opportunity for new drugs effective against specific strains of
fungi, including drug resistant strains, as well as drugs with broad spectrum
effectiveness for both Candida and Aspergillus infections. We believe our orally
deliverable compounds would be well suited for treatment of these infections if
effective.
ii. Hepatitis C
According to a December 2005 Decision Resources, Inc. report, the number
of prevalent cases of HCV in the major markets exceeded 11 million in 2004. The
HCV drug market, approximately $3 billion in 2005, is projected to grow to $9
billion in 2012 and over $10 billion annually by 2014. Growth in use of HCV
therapies also will come from increasing numbers of
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patients whose disease do not respond to initial treatments, and are being
retreated with second courses of standard and/or other new therapies.
We base our research activities in HCV upon published findings that show
compounds active in an HCV-related animal virus, bovine viral diarrhea virus
("BVDV"), may have similar activity against HCV. We have tested several classes
of compounds against the BVDV virus in vitro, and several compounds exhibited
potent inhibitory effects on the BVDV viral life cycle. We have identified a
class of compounds that prevents BVDV infection at very low concentrations in
cell culture, and have evaluated these compounds in in vitro cell culture assays
of HCV infection. Certain classes of compounds exhibit potent cross-reactivity
in this assay and preliminary time of addition studies point to the compounds
having an effect on early events in the virus life-cycle. This important
proof-of-concept is being followed up by new medicinal chemistry efforts to
further optimize the pharmacokinetics, safety and pharmacological activity
characteristics of the lead compound series. The potential novel mechanism of
action suggests a compound from this class could have synergies with other
existing and developing anti-HCV compounds.
iii. Tuberculosis Program
TB is the world's number one killer among infectious diseases, causing
over two million deaths per year, according to the WHO and the United States
Center for Disease Control and Prevention (the "CDC"). TB is a difficult
infection to treat because the bacteria that cause the disease can "hide" inside
white blood cells where they avoid the immune system and are less susceptible to
antibiotic drugs. The CDC reports that about two billion people, or one-third of
the world's population, are infected with TB, including 10 to 15 million people
in the United States. The disease is spreading rapidly in developing countries
in Asia, Africa, South America and Eastern Europe, and is becoming increasingly
problematic in developed countries. Japan has declared TB its most threatening
disease, and the United States has reported an alarming increase in multi-drug
resistant ("MDR") TB cases. The combination of the rapid spread of TB and
increasing cases of MDR strains of the TB organism make this infectious disease
a major health threat throughout the world.
In collaboration with the National Institutes of Health (the "NIH") and
Dr. Scott G. Franzblau of the University of Illinois at Chicago ("UIC"), we have
screened over 800 of our dication compounds for potential drug candidates to
treat TB. Of the 50 compounds showing favorable activity, 5 compounds showed in
vitro activity comparable or superior in performance to drugs currently
available to treat TB. Based on results from in vitro and in vivo testing, we
are making progress with the most active group of compounds and are optimizing
the chemical structures to enhance the pharmaceutical properties in preparation
for upcoming in vivo tests of antibacterial activity and safety. Selection of
development candidates will follow successful testing of the new analogues
against predefined criteria.
iv. Antibacterial Program
We have recently identified a unique class of compounds within our
proprietary library that demonstrate significant activity in inhibiting the
growth of antibiotic-susceptible and antibiotic-resistant, Gram positive
pathogens, frequently referred to as "superbugs." The
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underserved need for new antibiotics to combat superbugs represents a
significant potential future opportunity for us and these compounds will serve
as a starting point for the discovery and development of a potential new
clinical candidate.
In 2004, the global antibacterial market was valued at approximately $24
billion. Following the introduction of virtually every class of antibiotics in
the past 50 years, resistance has emerged that limits or is threatening to limit
their efficacy. Drug resistance has and will continue to be an incessant source
of medical need. Novel classes of antibacterials are needed to combat MDR
infections and expand physician treatment options. Rapid uptake of products
focused on drug-resistant infections has been driven by the increasing numbers
of immunocompromised patients in hospitals.
Several of our compounds show potent, submicrogram/mL activity against a
panel of methicillin-resistant staph (methicilln-resistant Staphylococcus
aureus, "MRSA"), methicillin-sensitive staph ("MSSA"), and vancomycin-resistant
enterococcus ("VRE"). Selected compounds are being tested in in vivo models of
efficacy. The first compound to be tested demonstrated potent activity against a
MSSA infection in a neutropenic mouse thigh infection model. Medicinal chemistry
lead optimization is in progress to improve the pharmacokinetics, safety and
efficacy profile.
MRSA is a type of bacteria that is resistant to certain antibiotics
including methicillin, oxacillin, penicillin and amoxicillin.
Healthcare-associated MRSA and VRE occurs most frequently among persons in
hospitals and healthcare facilities who have weakened immune systems. MRSA is a
major cause of hospital-acquired infections that are becoming increasingly
difficult to combat because of emerging resistance to all current antibiotic
classes and its appearance as an outpatient infection in individuals with normal
immune systems. According to a May 2006 Espicom Business Intelligence report,
the market for anti-MRSA antibiotics is expected to reach $2 billion by 2006.
v. Other Programs and Trials
We have data related to two other indications - neurological disorders
and diabetes - that indicates to us that compounds from our library could be
appropriate and promising for treating these disorders. In addition, research
indicates that our aromatic cationic compounds may be useful as small molecule
drugs that can potentially selectively control gene expression.
C. Technology
1. Aromatic Cationic Compounds
The pharmaceutical compounds made by the scientists at our consortium
universities UNC-CH and Georgia State generally fall under the broad class of
"aromatic cationic" compounds. Aromatic cations are molecules that have at least
one positively charged end and at least one benzene ring in their structure. The
cationic species in our library are largely comprised of amidines, substituted
amidines, amidine bioisosteres and prodrugs. Many of the active compounds in our
library are aromatic dications. Our library of compounds also includes a
subclass of aromatic compounds containing a single positive charge
(monocations).
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One mechanism of action of many of our aromatic cationic compounds
involves binding to segments of deoxyribonucleic acid ("DNA"). Some aromatic
cation drugs bind in the minor groove of DNA and in so doing, interfere with the
activity of enzymes needed for microbial and cell growth. The composition of the
dications, with positive charges on the ends and linkers of different length,
shape, flexibility and curvature, allows binding to specific sites of the DNA or
other receptors, interfering with key biochemical processes fundamental to
microbe growth and development.
Scientists at UNC-CH and Georgia State used pentamidine as a template to
design aromatic compounds that have significant advantages over pentamidine.
While pentamidine has broad based activity against many diseases including
fungal infections and cancer, it can only be administered intravenously, by
intramuscular injection, or via inhalation, and is therefore costly and
difficult to administer outside of a hospital setting. In addition, pentamidine
has many adverse effects and due to its narrow margin of safety, it needs to be
administered by a person trained in the use and administration of this drug.
Consortium scientists have developed a large and growing library of
compounds based on decades of work on aromatic compounds. Several compounds have
been tested in a wide variety of assays and animal models for activity against
various diseases. These compounds and their methods of use and manufacture are
the subject of over 150 patents that have issued to date to our partner
universities, patents to which we have exclusive, worldwide licenses (see
"Collaborations" section below).
2. Prodrug Formulations
One of the many significant accomplishments of our research and
development program was the discovery of technology to make aromatic cationic
drugs orally deliverable. This proprietary technology temporarily masks the
positive charges of the aromatic amidine, enabling it to effectively move across
intestinal barriers into blood circulation. Once the prodrug is in the
circulation, the masking functional groups are removed enzymatically thereby
releasing the active drug. Until now, the inability to deliver active compounds
across the digestive membrane into the bloodstream (and through the blood-brain
barrier, if so desired) had reduced the attractiveness of aromatic amidines as
effective drug treatments. The scientists at our consortium universities have
developed and patented prodrugs and the synthesis methods to make these
compounds allowing for oral administration. Pafuramidine is the first of this
group of compounds to be studied in Phase II and III clinical trials.
Pafuramidine is metabolized to DB75 in the body, which is the active form of the
drug.
D. Collaborations
1. Scientific Consortium at UNC-CH, Georgia State, Duke, and Auburn
On January 15, 1997, we entered into a consortium agreement with UNC-CH
and a third party ("Consortium Agreement") (to which each of Georgia State, Duke
University and Auburn University shortly thereafter joined (collectively with
UNC-CH, the "Scientific Consortium"). The Consortium Agreement provided that
aromatic cations developed by the scientific consortium members were to be
exclusively licensed to us for global commercialization. As contemplated by the
Consortium Agreement, on January 28, 2002 we entered into a license
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agreement with the consortium whereby we received the exclusive license to
commercialize all future technology and compounds ("future compounds") developed
or invented by one or more of the consortium scientists after January 15, 1997
(the "License Agreement"), and which also incorporated into such License
Agreement our license with the consortium with regard to compounds developed on
or prior to January 15, 1997 (defined in the Consortium Agreement as "current
compounds"). That License Agreement was amended and restated effective as of
March 24, 2006 (the "Amended and Restated License Agreement").
Pursuant to the Consortium Agreement, the worldwide license and
exclusive right to commercialize (together with related technology and patents),
use, manufacture, have manufactured, promote, sell, distribute or otherwise
dispose of any and all products based directly or indirectly on aromatic cations
developed by the consortium on or prior to January 15, 1997 (current compounds),
was transferred to us by the third party. The January 28, 2002, License
Agreement granted to us a similar worldwide license and exclusive right to
commercialize discoveries covering products based on aromatic cationic
technology developed by the consortium after January 15, 1997 (defined in the
License Agreement as "future compounds") and incorporated the worldwide license
and exclusive right to commercialize discoveries assigned to us by the
Consortium Agreement. The key modifications included in the Amended and Restated
License Agreement are expansion of the Company's rights to future technology
developed by the consortium with future grants and increased access to the
consortium's patent counsel.
The Consortium Agreement gives us rights to this consortium of
scientists' large and growing library of aromatic cationic compounds and to all
future aromatic cation technology designed by them. The consortium scientists
are considered to be among the world's leading experts in aromatic cations,
infectious diseases, computer modeling of cationic pharmaceutical drugs and
computer-generated drug designs.
The Consortium Agreement requires us to (i) reimburse UNC-CH, on behalf
of our consortium scientists for certain patent and patent-related fees, (ii)
pay certain milestone payments, and (iii) make royalty payments based on revenue
derived from the licensed technology. Each month on behalf of the consortium
scientist or university, as the case may be, UNC-CH submits to us an invoice to
reimburse patenting-related fees incurred prior to the invoice date and related
to patents and patent applications to which we hold a license under the
Consortium Agreement. For the fiscal year ended March 31, 2007, we reimbursed
UNC-CH approximately $704,000 for such patent and patent-related costs, and
through March 31, 2007, we have reimbursed to UNC-CH approximately $3,038,000 in
the aggregate for patent and patent-related costs. We are also required to make
milestone payments in the form of issuance of 100,000 shares of our Common Stock
to the consortium upon the filing of our first new NDA or an Abbreviated New
Drug Application ("ANDA") based on consortium technology developed and are
required to pay to UNC-CH on behalf of the consortium (other than Duke
University), (i) royalty payments capped at a percentage of our net worldwide
sales of "current products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively), and (ii) a
percentage of any fees we receive under sublicensing arrangements. With respect
to products or licensing arrangements emanating from Duke University technology,
we are required to negotiate in good faith with UNC-CH (on behalf of
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Duke University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
2. Clinical Research Agreement with UNC-CH
In November 2000, the Foundation awarded to UNC-CH a $15.1 million grant
to develop new drugs to treat African sleeping sickness and leishmaniasis (the
"Foundation Grant"). On March 29, 2001, we entered into a Clinical Research
Subcontract with UNC-CH, whereby we were to receive up to $9.8 million to be
paid contingent upon UNC-CH's receipt of the Foundation Grant. Our continued
funding under the Clinical Research Subcontract was subject to certain terms and
conditions over the succeeding five year period. We were required to conduct
certain clinical and research studies related to the Foundation Grant. In April
2003, the Foundation increased the Foundation Grant by approximately $2.7
million for the expansion of Phase IIb/III clinical trials to treat African
sleeping sickness and improved manufacturing processes. As of March 31, 2006, we
had received, pursuant to the Clinical Research Subcontract, inclusive of our
portion of the Foundation Grant increase, a total amount of funding of
approximately $11.7 million. In March 2006, we amended and restated the Clinical
Research Subcontract with UNC-CH and UNC-CH in turn obtained an expanded funding
commitment of $13.6 million from the Foundation. Under the amended and restated
agreement, the Company received on May 24, 2006 the first payment of
approximately $5.6 million of a 5 year $13.6 million contract, bringing funds
awarded under all Foundation Grants to approximately $17.3 million.
3. License Agreement with Tulane
On February 10, 2006, we entered into the Tulane License Agreement which
granted to us a worldwide license and exclusive right to commercialize Tulane
University's platform of 4-aminoquinoline compounds for the treatment,
prophylaxis and diagnosis of infectious diseases. Under the terms of the
agreement, we will pay a capped and volume reduced per unit royalty for sales of
licensed products. We also granted to Tulane University 5,000 restricted shares
of our Common Stock on the effective date of the agreement and agreed to grant
to Tulane University 10,000 more restricted shares upon initial approval of a
NDA related to a licensed product by a recognized regulatory authority,
including the United States, European or Japanese regulatory authorities. The
project has been put on hold because the documents requested from Tulane
University to continue with the FDA were not provided.
4. Malaria Program Agreements with Medicines for Malaria Venture
On November 26, 2003, we entered into the MMV Testing Agreement,
pursuant to which we, with the support of MMV and UNC-CH, conducted a proof of
concept study of pafuramidine in clinical trials with the goal of obtaining
marketing approval of a product for the treatment of malaria. Through March 31,
2006, the Company had received approximately $5.6 million under this agreement.
Immtech and MMV agreed in December 2005 to terminate the November 2003
agreement.
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E. Our Subsidiaries
1. Immtech Hong Kong Limited
On January 13, 2003, we entered into an agreement with an investor who
owned, through Lenton Fibre Optics Development Limited ("Lenton"), a Hong Kong
company, a 1.6 plus acre commercial real estate parcel located in a "free-trade
zone" called the Futian Free Trade Zone, Shenzhen, in the People's Republic of
China ("PRC"). Under the agreement, we purchased an 80% interest in Lenton by
issuing to the investor 1.2 million unregistered shares of our Common Stock. We
subsequently resold to the investor our interest in Lenton and the parcel of
land in exchange for 100% ownership in the improved property described below
under the headings "Super Insight Limited" and "Immtech Life Science Limited."
In connection with the sale of Lenton, we acquired 100% ownership of Immtech
Hong Kong Limited ("Immtech HK"), a Hong Kong company, including Immtech HK's
interest in Immtech Therapeutics Limited ("Immtech Therapeutics").
Subsequently, through a sublicense agreement, we transferred to Immtech
HK the rights licensed to us under the Consortium Agreement to develop and
license the aromatic cation technology platform in certain Asian countries and
to commercialize resulting products. We intend to use Immtech HK as a vehicle to
further sublicense rights to develop specific indications through other
subsidiaries formed for the purpose that are expected to partner with investors
who fund development costs of those indications.
2. Immtech Therapeutics Limited
Immtech Therapeutics, a Hong Kong company, provides assistance to
healthcare companies seeking access to the PRC to conduct clinical trials and to
manufacture and/or distribute pharmaceutical products in the PRC.
Immtech Therapeutics is majority owned by Immtech HK. Its minority
owners are Centralfield International Limited (a British Virgin Island ("BVI")
company and wholly-owned subsidiary of TechCap Holdings Limited ("TechCap")) and
Bingo Star Limited ("Bingo Star"). TechCap has assets and resources in the PRC
upon which Immtech Therapeutics may draw. Bingo Star has substantial financial
and medical expertise and resources located in Hong Kong and the PRC.
3. Super Insight Limited
On November 28, 2003, we purchased (i) from an investor, 100% of Super
Insight Limited ("Super Insight"), a BVI company, and Immtech Life Science
Limited ("Immtech Life Science") (Immtech Life Science is a wholly-owned
subsidiary of Super Insight) and (ii) from Lenton, a 100% interest in Immtech
HK. As payment for the acquisition, we transferred to the investor our 80%
interest in Lenton and $400,000 in cash.
4. Immtech Life Science Limited
Immtech Life Science, a Hong Kong company, owns two floors of a building
(the "Property") located in the Futian Free Trade Zone, Shenzhen, in the PRC. We
are exploring the
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possibility of housing a pharmaceutical production facility for the manufacture
of drug products here or at other locations within PRC. The Property comprises
Level One and Level Two of a building named the Immtech Life Science Building.
The duration of the land use right associated with the building on which the
Property is located is 50 years, which expires May 24, 2051.
Under current law, we would enjoy reduced tax on the business located on
the Property because the local government has granted incentives to business in
high technology industrial sectors located in the Futian Free Trade Zone. Our
intended pharmaceutical manufacture use would qualify for the tax incentives.
F. Manufacturing
1. First Drug Candidate---Pafuramidine Maleate
Immtech has finalized the drug substance process scale-up to commercial
scale and the process has been validated. The micronization process for the drug
substance has also been validated. The drug product (tablet) process is
undergoing optimization and validation, and is expected to be completed by the
second half of 2007. Packaging for the drug to be used in the Phase IIIb study
and for commercial product has been selected, and packaging studies are in
progress.
2. Aromatic Cationic Compounds
The scientists at our consortium universities, specifically the
synthetic chemistry laboratories at Georgia State and UNC-CH, have the
capability to produce and inventory small quantities of aromatic cations under
license to us. To date, Georgia State and UNC-CH have produced and supplied the
aromatic cations requested in the quantities required under various testing
agreements with third parties. We believe that these scientists will continue to
produce and deliver small quantities of compounds as needed for testing
purposes.
3. Third Party Sources
In April 2005, we entered into an agreement with Dr. Reddy's
Laboratories, Inc. ("DRL") to improve a selected step in the synthetic process
for producing pafuramidine, which work has been successfully completed. Since
April 2005, we have entered into several more work orders with DRL to (i)
prepare the pafuramidine compound for production of commercial quantities for
clinical trials, registration and sale, (ii) develop a micronization process for
pafuramidine, (iii) prepare the formulated pafuramidine containing drug for
clinical trials and registration, and (iv) conduct analytical characterization
studies. DRL is a global pharmaceutical company that manufactures and markets
API (Bulk Actives), Finished Dosages and Biologics in over 100 countries
worldwide, in addition to having a drug discovery pipeline. DRL also provides
contract services for chemical process development, formulation development, and
commercial manufacturing.
In January 2005, we entered into an agreement with UPM Pharmaceuticals,
Inc. ("UPM") for production and scale-up of pafuramidine tablets. In May 2005,
we entered into a work order with UPM to develop and manufacture placebo tablets
for the PCP Phase III clinical trial, which
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has subsequently been completed. In January 2007, we entered into a work order
to produce additional pafuramidine tablets for use in clinical trials. UPM has
previously conducted analytical method validation and stability studies for us,
as well as manufacturing supplies for clinical trials. UPM is a leading provider
of contract drug development, manufacturing, analytical and regulatory services.
UPM provides formulation, current Good Manufacturing Practice ("cGMP")
manufacturing, clinical trial materials, analytical testing and related
regulatory documentation for pharmaceutical companies.
In September 2005 we entered into an agreement with Fisher Clinical
Services, Inc. ("FCS") to conduct feasibility studies and to manufacture
comparator drug products for the PCP Phase III clinical study. Since September
2005, we have placed several work orders with FCS to package drugs for clinical
studies and label clinical supplies. In addition, work orders have been placed
to package drug for stability evaluations and conduct analytical method
development and stability (through Lancaster Laboratories). The analytical
method development has been completed and the stability studies are ongoing. FCS
is a global leader in providing clinical trial supply and distribution services.
4. Property in the PRC
See disclosure above under the heading "Immtech Life Science Limited".
The Property is located in a mixed-use office park and is suitable for
administrative offices and research and development operations, as well as
potentially housing a small-scale pharmaceutical production facility capable of
producing up to 10 tons of drug product per year. In addition, we have begun the
site selection process to find a location in the PRC for a manufacturing plant
capable of producing up to 60 tons of GMP quality drug product per year.
G. Strategy
Our strategy is to develop and commercialize a pipeline of new drugs to
treat infectious diseases and other disorders. Infectious diseases in the global
population have increased significantly during the past 20 years and are the
most common cause of death worldwide according to the WHO. Relatively few new
drugs for the treatment of infectious diseases have been brought to market
during this period. New drugs are needed to overcome the health risks of MDR
strains and the increasing number of new pathogens that are causing these
diseases.
Our business model is a new paradigm focused on reducing the time and
cost to develop drugs aimed at solving global health issues. Our drug discovery
activities include programs in fungal diseases, bacterial infections, HCV, and
TB.
Two other indications - neurological disorders and diabetes - are
therapeutic areas for which we believe our aromatic cation technology platform
is appropriate and promising. In addition, recent research indicates that the
aromatic cation compounds may be useful as small molecule drugs that can
potentially selectively control gene expression and provide treatment for cancer
and disorders of genetic origin.
We believe we have been successful in developing a drug with a low
toxicity profile that is orally available using our aromatic cation platform and
prodrug technologies. We have leveraged our scientific partners and foundation
funding while advancing our technology and
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clinical trials in niche markets such as African sleeping sickness, as well as
in larger markets like malaria. We are advancing our pipeline in antifungal,
antibacterial, anti-HCV and anti-TB drugs, and continue to pursue other
attractive therapeutic opportunities.
We intend to proceed with the development and commercialization of
aromatic cations (which include dications) as drug products pursuant to the
Consortium Agreement as follows:
o generate revenues by sales of drug products to commercial entities,
governments, international organizations and foundations expedited
through the FDA's accelerated approval program and/or other
countries' similar programs;
o conduct a pilot study using pafuramidine as a malaria prophylaxis;
o complete Phase III pivotal clinical trial of pafuramidine to treat
PCP;
o complete Phase III pivotal clinical trial of pafuramidine to treat
African sleeping sickness;
o utilize the FDA's fast-track designation of pafuramidine for the
treatment of African sleeping sickness to potentially expedite
commercial sales through accelerated approval of our NDA or any
foreign accelerated drug approval procedure; and
o select new drug candidates to target fungal diseases, bacterial
infections, HCV and TB.
Our strategy is to commercialize aromatic cations and our prodrug
technology, and generate revenues, first in niche markets by selling drugs for
serious or life-threatening diseases where we believe (i) our drug candidates
provide meaningful therapeutic benefits over existing therapies and (ii)
programs are available for expedited regulatory review due to the lack of
available effective treatments for such diseases. We intend to apply for and
utilize FDA fast-track and accelerated approval or corollary foreign accelerated
approval programs to accelerate commercialization of these drug candidates. We
believe our first drug candidates will demonstrate the power and versatility of
the aromatic cation platform and prodrug technologies thereby helping us to
expedite acceptance of the platform and prodrug technologies and to obtain
regulatory approval of our drug candidates for other indications.
H. Research and Development
Our success will depend in large part on our ability to commercialize
products from a large library of well defined compounds to which we hold
worldwide licenses and exclusive rights to commercialize.
We estimate that we have spent approximately $1.5 million, $4.3 million,
and $5.8 million respectively, in fiscal years ended March 31, 2005, 2006 and
2007, on Company sponsored research and development and approximately $5.8
million, $5.4 million, and $3.0 million respectively, in fiscal years ended
March 31, 2005, 2006 and 2007, on research and development sponsored by others.
All research and development activity for fiscal years ended
-25-
March 31, 2005, 2006 and 2007 has been in support of our pharmaceutical
commercialization effort.
I. Patents and Trade Secrets
Our pharmaceutical compounds, including pafuramidine, are protected by
multiple patents secured by our research partners. We consider the protection of
our proprietary technologies and products to be important to our business. We
rely on a combination of patents, licenses, copyrights and trademarks to protect
these technologies and products. Protection of our aromatic cation technology
platform includes exclusive licensing rights to, as of March 2007, 204 patents
and patent applications, 104 of which have issued in the United States and in
various global markets. We also own separately six issued patents that have been
assigned to us. Generally, United States patents have a term of 17 years from
the date of issue for patents issued from applications submitted prior to June
8, 1995, and 20 years from the date of filing of the application in the case of
patents issued from applications submitted on or after June 8, 1995. Patents in
most other countries have a term of 20 years from the date of filing the patent
application. One hundred forty one of our licensed patents and patent
applications, which includes 5 licensed United States patents and patent
applications, were submitted after June 8, 1995, including patents covering
pafuramidine, its active metabolite drug form (DB75) and our latest prodrug
formulation processes.
Our policy is to file patent applications and defend the patents
licensed to and/or owned by us covering the technology we consider important to
our business in all countries where such protection is available and worthwhile.
We intend to continue to file and defend patent applications we license or own.
Although we pursue and encourage patent protection and defend our patents and
those licensed to us, obtaining patents for pharmaceutical drugs and their
specific uses involves complex legal and factual questions and consequently
involves a high degree of uncertainty. In addition, others may independently
develop similar products, duplicate our potential products or design around our
patent claims. Because of the time delay in patent approval and the secrecy
afforded patent applications during the first 18 months after they are filed, we
do not know if other applications, which might have priority over our
applications, have been filed. We also rely on trade secrets, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position.
Publication of discoveries in the scientific or patent literature tends
to lag behind actual discoveries by several months at a minimum. As a result,
there can be no assurance that patents will be issued from any of our patent
applications or from applications licensed to us. The scope of any of our issued
patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier.
The patents and patent applications to which we hold an exclusive
worldwide license right include claims to pharmaceutical compounds, methods of
their manufacture, and their uses to treat conditions related to diseases
including PCP, TB, Cryptosporidium parvum, Giardia lamblia, Leishmania mexicana
amazonensis, Trypanosoma brucei rhodesiense, various fungi, Plasmodium
falciparum, Alzheimer's disease, amyloidosis, Type II diabetes, HCV, BVDV and
-26-
HIV. We are obligated to reimburse or pay for the patents and patent prosecution
process for any patent applications which claim subject matter to which we want
to have an exclusive license. Patents and patent applications also protect
certain processes for making prodrugs and the uses of compounds to detect and
treat specific diseases as well as for a new method for making chemical
compounds that stack on top of each other (called dimers) when they are bound to
DNA.
We also rely in part on trade secret, copyright and trademark protection
of our intellectual property. We protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants.
Generally, employees and consultants sign agreements to assign to us their
interests in patents and copyrights arising from their work for us. Key
employees also generally agree not to engage in unfair competition with us
during and after their employment with us. We have additional secrecy measures
as well. However, these agreements can be breached and, if they were, there
might not be an adequate remedy available to us. Also, a third party could learn
our trade secrets through means other than by breach of our confidentiality
agreements, or our trade secrets could be independently developed by our
competitors.
J. Governmental Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture, marketing and distribution of drug products.
These agencies and other federal, state and local entities regulate research and
development activities, including the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our drug candidates.
Our ability to market our drug products will depend on receiving
marketing authorizations from the appropriate regulatory authorities. The
foreign regulatory approval process generally includes all of requirements
associated with FDA approval; however, the requirements governing the conduct of
clinical trials and marketing authorization vary widely from country to country.
At present, foreign marketing authorizations are applied for at a national
level, although within the European Community ("EC") registration procedures are
available to companies wishing to market a product to more than one EC member
state. If the relevant regulatory authority is satisfied that adequate evidence
of safety, quality and efficacy of a drug candidate has been presented, a
marketing authorization typically will be granted.
Once regulatory approval is obtained for an indication applicable to
diseases endemic in third-world countries, we intend to apply to the WHO to have
the approved drug listed for such indication as a WHO Recommended Drug and for
inclusion on the WHO's Essential Medicines List. The WHO generally accepts
marketing approvals from drug regulatory agencies in the United States, UK,
European Union and Japan as well as other countries with established regulatory
agencies for the Essential Medicines List. In most cases, inclusion as a WHO
Recommended Drug and/or inclusion on the Essential Medicine List is the primary
requirement to selling drugs in the countries where we intend to sell
pafuramidine to treat African sleeping sickness and other tropical diseases. We
believe we will then be able to sell our products in such countries while
continuing to perform post-approval studies as and if required.
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In the United States, the FDA regulates drug products under the Federal
Food, Drug, and Cosmetic Act ("FFDCA") and its implementing regulations. The
process required by the FDA before our drug candidates may be marketed in the
United States generally involves the following:
o completion of extensive preclinical laboratory tests, preclinical
animal studies and formulation studies, all performed in accordance
with FDA's good laboratory practice ("GLP") regulations;
o submission to the FDA of an investigational new drug application
which must become effective before human clinical trials may begin;
o completion of adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug candidate for each
proposed indication in accordance with ethical principles and good
clinical practice, or GCP, requirements;
o submission to the FDA of a new drug application, or NDA;
o satisfactory completion of a FDA pre-approval inspection of the
manufacturing facilities at which the drug is produced to assess
compliance with cGMP regulations; and
o FDA review and approval of the NDA prior to any commercial marketing,
sale or shipment of the drug.
The testing and approval process requires substantial time, effort and
financial resources, and we cannot be certain that any approvals for our drug
candidates will be granted on a timely basis, or at all.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as studies to evaluate toxicity in animals.
The results of preclinical tests, together with manufacturing information and
analytical data, are submitted as part of an IND application to the FDA. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30 day time period, raises concerns or questions about the
conduct of the clinical trial, including concerns that human research subjects
will be exposed to unreasonable health risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the clinical trial can
begin. Our submission of an IND may not result in FDA authorization to commence
a clinical trial. A separate submission to an existing IND must also be made for
each successive clinical trial conducted during drug development, and the FDA
must grant permission before each clinical trial can begin. Further, an
independent institutional review board, or IRB, for each medical center
proposing to conduct the clinical trial must review and approve the plan for any
clinical trial before it commences at that center, and the IRB must monitor the
study until completed. The FDA, the IRB, or the sponsor may suspend a clinical
trial at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk. Clinical testing also
must satisfy extensive GCP regulations, including regulations governing informed
consent.
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Clinical Trials. For purposes of a NDA submission and approval, clinical
trials are typically conducted in 3 sequential phases, but may be conducted in 4
phases, which may overlap:
o Phase I: Studies are initially conducted in a limited population to
test the drug candidate for safety, dose tolerance, absorption,
metabolism, distribution and excretion in healthy humans or, on
occasion, in patients, such as AIDS or cancer patients.
o Phase II: Studies are generally conducted in a limited patient
population to identify possible adverse effects and safety risks, to
determine the potential efficacy of the drug for specific targeted
indications and to determine dose tolerance and optimal dosage.
Multiple Phase II clinical trials may be conducted by the sponsor to
obtain information prior to beginning larger and more expensive Phase
III clinical trials.
o Phase III: These are commonly referred to as pivotal studies. When
Phase II evaluations demonstrate that a dose range of the drug has a
therapeutic effect and an acceptable safety profile, Phase III trials
are undertaken in larger patient populations to further evaluate
dosage, to provide substantial evidence of clinical efficacy and to
further test for safety in an expanded and diverse patient population
at multiple, geographically-dispersed clinical trial sites.
o Phase IV: In some cases, the FDA may condition approval of a NDA for
a drug candidate on the sponsor's agreement to conduct additional
clinical trials to further assess the drug's safety and effectiveness
after NDA approval. Such post approval trials are typically referred
to as Phase IV studies.
New Drug Application. The results of drug development, preclinical
studies and clinical trials are submitted to the FDA as part of a NDA. The NDA
also must contain extensive manufacturing information. Once the submission has
been submitted for filing, by law the FDA has 30 days to accept or reject the
NDA. Once filed, the FDA has a stated goal of reviewing most applications and
responding to the sponsor within 10 months. The review process can be
significantly extended by FDA requests for additional information or
clarification. The FDA may refer the NDA to an advisory committee for review,
evaluation and recommendation as to whether the application should be approved.
The FDA is not bound by the recommendations of an advisory committee, but it
generally follows them. The FDA may deny approval of a NDA if the applicable
regulatory criteria are not satisfied, or it may require additional clinical
data and/or an additional Phase III pivotal clinical trial. Even if such data
are submitted, the FDA may ultimately decide that the NDA does not satisfy the
criteria for approval. Data from clinical trials are not always conclusive and
the FDA may interpret data differently than we or our collaborators interpret
the data. Once issued, the FDA may withdraw product approval if ongoing
regulatory requirements are not met or if safety problems occur after the drug
reaches the market. In addition, the FDA may require testing, including Phase IV
studies, and surveillance programs to monitor the safety of approved products
which have been commercialized, and the FDA has the power to prevent or limit
further marketing of a drug based on the results of these post-marketing
programs. Drugs may be marketed only for the approved indications and in
accordance with the provisions of the approved label. Further, if
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there are any modifications to the drug, including changes in indications,
labeling, or manufacturing processes or facilities, we may be required to submit
and obtain FDA approval of a new NDA or NDA supplement, which may require us to
develop additional data or conduct additional preclinical studies and clinical
trials.
Fast-track Designation. FDA's fast-track program is intended to
facilitate the development and to expedite the review of drugs that are intended
for the treatment of a serious or life-threatening condition which demonstrate
the potential to address unmet medical needs for the condition. Under the
fast-track program, the sponsor of a new drug may request the FDA to designate
the drug for a specific indication as a fast-track drug concurrent with or after
the IND is filed for the drug candidate. The FDA must determine if the drug
qualifies for fast-track designation within 60 days of receipt of the sponsor's
request.
If fast-track designation is obtained, the FDA may initiate review of
sections of a NDA before the application is complete. This rolling review is
available if the applicant provides, and the FDA approves, a schedule for the
submission of the remaining information and the applicant pays applicable user
fees. However, the time period specified in the Prescription Drug User Fees Act,
which governs the time period goals that the FDA has committed to reviewing an
application, does not begin until the complete application is submitted.
Additionally, the fast-track designation may be withdrawn by the FDA if the FDA
believes that the designation is no longer supported by data emerging in the
clinical trial process.
In some cases, a fast-track designated drug may also qualify for one or
more of the following programs:
o Priority Review. Under FDA policies, a drug is eligible for priority
review, or review within a 6 month time frame from the time a
complete NDA is accepted for filing, if the product provides a
significant improvement compared to marketed products in the
treatment, diagnosis, or prevention of a disease. A fast-track
designated drug would ordinarily meet the FDA's criteria for priority
review. We cannot guarantee any of our products will receive a
priority review designation, or if a priority designation is
received, that review or approval will be faster than conventional
FDA procedures, or that FDA will ultimately grant product approval.
There can be no guarantee that we will be granted priority review
quickly or at all or, if granted, that such status will not be later
revoked.
o Accelerated Approval. Under the FDA's accelerated approval
regulations, the FDA is authorized to approve drugs that have been
studied for their safety and effectiveness in treating serious or
life-threatening illnesses and that provide meaningful therapeutic
benefit to patients over existing treatments based upon either a
surrogate endpoint that is reasonably likely to predict clinical
benefit, or on the basis of an effect on a clinical endpoint other
than patient survival. In clinical trials, surrogate endpoints are
alternative measurements of the symptoms of a disease or condition
that are substituted for measurements of observable clinical
symptoms. A drug approved on this basis is generally subject to
rigorous post-market compliance requirements, including the
completion of Phase IV or post-approval studies to validate the
surrogate endpoint or to confirm the effect on the clinical endpoint.
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Failure to conduct required post-approval studies, or to validate a
surrogate endpoint or confirm a clinical benefit during
post-marketing studies, will allow the FDA to withdraw the drug from
the market on an expedited basis. All promotional materials for drugs
approved under accelerated regulations are subject to prior review by
the FDA. There can be no guarantee that we will be granted
accelerated approval quickly or at all or, if granted, that such
approval will not be later revoked.
When appropriate, we and our collaborators intend to seek fast-track
designation and/or accelerated approval for our drug candidates, including
pafuramidine. On April 23, 2004, the FDA designated pafuramidine for the
treatment of African sleeping sickness as a fast-track product. We cannot
predict whether any of our other drug candidates or proposed indications will
obtain a fast-track and/or accelerated approval designation, or, if obtained,
the ultimate impact, if any, of the fast-track or the accelerated approval
process on the timing or likelihood of FDA approval of any of our proposed
products.
Satisfaction of FDA regulations and requirements, or similar regulations
and requirements of state, local and foreign regulatory agencies typically takes
several years and the actual time required may vary substantially based upon the
type, complexity and novelty of the drug or disease. Government regulation may
delay or prevent marketing of drug candidates for a considerable period of time
and impose costly procedures upon our activities. The FDA or any other
regulatory agency may not grant approvals for new indications for our drug
candidates on a timely basis, if at all. Even if a drug candidate receives
regulatory approval, the approval may be significantly limited to specific
disease states, patient populations and dosages. Further, even after regulatory
approval is obtained, later discovery of previously unknown problems with a drug
may result in restrictions on the drug or even complete withdrawal of the drug
from the market. Delays in obtaining, or failures to obtain, regulatory
approvals for any of our drug candidates would harm our business. In addition,
we cannot predict what adverse governmental regulations may arise from future
United States or foreign governmental action.
Other Regulatory Requirements. Any drugs manufactured or distributed by
us or our collaborators pursuant to FDA approvals are subject to continuing
regulation by the FDA, including recordkeeping requirements and reporting of
adverse experiences associated with the drug. Drug manufacturers and their
subcontractors are required to register their establishments with the FDA and
certain state agencies, and are subject to periodic unannounced inspections by
the FDA and certain state agencies for compliance with ongoing regulatory
requirements, including cGMPs, which impose certain procedural and documentation
requirements upon us and our third party manufacturers. Failure to comply with
the statutory and regulatory requirements can subject a manufacturer to legal or
regulatory action, such as Warning Letters, suspension of manufacturing, seizure
of drug, injunctive action or possible civil penalties. We cannot be certain
that we or our present or future third party manufacturers or suppliers will be
able to comply with the cGMP regulations and other ongoing FDA regulatory
requirements. If our present or future third party manufacturers or suppliers
are not able to comply with these requirements, the FDA may halt our clinical
trials, require us to recall a drug from distribution, or withdraw approval of
the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of
drugs, including standards and regulations for direct-to-consumer advertising,
off-label promotion,
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industry-sponsored scientific and educational activities and promotional
activities involving the Internet. A company can make only those claims relating
to safety and efficacy that are approved by the FDA. Failure to comply with
these requirements can result in adverse publicity, Warning Letters, corrective
advertising and potential civil and criminal penalties. Physicians may prescribe
legally available drugs for uses that are not described in the drug's labeling
and that differ from those tested by us and approved by the FDA. Such off-label
uses are common across medical specialties. Physicians may believe that such
off-label uses are the best treatment for many patients in varied circumstances.
The FDA does not regulate the behavior of physicians in their choice of
treatments. The FDA does, however, impose stringent restrictions on
manufacturers' communications regarding off-label use.
Exports From the United States. The FDA regulates the export of
unapproved drug products for use outside of the United States under the FFDCA
and its implementing regulations. The level of regulatory scrutiny the FDA
applies to exports of unapproved drugs depends on a number of factors,
including, among others, the country to which the investigational drug product
is exported, whether that country has approved the drug for commercial sale
within that jurisdiction, whether the exported drug is intended for use in a
clinical trial or is intended to be sold commercially, and, if the drug is to be
used in clinical testing, whether the manufacturer has obtained an IND from the
FDA to conduct the clinical trial. Depending on the applicability of these
factors, a manufacturer may be required to request and obtain authorization from
the FDA prior to exporting an unapproved drug. We have requested and obtained
several authorizations from the FDA to export quantities of pafuramidine for use
in clinical trials abroad.
K. Competition
Competition in the pharmaceutical and biotechnology industries is
intense. Factors such as scientific and technological developments, the
procurement of patents, timely governmental approval for testing, manufacturing
and marketing, availability of funds, the ability to commercialize drug
candidates in an expedient fashion and the ability to obtain governmental
approval for testing, manufacturing and marketing play a significant role in
determining our ability to effectively compete. Furthermore, our industry is
subject to rapidly evolving technology that could result in the obsolescence of
any drug candidates prior to profitability.
Many of our potential competitors may have substantially greater
financial, technical and human resources than we have and may be better equipped
to develop, manufacture and market products. Many of our potential competitors
have concentrated their efforts in the development of human therapeutics and
developed or acquired internal biotechnology capabilities. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials and in obtaining regulatory approvals. Our competitors may
succeed in obtaining approval for products more rapidly than us and in
developing and commercializing products that are safer and more effective than
those that we propose to develop. Competitors, as well as academic institutions,
governmental agencies and private research organizations, also compete with us
in acquiring rights to products or technologies from universities, and
recruiting and retaining highly qualified scientific personnel and consultants.
The timing of market introduction of our potential products or of competitors'
products will be an important competitive factor. Accordingly, the relative
speed with which we can develop products,
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complete preclinical testing, human clinical trials and regulatory approval
processes and supply commercial quantities to market will influence our ability
to bring a product to market.
Our competition will be determined in part by the indications for which
our products are developed and ultimately approved by regulatory authorities. We
rely on our collaborations with our university partners and other joint venture
partners to enhance our competitive edge by providing manufacturing, testing and
commercialization support. We are developing products to treat infectious
diseases and other diseases, some with no current or effective therapies.
Currently, pafuramidine is in clinical trials to treat PCP and African sleeping
sickness and to prevent and treat malaria. Other drugs moving forward in our
pipeline address markets for new drugs for use in treating MRD Gram positive
bacterial infections, fungal infections, HCV, TB, and other diseases. There are
a number of companies of which we are aware which manufacture products that may
compete with pafuramidine and/or other products we are currently developing.
However, many of these companies' competing products have limitations in terms
of effectiveness to treat their indicated diseases, toxicity, severity of
side-effects, and/or difficulty of delivery (for example, pentamidine must be
administered either by injection or by inhalation). We therefore believe that
direct competition for our drug candidates for certain indications has not yet
been developed and/or approved.
L. EMPLOYEES
As of June 4, 2007, we had 27 employees (which includes 2 employees who
work for Immtech HK, our Hong Kong subsidiary), 10 of whom hold advanced
degrees. Sixteen of our employees work in support of clinical trials, research
and development, and regulatory compliance, and the other 11 work in general and
administrative capacities which include business development, finance, investor
relations and administration. In addition, there are over 50 scientists
affiliated with our consortium university partners who are engaged in the
research and discovery of novel pharmaceutical compounds to which we have
exclusive license and commercialization rights. We expect to add new employees
in our regulatory, clinical development and commercial development departments
as our programs advance.
ITEM 1A. RISK FACTORS
There is no assurance that we will successfully develop a commercially viable
product. Our most advanced and first drug candidate, pafuramidine, is in Phase
III pivotal clinical trials for two indications.
We are in various stages of human clinical trials, and in some cases
preclinical development activities required for drug approval and
commercialization. Since our formation in October 1984, we have engaged in
research and development programs, expanding our network of scientists and
scientific advisors, licensing technology agreements and, since obtaining the
rights thereto in 1997, advancing the commercialization of the aromatic cation
technology platform that is the basis for our first drug candidate,
pafuramidine. We have generated no revenue from product sales, do not have any
products currently available for sale, and none are expected to be commercially
available for sale until after March 31, 2008, if at all. There can be no
assurance that the research we fund and manage will lead to commercially viable
products. Our most advanced programs are in clinical testing using pafuramidine,
our first
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drug candidate, for several indications including Phase III clinical studies of
PCP and African sleeping sickness and malaria prophylaxis and malaria treatment
and must undergo substantial additional regulatory review prior to
commercialization.
We have a history of losses and an accumulated deficit and, as a result, our
future profitability is uncertain.
We have experienced significant operating losses since our inception and
we expect to incur additional operating losses as we continue research and
development, clinical trial and commercialization efforts. As of March 31, 2007,
we had an accumulated deficit of approximately $100.5 million. Losses from
operations were approximately $15.7 million and $11.7 million for the fiscal
years ended March 31, 2006 and March 31, 2007, respectively.
We need substantial additional funds, currently and in future years, to continue
our research and development. If such financing is not available, we may be
required to pursue other financing alternatives, reduce spending for our
research programs or cease operations.
Our operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to continue in the foreseeable
future. Without substantial additional financing, we may be required to reduce
some or all of our research programs or cease operations. Our cash requirements
may vary materially from those now planned because of results of research and
development, results of preclinical and clinical testing, responses to our grant
requests, relationships with strategic partners, changes in the focus and
direction of our research and development programs, delays in the enrollment and
completion of our clinical trials, competitive and technological advances, FDA
and foreign regulatory approval processes and other factors. In any of these
circumstances, we may require substantially more funds than we currently have
available or intend to raise to continue our business. We may seek to satisfy
future funding requirements through public or private offerings of equity
securities, by collaborative or other arrangements with pharmaceutical or
biotechnology companies, issuance of debt or from other sources. Additional
financing may not be available when needed or may not be available on acceptable
terms. If adequate financing is not available, we may not be able to continue as
a going concern or may be required to delay, scale back or eliminate certain
research and development programs, relinquish rights to certain technologies or
drug candidates, forego desired opportunities or license third parties to
commercialize our products or technologies that we would otherwise seek to
pursue internally. To the extent we raise additional capital by issuing equity
securities, ownership dilution to existing stockholders may result.
We receive funding primarily from research and development programs,
fees associated with licensing of our technology, grants and from sales of
equity securities. To date we have directed most of such funds not used for
general and administrative overhead toward our research and development and
commercialization programs (including preparation of submissions to regulatory
agencies). Until one or more of our drug candidates is approved for sale, our
funding is limited to funds from research and development programs, fees
associated with licensing of our technology, grants and proceeds from sales of
equity or debt securities.
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We do not have employment contracts with most of our employees.
All of our employees are "at will" and may leave at any time. None of
our executive officers has as of this date, expressed any intention to retire or
leave our employ. We do not have "key-man" life insurance policies on any of our
executives.
Most of our business' financial aspects, including investor relations,
intellectual property control and corporate governance, are under the
supervision of Eric L. Sorkin, Cecilia Chan and Gary Parks. Together, Mr.
Sorkin, Ms. Chan and Mr. Parks hold institutional knowledge and business acumen
that they utilize to assist us to forge new relationships and foster new
business opportunities without diminishing or undermining existing programs and
obligations.
A substantial portion of our proprietary intellectual property is developed by
scientists who are not employed by us.
Our business depends to a significant degree on the continuing
contributions of our key management, scientific and technical personnel, as well
as on the continued discoveries of scientists, researchers and specialists at
UNC-CH, Georgia State University, Duke University, Auburn University, and Tulane
University and other research groups that form part of our Scientific Consortium
and assist in the development of our drug candidates. A substantial portion of
our proprietary intellectual property is developed by scientists who are
employed by our partner universities and other research groups. We do not have
control over, knowledge of, or access to those employment arrangements. We have
not been advised by any of our key employees, key members of the scientific
research groups or other research groups that form part of our Scientific
Consortium of their intention to leave their employ with these parties or the
programs they conduct.
There can be no assurance that the loss of certain members of management
or the scientists, researchers and technicians from the universities or other
members of our Scientific Consortium would not materially adversely affect our
business.
Additional research grants to fund our operations may not be available or, if
available, not on terms acceptable to us.
We have funded our product development and operations as of March 31,
2007 through a combination of sales of equity instruments and revenue generated
from research agreements and grants. As of March 31, 2007, our accumulated
deficit was approximately $100.5 million, net of approximately $25.1 million,
which was funded either directly or indirectly with grant funds and payments
from research and testing agreements.
In November 2000, the Foundation awarded a $15.1 million grant to UNC-CH
to develop new drugs to treat African sleeping sickness and leishmaniasis, a
parasite that infects humans and can cause severe liver damage or disfiguring
skin disease. On March 29, 2001, we entered into the Clinical Research
Subcontract, whereby we were to receive up to $9.8 million, subject to certain
terms and conditions, over the succeeding five year period, to conduct certain
clinical and research studies related to the Foundation Grant. In April 2003,
the Foundation increased the Foundation Grant by approximately $2.7 million for
the expansion of Phase IIb/III clinical trials to treat African sleeping
sickness and to improve manufacturing processes. As of March 31,
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2006, we had received, pursuant to the Clinical Research Subcontract, inclusive
of our portion of the Foundation Grant increase, a total amount of funding of
approximately $11.7 million. On March 28, 2006, the Foundation increased the
Foundation Grant by an approximate additional $22.6 million. $13.6 million of
the additional Foundation Grant is budgeted to be paid to us over five years
under the Amended and Restated Clinical Research Subcontract. On May 24, 2006,
we received the first payment of approximately $5.6 million of the five year
$13.6 million contract.
On November 26, 2003, we entered into the MMV Testing Agreement,
pursuant to which we, with the support of MMV and UNC-CH, conducted a proof of
concept study of pafuramidine in human clinical trials with the goal of
obtaining marketing approval of a product for the treatment of malaria. Through
March 31, 2006, the Company had received approximately $5.6 million under this
agreement. Immtech and MMV agreed in December 2005 to terminate the current
agreement.
We will continue to apply for new grants to support continuing research
and development of our proprietary aromatic cation technology platform and other
drug candidates. The process of obtaining grants is extremely competitive and
there can be no assurance that any of our grant applications will be acted upon
favorably. Some charitable organizations directly or indirectly provide funding
to us may require licenses to our proprietary information or may impose price
restrictions on the products we develop with their funds. We may not be able to
negotiate terms that are acceptable to us with such organizations. In the event
we are unable to raise sufficient funds to advance our product developments with
such grant funds we may seek to raise additional capital with the issuance of
equity or debt securities. There can be no assurance that we will be able to
place or sell equity or debt securities on terms acceptable to us and, if we
sell equity, existing stockholders may suffer dilution (see Risk Factors, this
section, entitled "Shares eligible for future sale may adversely affect our
ability to sell equity securities" and "Our outstanding options and warrants may
adversely affect our ability to consummate future equity financings due to the
dilution potential to future investors").
None of our drug candidates have been approved for sale by any regulatory
agency. Such approval is required before we can sell drug products commercially.
Our first drug candidate, pafuramidine, requires additional clinical
testing, regulatory approval and development of marketing and distribution
channels, all of which are expected to require substantial additional investment
prior to commercialization. There can be no assurance that any of our drug
candidates will be successfully developed, demonstrated to be safe and effective
in human clinical trials, meet applicable regulatory standards, be approved by
regulatory authorities, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. If we are unable to commercialize our drug candidates in a timely
manner we may be required to seek additional funding, reduce or cancel some or
all of our development programs, sell or license some of our proprietary
information or cease operations.
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There are substantial uncertainties related to clinical trials that may result
in the extension, modification or termination of one or more of our programs.
In order to obtain required regulatory approvals for the commercial sale
of our drug candidates, we must demonstrate through human clinical trials that
our drug candidates are safe and effective for their intended uses. Prior to
conducting human clinical trials we must obtain governmental approvals from the
host nation, approval from the United States to export our drug candidate to the
test site (if the test site is not in the United States) and qualify a
sufficient number of volunteer patients that meet our trial criteria. If we do
not obtain required governmental consents or if we do not enroll a sufficient
number of patients in a timely manner or at all, our trial expenses could
increase, results may be delayed or the trial may be cancelled.
We may find, at any stage of our research and development and
commercialization, that drug candidates that appeared promising in earlier
clinical trials do not demonstrate safety or effectiveness in later clinical
trials and therefore do not receive regulatory approvals. Despite the positive
results of our preclinical testing and human clinical trials those results may
not be predictive of the results of later clinical trials and large-scale
testing. Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in various stages of clinical trials, even after
promising results had been obtained in early-stage or late-stage human clinical
trials or even after initial regulatory approval and commercialization of the
approved product.
Completion of human clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, participant retention and
follow up, difficulty in securing sufficient supplies of clinical trial
materials or other adverse events occurring during clinical trials. For
instance, once we obtain permission to run a human trial, there are strict
criteria regulating who we can enroll in the trial. In the case of African
sleeping sickness, we are subject to civil unrest in sub-Sahara Africa where
local rebels could close clinics and dramatically reduce enrollment or follow up
rates, and make it difficult to conduct trials. Political instability and the
minimal infrastructure in the African countries where we conduct our African
sleeping sickness trials may cause delays in enrollment and difficulty in the
completion of trials.
Completion of preclinical and clinical studies, and development of the
chemistry, manufacturing and quality controls of the drug candidate may take
several years, and the length of time varies substantially with the type,
complexity, novelty and intended use of the product. Delays or rejections may be
based upon many factors, including changes in regulatory policy during the
period of product development. No assurance can be given that any of our
development programs will be successfully completed, that any IND application
filed with the FDA (or any foreign equivalent filed with the appropriate foreign
authorities) will become effective, that additional clinical trials will be
allowed by the FDA or other regulatory authorities, or that clinical trials will
commence as planned. There have been delays in our testing and development
schedules due to the aforementioned conditions and funding and patient
enrollment difficulties and there can be no assurance that our future testing
and development schedules will be met.
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We do not currently have pharmaceutical manufacturing and distribution
capability, which could impair our ability to develop commercially viable
products at reasonable costs.
Our ability to commercialize drug candidates will depend in part upon
our ability to have manufactured or developed the capability to manufacture our
drug candidates and to distribute those goods, either directly or through third
parties, at a competitive cost and in accordance with FDA and other regulatory
requirements. We currently lack facilities and personnel to manufacture or
distribute our drug candidates. There can be no assurance that we will be able
to acquire such resources, either directly or through third parties, at
reasonable costs, if we develop commercially viable products.
We are dependent on third party relationships for critical aspects of our
business. Problems that develop in these relationships may increase costs and/or
diminish our ability to develop our drug candidates.
We use the expertise and resources of strategic partners and third
parties in a number of key areas, including (i) discovery research, (ii)
preclinical and human clinical trials, (iii) product development, and (iv)
manufacture of pharmaceutical drugs. We have a worldwide license and exclusive
commercialization rights to a proprietary aromatic cation technology platform
and are developing drugs intended for commercial use based on that platform.
This strategy creates risks by placing critical aspects of our business in the
hands of third parties, whom we may not be able to control. If these third
parties do not perform in a timely and satisfactory manner, we may incur costs
and delays as we seek alternate sources of such products and services, if
available. Such costs and delays may have a material adverse effect on our
business if the delays jeopardize our licensing arrangements by causing us to
become non-compliant with certain license agreements.
We may seek additional third party relationships in certain areas,
particularly in clinical testing, manufacturing, marketing, distribution and
other areas where pharmaceutical and biotechnology company collaborators will
enable us to develop particular products or geographic markets that are
otherwise beyond our current resources and/or capabilities. There is no
assurance that we will be able to obtain any such collaboration or any other
research and development, clinical trial, manufacturing, marketing or
distribution relationships. Our inability to obtain and maintain satisfactory
relationships with third parties may have a material adverse effect on our
business by slowing our ability to develop new products, requiring us to expand
our internal capabilities, increasing our overhead and expenses, hampering
future growth opportunities or causing us to delay or terminate affected
programs.
We are uncertain about our ability to protect or obtain necessary patents and
protect our proprietary information. Our ability to develop and commercialize
drug candidates would be compromised without adequate intellectual property
protection.
We have spent and continue to spend considerable funds to develop our
drug candidates and we are relying on the potential to exploit commercially
without competition the results of our product development. Much of our
intellectual property is licensed to us under various agreements, including the
Consortium Agreement, Amended and Restated License Agreement, and the Tulane
License Agreement. It is the primary responsibility of the discoverer to develop
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his, her or its invention confidentially, insure that the invention is unique,
and to obtain patent protection. In most cases, our role is to reimburse patent
related costs after we decide to develop any such invention. We therefore rely
on the inventors to insure that technology licensed to us is adequately
protected. Without adequate protection for our intellectual property we believe
our ability to realize profits on our future commercialized product would be
diminished. Without protection, competitors might be able to copy our work and
compete with our products without having invested in the development.
There can be no assurance that any particular patent will be granted or
that issued patents (issued to us directly or through licenses) will provide us
with the intellectual property protection contemplated by such patents. Patents
and licenses of patents can be challenged, invalidated or circumvented. Patent
litigation is expensive and time-consuming and the outcome cannot be predicted.
It is also possible that competitors will develop similar products
simultaneously. Our breach of any license agreement or the failure to obtain a
license to any technology or process which may be required to develop or
commercialize one or more of our drug candidates may have a material adverse
effect on our business, including the need for additional capital to develop
alternate technology, the potential that competitors may gain unfair advantage
and lessen our expectation of potential future revenues.
The pharmaceutical and biotechnology fields are characterized by a large
number of patent filings, and a substantial number of patents have already been
issued to other pharmaceutical and biotechnology companies. Third parties may
have filed applications for, or may have been issued, certain patents and may
obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those that we are attempting to develop
and commercialize. We may not be aware of all of the patents potentially adverse
to our interests that may have been issued to others. No assurance can be given
that patents do not exist, have not been filed or could not be filed or issued,
which contain claims relating to or competitive with our technology, drug
candidates, product uses or processes. If patents have been or are issued to
others containing preclusive or conflicting claims, then we may be required to
obtain licenses to one or more of such patents or to develop or obtain
alternative technology. There can be no assurance that the licenses or
alternative technology that might be required for such alternative processes or
products would be available on commercially acceptable terms, or at all.
Because of the substantial length of time and expense associated with
bringing new drug products to market through the development and regulatory
approval process, the pharmaceutical and biotechnology industries place
considerable importance on patent and trade secret protection for new
technologies, products and processes. Since patent applications filed in the
United States are confidential for eighteen months after filing and some are
confidential until their date of issue as a patent and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we (or our licensors) were the first to
make the inventions covered by pending patent applications or that we (or our
licensors) were the first to file patent applications for such inventions. The
patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions and, therefore, the
breadth of claims allowed in pharmaceutical and biotechnology patents, or their
enforceability, cannot be predicted. There can be no assurance that any patents
under pending patent applications or any further patent applications will be
issued. Furthermore,
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there can be no assurance that the scope of any patent protection will exclude
competitors or provide us competitive advantages, that any of our (or our
licensors') patents that have been issued or may be issued will be held valid if
subsequently challenged, or that others, including competitors or current or
former employers of our employees, advisors and consultants, will not claim
rights in, or ownership to, our (or our licensors') patents and other
proprietary rights. There can be no assurance that others will not independently
develop substantially equivalent proprietary information or otherwise obtain
access to our proprietary information, or that others may not be issued patents
that may require us to obtain a license for, and pay significant fees or
royalties for, such proprietary information.
We rely on technology developed by others and shared with collaborators to
develop our drug candidates, which puts our proprietary information at risk of
unauthorized disclosure.
We rely on trade secrets, know-how and technological advancement to
maintain our competitive position. Although we use license agreements,
confidentiality agreements and employee proprietary information and invention
assignment agreements to protect our trade secrets and other unpatented
know-how, these agreements may be breached by the other party thereto or may
otherwise be of limited effectiveness or enforceability.
We are licensed to commercialize technology from a proprietary aromatic
cation technology platform developed by our research partners, comprised
primarily of scientists employed by universities in our Scientific Consortium.
The academic world is improved by the sharing of information. As a business,
however, the sharing of information whether through publication of research,
academic lectures or general intellectual discourse among contemporaries is not
conducive to protection of proprietary information. Our proprietary information
may fall into the possession of unintended parties without our knowledge through
customary academic information sharing.
At times we may enter into confidentiality agreements with other
companies, allowing them to test our technology for potential future licensing,
in return for milestone and royalty payments should any discoveries result from
the use of our proprietary information. We cannot be assured that such parties
will honor these confidentiality agreements subjecting our intellectual property
to unintended disclosure.
The pharmaceutical and biotechnology industries have experienced
extensive litigation regarding patent and other intellectual property rights. We
could incur substantial costs in defending suits that may be brought against us
(or our licensors) claiming infringement of the rights of others or in asserting
our (or our licensors') patent rights in a suit against another party. We may
also be required to participate in interference proceedings declared by the
United States Patent and Trademark Office or similar foreign agency for the
purpose of determining the priority of inventions in connection with our (or our
licensors') patent applications.
Adverse determinations in litigation or interference proceedings could
require us to seek licenses (which may not be available on commercially
reasonable terms) or subject us to significant liabilities to third parties, and
could therefore have a material adverse effect on our business by increasing our
expenses and having an adverse effect on our business. Even if we
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prevail in an interference proceeding or a lawsuit, substantial resources,
including the time and attention of our officers, would be required.
Confidentiality agreements may not adequately protect our intellectual property,
which could result in unauthorized disclosure or use of our proprietary
information.
We require our employees, consultants and third parties with whom we
share proprietary information to execute confidentiality agreements upon the
commencement of their relationship with us. The agreements generally provide
that trade secrets and all inventions conceived by the individual and all
confidential information developed or made known to the individual during the
term of the relationship will be our exclusive property and will be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for our proprietary information in the event of
unauthorized use or disclosure of such information. If our unpatented
proprietary information is publicly disclosed before we have been granted patent
protection, our competitors could be unjustly enriched and we could lose the
ability to profitably develop products from such information.
Our industry has significant competition; our drug candidates may become
obsolete prior to commercialization due to alternative technologies, thereby
rendering our development efforts obsolete or non-competitive.
The pharmaceutical and biotechnology fields are characterized by
extensive research efforts and rapid technological progress. Competition from
other pharmaceutical and biotechnology companies and research and academic
institutions is intense and other companies are engaged in research and product
development to treat the same diseases that we target. New developments in
pharmaceutical and biotechnology fields are expected to continue at a rapid pace
in both industry and academia. There can be no assurance that research and
discoveries by others will not render some or all of our programs or products
non-competitive or obsolete.
We are aware of other companies and institutions dedicated to the
development of therapeutics similar to those we are developing. Many of our
existing or potential competitors have substantially greater financial and
technical resources than we do and therefore may be in a better position to
develop, manufacture and market pharmaceutical products. Many of these
competitors are also more experienced performing preclinical testing and human
clinical trials and obtaining regulatory approvals. The current or future
existence of competitive products may also adversely affect the marketability of
our drug candidates.
In the event some or all of our programs are rendered non-competitive or
obsolete, we do not currently have alternative strategies to develop new product
lines or the financial resources to pursue such a course of action.
There is no assurance that we will receive FDA or corollary foreign approval for
any of our drug candidates for any indication. We are subject to government
regulation for the commercialization of our drug candidates.
We have not made application to the FDA or any other regulatory agency
to sell commercially or label any of our drug candidates. We or our
collaborators have received
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licenses from the FDA to export pafuramidine for testing purposes and have
previously been approved to conduct human clinical trials for various
indications in each of the United States, Germany, France, the Democratic
Republic of Congo, Angola, Sudan, Thailand, Argentina, Chile, Colombia, Mexico,
Peru, South Africa, and the United Kingdom.
All new pharmaceutical drugs, including our drug candidates, are subject
to extensive and rigorous regulation by the federal government, principally the
FDA under the FFDCA and other laws and by applicable state, local and foreign
governments. Such regulations govern, among other things, the development,
testing, manufacturing, labeling, storage, pre-market clearance or approval,
advertising, promotion, sale and distribution of pharmaceutical drugs. If drug
products are marketed abroad, they are subject to extensive regulation by
foreign governments. Failure to comply with applicable regulatory requirements
may subject us to administrative or judicially imposed sanctions such as civil
penalties, criminal prosecution, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending applications.
Each of our drug candidates must be approved for each indication for
which we believe it to be viable. We have not yet determined from which
regulatory agencies we will seek approval for our drug candidates or indications
for which approval will be sought. Once determined, the approval process is
subject to those agencies' policies and acceptance of those agencies' approvals,
if obtained, in the countries where we intend to market our drug candidates.
We have not received regulatory approval in the United States or any foreign
jurisdiction for the commercial sale of any of our drug candidates.
On November 21, 2006, the FDA granted orphan drug designation for
pafuramidine to treat PCP. This provides Immtech with financial and regulatory
benefits during the development course of pafuramidine, including opportunity to
apply for government grants for conducting clinical trials, waiver of the
Prescription Drug User's Fee for submission of the NDA for pafuramidine for PCP,
tax credits, and a seven-year market exclusivity upon final FDA approval.
On April 23, 2004, the FDA granted fast-track designation for
pafuramidine for treatment of African sleeping sickness. Fast-track designation
means, among other things, that the FDA may accept initial late-stage data from
us, rather than waiting for the entire Phase III pivotal clinical trial data to
be submitted together, for consideration of approval to market the drug. There
is, however, no guarantee that fast-track designation will result in faster
product development or licensing approval or that our drug candidates will be
approved at all.
The process of obtaining FDA or other regulatory approvals, including
foreign approvals, often takes many years and varies substantially based upon
the type, complexity and novelty of the products involved and the indications
being studied. Furthermore, the approval process is extremely expensive and
uncertain. There can be no assurance that our drug candidates will be approved
for commercial sale in the United States by the FDA or regulatory agencies in
foreign countries. The regulatory review process can take many years and we will
need to raise additional funds to complete the regulatory review process for our
current drug candidates. The failure to receive FDA or other governmental
approval would have a material adverse effect on our business by precluding us
from marketing and selling such products and negatively
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impacting our ability to generate future revenues. Even if regulatory approval
of a product is granted, there can be no assurance that we will be able to
obtain the labeling claims (a labeling claim is a product's description and its
FDA permitted uses) necessary or desirable for the promotion of such product.
FDA regulations prohibit the marketing or promotion of a drug for unapproved
indications. Furthermore, regulatory marketing approval may entail ongoing
requirements for post-marketing studies if regulatory approval is obtained. We
will also be subject to ongoing FDA obligations and continued regulatory review.
In particular, we, or our third party manufacturers, will be required to adhere
to good manufacturing practices, which require us (or our third party
manufacturers) to manufacture products and maintain records in a prescribed
manner with respect to manufacturing, testing and quality control. Further, we
(or our third party manufacturers) must pass a manufacturing facilities
pre-approval inspection by the FDA or corollary agency before obtaining
marketing approval. Failure to comply with applicable regulatory requirements
may result in penalties, such as restrictions on a product's marketing or
withdrawal of the product from the market. In addition, identification of
certain side-effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials and
changes in labeling of the product.
Prior to the submission of an application for FDA or other regulatory
approvals, our pharmaceutical drugs undergo rigorous preclinical and clinical
testing, which may take several years and the expenditure of substantial
financial and other resources. Before commencing clinical trials in humans in
the United States, we must submit to the FDA and receive clearance of an IND.
There can be no assurance that submission of an IND for future clinical testing
of any of our drug candidates under development or other future drug candidates
will result in FDA permission to commence clinical trials or that we will be
able to obtain the necessary approvals for future clinical testing in any
foreign jurisdiction. Further, there can be no assurance that if such testing of
drug candidates under development is completed, any such drug compounds will be
accepted for formal review by the FDA or any foreign regulatory agency or
approved by the FDA for marketing in the United States or by any such foreign
regulatory agencies for marketing in foreign jurisdictions.
Our most advanced programs are developing products intended for sale in
countries that may not have established pharmaceutical regulatory agencies.
Some of the intended markets for our treatment of African sleeping
sickness and malaria are in countries without developed pharmaceutical
regulatory agencies. We plan in such cases to try first to obtain regulatory
approval from a recognized pharmaceutical regulatory agency such as the FDA or
one or more European agencies and then to apply to the targeted country for
recognition of the foreign approval. Because the countries where we intend to
market treatments for African sleeping sickness and malaria are not obligated to
accept foreign regulatory approvals and because those countries do not have
standards of their own for us to rely upon, we may be required to provide
additional documentation or complete additional testing prior to distributing
our products in those countries.
There is uncertainty regarding the availability of health care reimbursement to
prospective purchasers of our anticipated products. Health care reform may
negatively impact the ability of prospective purchasers of our anticipated
products to pay for such products.
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Our ability to commercialize any of our drug candidates will depend in
part on the extent to which reimbursement for the costs of the resulting drug
will be available from government health administration authorities, private
health insurers, non-governmental organizations and others. Many of our drug
candidates, including treatments for human African sleep sickness, malaria and
TB, would be in the greatest demand in developing nations, many of which do not
maintain comprehensive health care systems with the financial resources to pay
for such drugs. We do not know to what extent governments, private charities,
international organizations and others would contribute toward bringing newly
developed drugs to developing nations. Even among drugs sold in developed
countries, significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance of the
availability of third party insurance reimbursement coverage enabling us to
establish and maintain price levels sufficient for realization of a profit on
our investment in developing pharmaceutical drugs. Government and other
third-party payers are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new drug products
approved for marketing by the FDA and by refusing, in some cases, to provide any
coverage for uses of approved products for disease indications for which the FDA
has not granted marketing approval. If adequate coverage and reimbursement
levels are not provided by government and third-party payers for uses of our
anticipated products, the market acceptance of these products would be adversely
affected.
Healthcare reform proposals are regularly introduced in the United
States Congress and in various state legislatures and there is no guarantee that
such proposals will not be introduced in the future. We cannot predict when any
proposed reforms will be implemented, if ever, or the effect of any implemented
reforms on our business. Implemented reforms may have a material adverse effect
on our business by reducing or eliminating the availability of third-party
reimbursement for our anticipated products or by limiting price levels at which
we are able to sell such products. If reimbursement is not available for our
products, health care providers may prescribe alternative remedies if available.
Patients, if they cannot afford our products, may do without. In addition, if we
are able to commercialize products in overseas markets, then our ability to
achieve success in such markets may depend, in part, on the health care
financing and reimbursement policies of such countries. We cannot predict
changes in health care systems in foreign countries, and therefore, do not know
the effects on our business of possible changes.
Shares eligible for future sale may adversely affect our ability to sell equity
securities.
Sales of our Common Stock (including the issuance of shares upon
conversion of our preferred stock (the "Preferred Stock")) in the public market
could materially and adversely affect the market price of shares because prior
sales have been executed at or below our current market price. We have
outstanding five series of Preferred Stock that convert to our Common Stock at
prices equivalent to $4.42, $4.00, $4.42, $9.00 and $7.04, respectively, for our
series A convertible preferred stock ("Series A Preferred Stock"), series B
convertible preferred stock ("Series B Preferred Stock"), series C convertible
preferred stock ("Series C Preferred Stock"), series D convertible preferred
stock ("Series D Preferred Stock") and series E convertible preferred stock
("Series E Preferred Stock") (subject to adjustment for stock splits, stock
dividends and similar dilutive events). Our obligation to convert our Preferred
Stock upon demand by the holders may depress the price of our Common Stock and
also make it more
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difficult for us to sell equity securities or equity-related securities in the
future at a time and price that we deem appropriate.
As of June 4, 2007 we had 15,374,334 shares of Common Stock outstanding,
plus (1) 55,500 shares of Series A Preferred Stock, convertible into
approximately 313,914 shares of Common Stock at the conversion rate of 1:5.6561,
(2) 13,464 shares of Series B Preferred Stock convertible into approximately
84,150 shares of Common Stock at the conversion rate of 1:6.25, (3) 45,536
shares of Series C Preferred Stock convertible into approximately 257,556 shares
of Common Stock at the conversion rate of 1:5.6561, (4) 117,200 shares of Series
D Preferred Stock convertible into approximately 325,558 shares of Common Stock
at the conversion rate of 1:2.7778, (5) 110,200 shares of Series E Preferred
Stock convertible into approximately 391,336 shares of Common Stock at the
conversion rate of 1:3.5511, (6) 1,719,609 options to purchase shares of Common
Stock with a weighted-average exercise price of $8.82 per share, and (7)
2,303,610 warrants to purchase shares of Common Stock with a weighted-average
exercise price of $8.02. Of the shares outstanding, 14,515,960 shares of Common
Stock are freely tradable without restriction. All of the remaining 858,374
shares are restricted from resale, except pursuant to certain exceptions under
the Securities Act of 1933, as amended (the "Securities Act").
Our outstanding options and warrants may adversely affect our ability to
consummate future equity financings due to the dilution potential to future
investors.
We have outstanding options and warrants for the purchase of shares of
our Common Stock with exercise prices currently below market which may adversely
affect our ability to consummate future equity financings. The holders of such
warrants and options may exercise them at a time when we would otherwise be able
to obtain additional equity capital on more favorable terms. To the extent any
such options and warrants are exercised, the value of our outstanding shares of
our Common Stock may be diluted.
As of June 4, 2007, we have outstanding vested options to purchase
1,297,013 shares of Common Stock at a weighted-average exercise price of $9.53
and vested warrants to purchase 2,293,610 shares of Common Stock with a
weighted-average price of $8.05
Due to the number of shares of Common Stock we are obligated to sell
pursuant to outstanding options and warrants described above, potential
investors may not purchase our future equity offerings at market price because
of the potential dilution such investors may suffer as a result of the exercise
of the outstanding options and warrants.
The market price of our Common Stock has experienced significant volatility.
The securities markets from time to time experience significant price
and volume fluctuations unrelated to the operating performance of particular
companies. In addition, the market prices of the Common Stock of many publicly
traded pharmaceutical companies have been and can be expected to be especially
volatile. Our Common Stock price in the 52-week period ended (i) March 31, 2007
had a high of $9.60 and a low of $4.50 and (ii) June 4, 2007 had a high of $9.60
and a low of $4.50. Announcements of technological innovations or new products
by us or our competitors, developments or disputes concerning patents or
proprietary
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rights, publicity regarding actual or potential clinical trial results relating
to products under development by us or our competitors, regulatory developments
in both the United States and foreign countries, delays in our testing and
development schedules, public concern as to the safety of pharmaceutical drugs
and economic and other external factors, as well as period-to-period
fluctuations in our financial results, may have a significant impact on the
market price of our Common Stock. The realization of any of the risks described
in these "Risk Factors" may have a significant adverse impact on such market
prices.
We may pay vendors in stock as consideration for their services. This may result
in stockholder dilution, additional costs and difficulty retaining certain
vendors.
In order for us to preserve our cash resources, we have previously paid
and may in the future pay vendors in shares, warrants or options to purchase
shares of our Common Stock rather than cash. Payments for services in stock may
materially and adversely affect our stockholders by diluting the value of
outstanding shares of our Common Stock. In addition, in situations where we have
agreed to register the shares issued to a vendor, this will generally cause us
to incur additional expenses associated with such registration. Paying vendors
in shares, warrants or options to purchase shares of Common Stock may also limit
our ability to contract with the vendor of our choice should that vendor decline
payment in stock.
We do not intend to pay dividends on our Common Stock. Until such time as we pay
cash dividends, our stockholders must rely on increases in our stock price for
appreciation.
We have never declared or paid dividends on our Common Stock. We intend
to retain future earnings to develop and commercialize our products and
therefore we do not intend to pay cash dividends in the foreseeable future.
Until such time as we determine to pay cash dividends on our Common Stock, our
stockholders must rely on increases in our Common Stock's market price for
appreciation.
If we do not effectively manage our growth, our resources, systems and controls
may be strained and our operating results may suffer.
We have recently added to our workforce and we plan to continue to
increase the size of our workforce and scope of our operations as we continue
our drug development programs and clinical trials and move towards
commercialization of our products. This growth of our operations will place a
significant strain on our management personnel, systems and resources. We may
need to implement new and upgraded operational and financial systems, procedures
and controls, including the improvement of our accounting and other internal
management systems. These endeavors will require substantial management effort
and skill, and we may require additional personnel and internal processes to
manage these efforts. If we are unable to effectively manage our expanding
operations, our revenue and operating results could be materially and adversely
affected.
Our continuing obligations as a public company under the laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and
related regulations, are likely to increase our expenses and administrative
burden. Changes in the laws, regulations and standards relating to corporate
-46-
governance and public disclosure, including the Sarbanes-Oxley Act and related
regulations implemented by the SEC and self-regulatory organizations (e.g. the
AMEX), are creating uncertainty for public companies, increasing legal and
financial compliance costs and making some activities more time consuming. These
laws, regulations and standards are subject to varying interpretations, and, as
a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We have and expect to
continue to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and
administrative expenses and a diversion of management's time and attention from
the business of the Company to compliance activities. If our efforts to comply
with new laws, regulations and standards differ from the conduct expected by
regulatory or governing bodies, those authorities may initiate legal proceedings
against us and our business may be harmed.
There are limitations on the liability of our directors, and we may have to
indemnify our officers and directors in certain instances.
Our certificate of incorporation limits, to the maximum extent permitted
under Delaware law, the personal liability of our directors for monetary damages
for breach of their fiduciary duties as directors. Our bylaws provide that we
will indemnify our officers, directors, employees and other agents to the
fullest extent permitted by law. These provisions may be in some respects
broader than the specific indemnification provisions under Delaware law. The
indemnification provisions may require us, among other things, to (i) indemnify
such persons against certain liabilities that may arise by reason of their
status with or service to the Company (other than liabilities arising from
willful misconduct of a culpable nature), (ii) advance expenses incurred as a
result of any proceeding against such persons as to which they could be
indemnified and (iii) obtain directors' and officers' insurance. Section 145 of
the Delaware General Corporation Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he or she was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation,
against expenses actually and reasonably incurred in connection with such action
if he or she acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. Delaware law does not permit a corporation to
eliminate a director's duty of care and the provisions of our certificate of
incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
We believe that our limitation of officer and director liability assists
us to attract and retain qualified officers and directors. However, in the event
an officer, a director or our board of directors commits an act that may legally
be indemnified under Delaware law, we will be responsible to pay for such
officer(s) or director(s) legal defense and potentially any damages resulting
therefrom. Furthermore, the limitation on director liability may reduce the
likelihood of derivative litigation against directors, and may discourage or
deter stockholders from instituting litigation against directors for breach of
their fiduciary duties, even though such an action, if successful, might benefit
us and our stockholders. Given the difficult environment and
-47-
potential for incurring liabilities currently facing directors of publicly-held
corporations, we believe that director indemnification is in our and our
stockholders' best interests because it enhances our ability to attract and
retain highly qualified directors and reduce a possible deterrent to
entrepreneurial decision-making.
Nevertheless, limitations of director liability may be viewed as
limiting the rights of stockholders, and the broad scope of the indemnification
provisions contained in our certificate of incorporation and bylaws could result
in increased expenses. Our board of directors believes, however, that these
provisions will provide a better balancing of the legal obligations of, and
protections for, directors and will contribute positively to the quality and
stability of our corporate governance. Our board of directors has concluded that
the benefit to stockholders of improved corporate governance outweighs any
possible adverse effects on stockholders of reducing the exposure of directors
to liability and broadened indemnification rights.
We are exposed to potential risks from recent legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act requires that we maintain effective internal
controls over financial reporting and disclosure controls and procedures. Among
other things, we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management to report on, and
our independent registered public accounting firm to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Compliance with Section 404 requires substantial accounting
expense and significant management efforts. Our testing, or the subsequent
review by our independent registered public accounting firm, may reveal
deficiencies in our internal controls that would require us to remediate in a
timely manner so as to be able to comply with the requirements of Section 404
each year. If we are not able to comply with the requirements of Section 404 in
a timely manner each year, we could be subject to sanctions or investigations by
the SEC, the AMEX or other regulatory authorities that would require additional
financial and management resources and could adversely affect the market price
of our Common Stock.
Product liability exposure may expose us to significant liability.
We do not have pharmaceutical products for sale and we therefore do not
carry product liability insurance. However, if we do commercialize drug products
we will face risk of exposure to product liability and other claims and lawsuits
in the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not be able to
avoid significant liability exposure. We may not have sufficient insurance
coverage and we may not be able to obtain sufficient coverage at a reasonable
cost. An inability to obtain product liability insurance at acceptable cost or
to otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of our products. A product liability claim could
hurt our financial performance. Even if we avoid liability exposure, significant
costs could be incurred, potentially damaging our financial performance. We do
carry commercial general liability insurance and clinical trial insurance which
covers our human clinical trial activities.
-48-
ITEM 2. PROPERTIES
Our executive offices are in New York, located at One North End Avenue,
New York, New York 10282. We pay rent of approximately $10,100 per month, on a
month-to-month basis, for approximately 2,500 square feet of space for our New
York office. Our research and development offices are located at 150 Fairway
Drive, Suite 150, Vernon Hills, Illinois 60061. We occupy approximately 9,750
square feet of space under a lease that expires on March 14, 2010. Our rent for
the Vernon Hills facility is approximately $8,200 per month through March 2008.
We are also charged by the landlord of our Vernon Hills, Illinois offices a
portion of the real estate taxes and common area operating expenses. We believe
our current facilities are adequate for our needs for the foreseeable future
and, in the opinion of our management, the facilities are adequately insured.
Our indirectly wholly-owned subsidiary, Immtech Life Science, owns two
floors of a newly-constructed building located in the Futian Free Trade Zone,
Shenzhen, in the PRC. The property comprises the first two floors of an
industrial building named the Immtech Life Science Building. The duration of the
land use right associated with the building on which the property is located is
50 years which expires May 24, 2051.
ITEM 3. LEGAL PROCEEDINGS
We are parties to the following legal proceedings:
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging that Neurochem misappropriated the Company's trade
secrets by filing a series of patent applications relating to compounds
synthesized and developed by the Consortium, with whom Immtech has an exclusive
licensing 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 (the "Neurochem Testing Agreement"). Pursuant to the terms
of the Neurochem Testing 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 invention was discovered
and to cooperate with Immtech and its counsel in filing any patent applications.
In its complaint, the Company also alleged, among other things, that
Neurochem fraudulently induced the Company into signing the Neurochem Testing
Agreement, and breached numerous provisions of the Neurochem 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 alleged that
Neurochem has prevented the public from obtaining the potential benefit of new
drugs for the treatment of Alzheimer's disease, which would compete with
Neurochem's Alzhemed drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company agreed to have a
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three member ICC arbitration panel (the "Arbitration Panel") hear and rule on
the dispute on the expectation that the Arbitration Panel would reach a more
timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005. Final papers
were filed by both parties on November 2, 2005. The ICC tribunal closed the
hearing on April 17, 2006.
On June 9, 2006, the International Court of Arbitration of the ICC
notified the parties that (i) the Arbitral Tribunal found that Neurochem
breached the Neurochem Testing Agreement and awarded Immtech approximately $1.9
million in damages and attorneys' fees and costs, which was received, and (ii)
denied all of Neurochem's claims against Immtech.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors alleging breaches of a stock lock-up agreement, option agreements and
a technology license agreement by the Company, as well as interference with the
Von der Ruhr Plaintiffs' contracts with the Company by its officers. The
complaint sought unspecified monetary damages and punitive damages, in addition
to equitable relief and costs. In 2005, one of the counts in the case was
dismissed upon the Company's motion for summary judgment. A preliminary
pre-trial conference was held on October 26, 2006 and the court granted the
Company's motions in limine to exclude plaintiffs' claim for lost profits
damages and to prohibit plaintiff Gerhard Von der Ruhr from offering expert
testimony at trial. The court subsequently granted a motion to sever the trial
on Count V, regarding a technology license agreement, from the trial on the
remaining counts. A pretrial order was submitted to the court in April 2007,
however, the date for trial of the four counts remaining in the Amended
Complaint has not yet been set.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Votes of the Stockholders
We held our Annual Meeting on March 2, 2007 at the Westin O'Hare Hotel
in Rosemont, Illinois. The following matters were presented to our stockholders:
(1) Proposal No. 1 - election of six directors to serve until the next annual
meeting of the stockholders, (2) Proposal No. 2 - approval of an amendment to
the Registrant's Certificate of Incorporation that would remove the limitation
on the number of directors and provide that the number of directors be fixed by
resolution of the board of directors, (3) Proposal No. 3 - to approve the
Immtech Pharmaceuticals, Inc. 2006 Stock Incentive Plan, and (4) Proposal No. 4
- ratification of the selection of Deloitte & Touche LLP as the Company's
independent auditors for the fiscal year ending March 31, 2007. Proposal No. 3
was withdrawn. All other proposals were approved or ratified by the
shareholders. The results of the votes are as follows:
Proposal 1 - Election of directors by the Votes For Authority Withheld
stockholders
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Eric L. Sorkin 10,011,408 1,173,562
Cecilia Chan 10,014,308 1,170,662
Harvey R. Colten, M.D.a 10,278,371 906,599
Judy Lau 9,993,459 1,191,511
Levi H. K. Lee, M.D. 10,291,108 893,862
Donald F. Sinex 10,289,108 895,862
(a) Dr. Colten passed away on May 24, 2007.
Votes For Votes Against Abstain *
Proposal 2 - Amendment 9,601,083 1,565,489 18,398
of Certificate
of Incorporation
Proposal 4 - Ratification 10,861,966 302,721 20,283
of Deloitte & Touche
as independent auditors
* Per the proxy statement, abstentions are considered votes against the
proposal.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
A. Market Information
Following are the reported high and low share trade prices as reported
by IDD Information Services, NASDAQ Online and Lexis/Nexis for each of the
quarters set forth below since the fiscal quarter ended March 31, 2004.
High Low
---------- ----------
2004
Quarter ended March 31, 2004...... $19.50 $10.11
Quarter ended June 30, 2004....... $22.80 $11.85
Quarter ended September 30, 2004.. $12.75 $8.45
Quarter ended December 31, 2004... $14.73 $7.58
2005
Quarter ended March 31, 2005...... $15.70 $10.03
Quarter ended June 30, 2005....... $13.89 $9.50
Quarter ended September 30, 2005.. $12.63 $10.61
Quarter ended December 31, 2005... $11.94 $6.30
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High Low
---------- ----------
2006
Quarter ended March 31, 2006...... $9.62 $6.80
Quarter ended June 30, 2006....... $8.25 $6.66
Quarter ended September 30, 2006.. $6.98 $4.50
Quarter ended December 31, 2006... $9.60 $4.80
2007
Quarter ended March 31, 2007...... $8.90 $5.00
B. Stockholders
As of June 4, 2007, the Company had approximately 214 stockholders of
record of our Common Stock and the number of beneficial owners of shares of
Common Stock as of such date was approximately 3,079. As of June 4, 2007, the
Company had approximately 15,374,334 shares of Common Stock issued and
outstanding.
C. Dividends
We have never declared or paid dividends on our Common Stock and we do
not intend to pay any Common Stock dividends in the foreseeable future. Our
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, and Series E Preferred Stock earn dividends of 6%, 8%,
8%, 6%, and 6% per annum, respectively, each payable semi-annually on each April
15 and October 15 while outstanding, and which, at our option, may be paid in
cash or in shares of our Common Stock valued at the 10-day volume-weighted
average of the closing sale price of our Common Stock as reported by the primary
stock exchange on which such stock is listed or traded.
D. Recent Sales of Unregistered Securities
We issued unregistered securities in the following transactions, in each
case pursuant to Section 4(2) of the Securities Act and Regulation 506
thereunder, during the fiscal quarter ended March 31, 2007:
o On January 8, 2007, an optionholder exercised its options to purchase
7,000 shares of Common Stock which were exercisable at $2.55 per
share of Common Stock resulting in proceeds to the Company of
$17,850.
o On January 11, 2007, a holder of Series A Preferred Stock converted
500 shares of Series A Preferred Stock and accrued dividends into 2,
851 shares of Common Stock.
E. Conversions of Preferred Stock to Common Stock
Series A Preferred Stock. On January 11, 2007, a holder of Series A
Preferred Stock converted 500 shares of Series A Preferred Stock and accrued
dividends into 2,851 shares of Common Stock.
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F. Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder
returns for our Common Stock, the S&P 500 Index and the Peer Group. The graph
assumes the investment of $100 on April 1, 2002, and the reinvestment of all
dividends. The performance shown is not necessarily indicative of future
performance.
[GRAPHIC OMITTED]
The information contained in the graph above shall not be deemed to be
"soliciting material" or to be "filed" with the SEC, nor shall such information
be incorporated by reference into any future filing under the Securities Act or
the Exchange Act, or subject to Regulation 14A or 14C promulgated under the
Exchange Act, other than as provided in Item 402 of the SEC's Regulation S-K, or
to the liabilities of Section 18 of the Exchange Act, except to the extent that
Immtech specifically requests that the information be treated as soliciting
material or specifically incorporates it by reference in such filing.
TOTAL STOCKHOLDER RETURNS
Total Return To Stockholder's
(Dividends reinvested monthly)
-------------------------------- --------- -------------------------------------------------------------
ANNUAL RETURN PERCENTAGE
YEARS ENDED
-------------------------------- --------- -------------------------------------------------------------
Company Name / Index Mar 03 Mar 04 Mar 05 Mar 06 Mar 07
-------------------------------- --------- ----------- ------------ ----------- ------------ -----------
Immtech Pharmaceuticals, Inc. -6.25 311.58 -32.93 -37.59 -25.80
-------------------------------- --------- ----------- ------------ ----------- ------------ -----------
S&P 500 Index -24.77 35.13 6.67 11.71 11.83
-------------------------------- --------- ----------- ------------ ----------- ------------ -----------
Peer Group -68.34 158.50 0.30 28.17 -14.58
-------------------------------- --------- ----------- ------------ ----------- ------------ -----------
Peer Group Companies
Cubist Pharmaceuticals, Inc. (NASDAQ: CBST)
EntreMed, Inc. (NASDAQ: ENMD)
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Encysive Pharmaceuticals, Inc. (NASDAQ: ENCY)
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data that was
derived from our consolidated financial statements (dollars in thousands except
share and per share data):
Fiscal Year Ended March 31,
---------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- -------
Statement of Operations:
REVENUES.................. $4,318 $3,575 $5,931 $2,416 $1,609
-------- -------- -------- -------- -------
EXPENSES:
Research and development 8,760 9,680 7,309 3,293 2,570
General and administrative 9,095(6) 9,631(5) 12,190(4) 11,989(3) 3,732(1)
Other................... (1,875)(7)
-------- -------- -------- -------- -------
Total expenses.......... 15,980 19,311 19,499 15,282 6,302
LOSS FROM OPERATIONS...... (11,662) (15,736) (13,569) (12,866) (4,693)
-------- -------- -------- -------- -------
OTHER INCOME (EXPENSE):
Interest income......... 530 210 135 20 14
Interest expense........
-------- -------- -------- -------- -------
Other income (expense) - net 530 211 135 20 14
NET LOSS.................. (11,132) (15,526) (13,433) (12,846) (4,679)
PREFERRED STOCK
DIVIDENDS(2) (551) (764) (580) (3,526) (452)(2)
-------- -------- -------- -------- -------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS............ (11,683) (16,290) (14,013) (16,372) (5,131)
======== ======== ======== ======== =======
BASIC AND DILUTED NET (LOSS) INCOME
PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
-------- -------- -------- -------- -------
Net loss................ (0.78) (1.31) (1.27) (1.43) (0.71)
-54-
Fiscal Year Ended March 31,
---------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- -------
Preferred Stock dividends (0.04) (0.06) (0.05) (0.39) (0.07)
-------- -------- -------- -------- -------
BASIC AND DILUTED NET (LOSS) INCOME
PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS............ (0.82) (1.37) $(1.32) $(1.82) $(0.78)
======== ======== ======== ======== =======
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS
PER SHARE............... 14,207,048 11,852,630 10,606,917 8,977,817 6,565,495
Balance Sheet Data:
Cash and cash equivalents. 12,462 14,138 9,472 6,745 112
Restricted funds on deposit 3,119 530 2,044 2,155 2,740
Working capital (deficiency) 10,991 11,910 8,069 6,136 (115)
Total assets.............. 19,144 18,554 15,276 12,586 6,610
Preferred Stock........... 8,796 10,015 7,752 9,522 5,138
Deficit accumulated during
development stage....... (100,525) (88,842) (72,552) (58,539) (42,167)
Stockholders' equity...... 14,456 15,603 11,741 9,748 3,192
--------------------------------
(1) Includes non-cash charges of (i) $758 of costs related to the issuance of
150,000 shares of Common Stock to Cheung Ming Tak to act as the Company's
non-exclusive agent to develop and qualify potential strategic partners
for the purpose of testing and/or the commercialization of Company
products in the PRC, (ii) $188 of costs related to the issuance of 40,000
shares of Common Stock to The Gabriele Group, L.L.C., for assistance with
respect to management consulting, strategic planning, public relations and
promotions and (iii) $89 of costs related to the issuance of 8,333 shares
of Common Stock and the vesting of 29,165 warrants to Fulcrum Holdings of
Australia, Inc. ("Fulcrum").
(2) See Note 8 to the notes to our consolidated financial statements included
in this Annual Report on Form 10-K for a discussion on the Preferred Stock
dividends.
(3) Includes non-cash charges of (i) $2,744 of costs related to 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 the PRC, (ii) $63 for
the issuance of 10,000 shares of Common Stock issued to Mr. David Tat Koon
Shu for consulting services in the PRC, (iii) $1,400 for the issuance of
100,000 shares of Common Stock issued to Fulcrum for assisting with
listing the Company's securities on a recognized stock exchange and for
consulting services, (iv) $2,780 for the vested portion of 91,667 shares
of Common Stock and the vested portion of warrants to purchase 320,835
shares of Common Stock issued to Fulcrum during the fiscal year based on
agreements signed March 21, 2003 and (v) $247 for the attainment of
certain milestones with respect to the vesting of warrants to purchase
20,000 shares of Common Stock issued to Pilot Capital Groups, LLC (f/k/a
The Gabriela Group, LLC) based upon agreements signed July 31, 2002.
(4) Includes non-cash charges of (i) $4,531 of costs related to the four year
extension of warrants received from RADE Management Corporation ("RADE"),
(ii) $233 for the issuance of 20,000 options to Mr. Tony Mok for
consulting services in the PRC, (iii) $301 for the extension of the
unexercised Fulcrum warrants to December 23, 2005 and (iv) $10 for the
extension of warrants initially issued to underwriters to purchase 21,400
shares of Common Stock from April 24, 2004 to May 11, 2004.
(5) Includes non-cash charges of $125 for the repricing and reduced exercise
period of 125,000 Fulcrum warrants. Fulcrum exercised 35,000 warrants. The
remaining 90,000 expired.
-55-
(6) Includes non-cash charges of (i) $36 for the issuance of 5,000 common
shares to Tulane University for the AQ13 agreement, (ii) $36 for the
issuance of 5,000 common shares to T. Stephen Thompson under his
retirement agreement, and (iii) $564,000 for the issuance of 80,000 common
shares to China Pharmaceutical for the attainment of certain milestones.
(7) Includes the award by the International Court of Arbitration of the ICC
for the breach of the Neurochem Testing Agreement by Neurochem and
attorneys' fees and costs of approximately $1,875,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. Overview
With the exception of certain research funding agreements and certain
grants, we have not generated any revenue from operations. For the period from
the date of our inception, October 15, 1984, to March 31, 2007, we incurred
cumulative net losses of approximately $96,084,000. We have incurred additional
operating losses since March 31, 2007 and expect to incur operating losses for
the foreseeable future. We expect that our cash sources for at least the next
year will be limited to:
o payments from UNC-CH, charitable foundations and other research
collaborators under arrangements that may be entered into in the
future;
o research grants, such as Small Business Innovation Research ("SBIR")
grants; and
o sales of equity securities or borrowing funds.
The timing and amounts of grant and other revenues, if any, will likely
fluctuate sharply and depend upon the achievement of specified milestones. Our
results of operations for any period may be unrelated to the results of
operations for any other period.
B. Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of the notes
to our consolidated financial statements included in this Annual Report of Form
10-K. Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
ongoing basis, we evaluate our estimates, including those related to the fair
value of our Preferred Stock and Common Stock and related options and warrants,
the recognition of revenues and costs related to our research contracts, and the
useful lives or impairment of our property and equipment. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis of
judgments regarding the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
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Grants to perform research are our 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. Prepaid cash payments from research and development grants
are reported as deferred revenue until such time as the research and development
activities covered by the grant are performed.
Effective April 1, 2006, we adopted SFAS 123(R), "Share-Based Payment,"
using the modified prospective method. SFAS No. 123(R) requires entities to
recognize the cost of employee services in exchange for awards of equity
instruments based on the grant-date fair value of those awards (with limited
exceptions). That cost, based on the estimated number of awards that are
expected to vest, will be recognized over the period during which the employee
is required to provide the service in exchange for the award. No compensation
cost is recognized for awards for which employees do not render the requisite
service. Upon adoption, the grant-date fair value of employee share options and
similar instruments was estimated using the Black-Scholes valuation model. The
Black-Scholes valuation requires the input of highly subjective assumptions,
including the expected life of the stock-based award and stock price volatility.
The assumptions used are management's best estimates, but the estimates involve
inherent uncertainties and the application of management judgment. As a result,
if other assumptions had been used, the recorded and pro forma stock-based
compensation expense could have been materially different from that depicted in
the financial statements.
We believe that the accounting policies affecting these estimates are
our critical accounting policies.
C. Research and Development Expenses
All research and development costs are expensed as incurred. Research
and development expenses include, but are not limited to, payroll and personnel
expenses, lab supplies, preclinical studies, raw materials to manufacture
clinical trial drugs, manufacturing costs, sponsored research at other labs,
consulting and research-related overhead. Accrued liabilities for raw materials
to manufacture clinical trial drugs, manufacturing costs and sponsored research
reimbursement fees are included in accrued liabilities and included in research
and development expenses. Specific information pertaining to amounts spent
directly on each of our major research and development projects follows. This
information includes to the extent ascertainable, project status, costs incurred
for the relevant fiscal years (including costs to date), nature, timing and
estimated costs of project completion, anticipated completion dates and the
period in which material net cash inflow from projects is expected to commence,
if at all. Not included in the information below are development activities and
the costs therefor undertaken by our Scientific Consortium where we are not
responsible for reimbursement.
All of our research and development projects contain high levels of
risk. Even if development is completed on schedule, there is no guarantee that
any of our products will be licensed for sale. Human trials conducted in foreign
and developing countries have additional risks, including governmental
instability and local militia uprisings that may interrupt or displace our work.
We are unable to quantify the impact to our operations, financial position or
liquidity
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if we are unable to complete on schedule, or at all, any of our
product commercialization programs.
D. Malaria
We expensed research and development costs for our malaria program for
the fiscal years ended March 31, 2005, March 31, 2006 and March 31, 2007 of
approximately $2,270,000, $2,650,000 and $752,000, respectively. Since our
inception through March 31, 2007, approximately $5,967,000 has been expensed on
research and development for our malaria program.
E. PCP
We expensed research and development costs for our PCP program for the
fiscal years ended March 31, 2005, March 31, 2006, and March 31, 2007 of
approximately $362,000, $3,025,000 and $3,993,000, respectively. Since our
inception through March 31, 2006, approximately $7,845,000 has been expensed on
our PCP program. F. African Sleeping Sickness
We expensed research and development costs for our African sleeping
sickness program for the fiscal years ended March 31, 2005, March 31, 2006, and
March 31, 2007 of approximately $3,584,000, $2,756,000 and $2,795,000,
respectively. Since our inception through March 31, 2007, approximately
$15,701,000 has been expensed on the African sleeping sickness program.
G. Antifungal & TB Programs
Each of our antifungal and TB programs is estimated to cost between
$25-40 million dollars (including manufacturing and formulation of their
respective drugs).
We expensed research and development costs for the antifungal program
for the fiscal years ended March 31, 2005, March 31, 2006, and March 31, 2007 of
approximately $29,000, $467,000 and $111,000, respectively. Since our inception
through March 31, 2006, approximately $974,000 has been expensed on the
antifungal program.
We expensed research and development costs for the TB program for the
fiscal years ended March 31, 2005, March 31, 2006 and March 31, 2007 of
approximately $72,000, $0 and $29,000, respectively. Since our inception through
March 31, 2007, approximately $205,000 has been expensed on the TB program.
H. Liquidity and Capital Resources
From our inception through March 31, 2007, we have financed our
operations with:
o proceeds from various private placements of debt and equity
securities, secondary public stock offerings, our initial public
stock offering (our "IPO") and other cash
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contributed from stockholders, which in the aggregate raised
approximately $77,123,000;
o payments from research agreements, foundation grants and SBIR
grants and Small- Business Technology Transfer program grants of
approximately $25,083,000; and
o the use of stock, options and warrants in lieu of cash
compensation.
On February 13, 2007, we completed a secondary public offering of Common
Stock which raised approximately $6,750,000 of gross proceeds through the
issuance of 1,000,000 shares of Common Stock sold to the public at $6.75 per
share. Net proceeds were approximately $6,114,000.
On February 13, 2006, we completed a secondary public offering of Common
Stock which raised approximately $14,880,000 of gross proceeds through the
issuance of 2,000,000 shares of Common Stock sold to the public at $7.44 per
share. Net proceeds were approximately $14,713,000.
On December 13, 2005, we issued an aggregate of 133,600 shares of our
Series E Preferred Stock in a private placement to certain accredited and
non-United States investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act. The gross proceeds of the offering were
$3,340,000. The net proceeds were approximately $3,286,000. We issued to the
purchasers of the Series E Preferred Stock, in connection with the offering,
warrants to purchase in the aggregate 83,500 shares of our Common Stock at an
exercise price of $10.00 per share of Common Stock (a warrant to purchase one
share of Common Stock for each $40 invested in Series E Preferred Stock). The
warrants expire on December 12, 2008. The securities were sold pursuant to
exemptions from registration under the Securities Act. Each purchaser of the
Series E Preferred Stock was also granted an option to purchase, at $25.00 per
share, up to an additional 25% of the number of shares of Series E Preferred
Stock purchased on December 13, 2005 (the option period terminated on March 10,
2006). On March 10, 2006, we completed private placements to the Series E
Preferred Stock option holders of 27,000 additional shares of Series E Preferred
Stock, which resulted in gross proceeds to us of approximately $675,000. Each
share of Series E Preferred Stock, among other things, (i) earns a 6% dividend
payable, at our discretion, in cash or Common Stock, (ii) has a $25.00 (plus
accrued but unpaid dividends) liquidation preference pari passu with our other
outstanding Preferred Stock over our Common Stock, (iii) is convertible at the
initial conversion rate into 3.5511 shares of Common Stock and (iv) may be
converted to Common Stock by us at any time.
On July 30, 2004, we completed a secondary public offering of Common
Stock wherein we sold 899,999 shares of Common Stock. The shares were sold to
the public at $10.25 per share. The net proceeds were approximately $8,334,000.
On January 22, 2004, we sold in private placements pursuant to
Regulation D and Regulation S of the Securities Act (i) 200,000 shares of our
Series D Preferred Stock, $0.01 par value, at a stated value of $25.00 per share
and (ii) warrants to purchase 200,000 shares of our Common Stock with a $16.00
per share exercise price, for the aggregate consideration of $5,000,000 before
issuance cost. The net proceeds were approximately $4,571,000. Each share
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of Series D Preferred Stock, among other things, (i) earns a 6% dividend
payable, at our discretion, in cash or Common Stock, (ii) has a $25.00 (plus
accrued but unpaid dividends) liquidation preference pari passu with our other
outstanding preferred stock, (iii) is convertible at the initial conversion rate
into 2.7778 shares of Common Stock and (iv) may be converted to Common Stock by
us at any time. The related warrants expire five years from the date of grant.
From June 6, 2003 through June 9, 2003, we issued an aggregate of
125,352 shares of our Series C Preferred Stock in private placements to certain
accredited and non-United States investors in reliance on Regulation D and
Regulation S, respectively, under the Securities Act. The securities were sold
pursuant to exemptions from registration under the Securities Act and were
subsequently registered on Form S-3 (Registration Statement No. 333-108278). The
gross proceeds of the offering were $3,133,800 and the net proceeds were
approximately $2,845,000.
On September 25, 2002 and October 28, 2002, we issued an aggregate of
76,725 shares of our Series B Preferred Stock and 191,812 related warrants in
private placements to certain accredited and non-United States investors in
reliance on Regulation D and Regulation S, respectively, under the Securities
Act. The warrants have an exercise period of five years from the date of
issuance and an exercise price of $6.125 per share. The securities were sold
pursuant to exemptions from registration under the Securities Act and were
subsequently registered on Form S-3 (Registration Statement No. 333-101197). The
gross proceeds of the offering were $1,918,125 and the net proceeds were
approximately $1,859,000.
On February 14, 2002 and February 22, 2002, we issued an aggregate of
160,100 shares of our Series A Preferred Stock and 400,250 related warrants in
private placements to certain accredited and non-United States investors in
reliance on Regulation D and Regulation S, respectively, under the Securities
Act. In connection with this offering, we issued in the aggregate 60,000 shares
of Common Stock and 760,000 warrants to purchase shares of Common Stock to
consultants assisting in the private placements. The warrants have an exercise
period of five years from the date of issuance and exercise prices of (i) $6.00
per share for 500,000 warrants, (ii) $9.00 per share for 130,000 warrants and
(iii) $12.00 per share for 130,000 warrants. The $9.00 and $12.00 warrants did
not vest, and therefore were cancelled, since our Common Stock did not meet or
exceed the respective exercise price for 20 consecutive trading days prior to
January 31, 2003. The gross proceeds of the offering were $4,003,000 and the net
proceeds were $3,849,000.
On December 8, 2000, we completed a private placement offering that
raised net proceeds of approximately $4,306,000 of additional net equity capital
through the issuance of 584,250 shares of Common Stock.
On April 26, 1999, we issued 1,150,000 shares of Common Stock through
our IPO, resulting in net proceeds of approximately $9,173,000. The underwriters
in our IPO received warrants to purchase 100,000 additional shares of Common
Stock at $16.00 per share. Those warrants were due to expire on April 25, 2004.
All warrants other than warrants to purchase 21,400 shares expired. The warrant
to purchase 21,400 shares was pursuant to an agreement with the holder and
subsequently exercised.
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Our cash resources have been used to finance research and development,
including sponsored research, capital expenditures, expenses associated with the
efforts of our Scientific 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 early-stage research in
preclinical and clinical trials, increased administrative expenses to support
research and development and commercialization operations and increased capital
expenditures for regulatory approvals, expanded research capacity and various
equipment needs.
As of March 31, 2007, we had federal net operating loss carry-forwards
of approximately $85,557,000, which expire from 2008 through 2027. We also had
approximately $83,559,000 of state net operating loss carryforwards as of March
31, 2007, which expire from 2009 through 2027, available to offset certain
future taxable income for state (primarily Illinois) income tax purposes.
Because of "change of ownership" provisions of the Tax Reform Act of 1986,
approximately $250,000 of our net operating loss carryforwards for federal
purposes are subject to an annual limitation regarding utilization against
taxable income in future periods. As of March 31, 2007, we had federal income
tax credit carryforwards of approximately $1,885,000, which expire from 2008
through 2027.
We believe our existing resources, including proceeds from any grants we
may receive, are sufficient to meet our planned expenditures through June 2008,
although there can be no assurance that we will not require additional funds.
Our working capital requirements will depend upon numerous factors, including
the progress of our research and development programs (which may vary as drug
candidates are added or abandoned), preclinical testing and clinical trials,
achievement of regulatory milestones, our partners fulfilling their obligations
to us, the timing and cost of seeking regulatory approvals, the level of
resources that we devote to the development of manufacturing, our ability to
maintain existing collaborative arrangements and establish new ones with other
companies to provide funding to us to support these activities and other
factors. In any event, we will require substantial funds in addition to our
existing working capital to develop our drug candidates and otherwise to meet
our business objectives.
We have, through our purchase of Super Insight, obtained an ownership
interest in real property in the PRC on which we may construct a pharmaceutical
manufacturing facility. We are exploring the possibility of housing a
pharmaceutical production facility for the manufacture of drug products in this
facility or at other locations within PRC. We may seek partners both in the PRC
and domestically to fund part or all of the capital cost of construction of the
pharmaceutical production line.
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I. Payments Due under Contractual Obligations
We have future commitments at March 31, 2007 consisting of operating
lease obligations as follows:
Year Ending
March 31, Lease Payments
--------- --------------
2008 98,000
--------------
2009 103,000
--------------
2010 99,000
--------------
Total $300,000
--------------
J. Results of Operations
1. Fiscal Year Ended March 31, 2007 Compared with Fiscal Year Ended
March 31, 2006
Revenues under collaborative research and development agreements
increased from approximately $3,575,000 in the fiscal year ended March 31, 2006
to approximately $4,318,000 in the fiscal year ended March 31, 2007. Revenue
relating to the Clinical Research Subcontract increased from approximately
$869,000 in the fiscal year ended March 31, 2006 to approximately $3,922,000 in
the fiscal year ended March 31, 2007, while revenue relating to the MMV Testing
Agreement decreased from approximately $2,663,000 to approximately $396,000 over
the same period. Additionally there were revenues of approximately $43,000
recognized from an SBIR grant from the NIH in the fiscal year ended March 31,
2006.
Research and development expenses decreased from approximately
$9,680,000 in the fiscal year ended March 31, 2006 to approximately $8,760,000
in the fiscal year ended March 31, 2007. Expenses relating to the Clinical
Research Subcontract increased from approximately $2,756,000 in the fiscal year
ended March 31, 2006 to approximately $2,795,000 in the fiscal year ended March
31, 2007. Expenses relating to the MMV Testing Agreement decreased from
approximately $2,650,000 in the fiscal year ended March 31, 2006 to
approximately $455,000 in the fiscal year ended March 31, 2007. Expenses
relating to preclinical and clinical trial costs primarily for PCP and general
research increased from approximately $3,323,000 in the fiscal year ended March
31, 2006 to approximately $4,731,000 in the fiscal year ended March 31, 2007.
The increase in expenses for PCP-related preclinical and clinical trial costs
was primarily due to ongoing Phase III clinical trials in the United States and
Latin America. Non-cash expenses of approximately $779,000 were charged to
research and development in the fiscal year ended March 31, 2007 for expense
related to options given during that fiscal year and options vesting during the
year which are covered by SFAS No. 123(R). The non-cash expense for options in
the fiscal year ended March 31, 2006 was approximately $53,000.
General and administrative expenses were approximately $9,095,000 in the
fiscal year ended March 31, 2007, compared to approximately $9,631,000 in the
fiscal year ended March
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31, 2006. Non-cash general and administrative expenses for Common Stock, stock
options and warrants in the fiscal year ended March 31, 2007 were approximately
$2,173,000 as compared to approximately $151,000 in the fiscal year ended March
31, 2006. Non-cash expenses in the fiscal year ended March 31, 2007 included (i)
approximately $36,000 for the issuance of 5,000 restricted common shares to
Tulane University under the Tulane License Agreement, (ii) approximately $36,000
for the issuance of 5,000 restricted shares of Common Stock to T. Stephen
Thompson, our former chief executive officer, under his retirement agreement,
(iii) approximately $564,000 for the issuance of 80,000 shares of Common Stock
to China Pharmaceutical for the attainment of certain milestones, and (iv)
approximately $1,536,000 for expense related to options given during the fiscal
year ended March 31, 2007 and options vesting during the year which are covered
by SFAS No. 123(R) as compared to non-cash expenses in the fiscal year ended
March 31, 2006 of (i) approximately $125,000 for the reduction in the warrant
price from $15.00 to $8.80 of warrants granted to Fulcrum and the shortening of
the exercise period from December 23, 2005 to November 5, 2005 and (ii)
approximately $26,000 for the issuance of 2,000 shares of Common Stock for
settling a disputed obligation. Legal expenses for patents increased from
approximately $442,000 in the fiscal year ended March 31, 2006 to approximately
$715,000 in the fiscal year ended March 31, 2007. Legal fees, primarily related
to the dispute with Neurochem concerning the Neurochem Testing Agreement
(including fees to the International Chamber of Commerce and expert witnesses),
decreased from approximately $4,778,000 in the fiscal year ended March 31, 2006
to approximately $722,000 the fiscal year ended March 31, 2007. Ongoing expenses
relating to Immtech Therapeutics, Super Insight, Immtech Life Science and
Immtech HK increased from approximately $217,000 in the fiscal year ended March
31, 2006 to approximately $236,000 in the fiscal year ended March 31, 2007.
Accounting fees increased from approximately $217,000 in the fiscal year ended
March 31, 2006 to approximately $228,000 in the fiscal year ended March 31,
2007. Payroll and associated expenses decreased from approximately $1,479,000 in
the fiscal year ended March 31, 2006 to approximately $1,369,000 in the fiscal
year ended March 31, 2007, due primarily to a reduction in administrative
employees. Contract services decreased from approximately $363,000 in the fiscal
year ended March 31, 2006 to approximately $257,000 in the fiscal year ended
March 31, 2007. Travel expenses increased from approximately $399,000 in the
fiscal year ended March 31, 2006 to approximately $502,000 in the fiscal year
ended March 31, 2007. Marketing, business development and commercialization
related expenses increased from approximately $339,000 in the fiscal year ended
March 31, 2006 to approximately $1,722,000 in the fiscal year ended March 31,
2007. All other general and administrative expenses, primarily relating to rent,
Director and Officer insurance, exchange listing fees and franchise taxes,
increased from approximately $685,000 in the fiscal year ended March 31, 2006 to
approximately $1,171,000 in the fiscal year ended March 31, 2007.
Other (see Note 10 in the F section) includes the award by the
International Court of Arbitration of the ICC for the breach of the testing
agreement by Neurochem and attorneys' fees and costs of approximately
$1,875,000, which reduced expenses.
We incurred a net loss of approximately $11,133,000 for the fiscal year
ended March 31, 2007, as compared to a net loss of approximately $15,525,000 for
the fiscal year ended March 31, 2006.
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In the fiscal year ended March 31, 2007, we also charged deficit
accumulated during the development stage of approximately $551,000 of non-cash
Preferred Stock dividends and Preferred Stock premium deemed dividends as
compared to approximately $764,000 in the fiscal year ended March 31, 2006.
2. Fiscal Year Ended March 31, 2006 Compared with Fiscal Year Ended
March 31, 2005
Revenues under collaborative research and development agreements
decreased from approximately $5,931,000 in the fiscal year ended March 31, 2005
to approximately $3,575,000 in the fiscal year ended March 31, 2006. Revenue
relating to the Clinical Research Subcontract decreased from approximately
$3,592,000 in the fiscal year ended March 31, 2005 to approximately $869,000 in
the fiscal year ended March 31, 2006, while revenue relating to the MMV Testing
Agreement increased from approximately $2,275,000 to approximately $2,663,000
over the same period. Additionally there were revenues of approximately $43,000
recognized from an SBIR grant from the NIH in the fiscal year ended March 31,
2006 compared to approximately $63,000 recognized in the fiscal year ended March
31, 2005.
Research and development expenses increased from approximately
$7,309,000 in the fiscal year ended March 31, 2005 to approximately $9,680,000
in the fiscal year ended March 31, 2006. Expenses relating to the Clinical
Research Subcontract decreased from approximately $3,584,000 in the fiscal year
ended March 31, 2005 to approximately $2,756,000 in the fiscal year ended March
31, 2006. Expenses relating to the MMV Testing Agreement increased from
approximately $2,270,000 in the fiscal year ended March 31, 2005 to
approximately $2,650,000 in the fiscal year ended March 31, 2006. Expenses
relating to preclinical and clinical trial costs primarily for PCP increased
from approximately $531,000 in the fiscal year ended March 31, 2005 to
approximately $3,323,000 in the fiscal year ended March 31, 2006. The increase
in expenses for PCP-related preclinical and clinical trial costs was primarily
due to ongoing Phase III clinical trials in the United States and Latin America.
The non-cash expense for options in the fiscal year ended March 31, 2006 was
approximately $53,000 and $102,000 in the fiscal year ended March 31, 2005.
General and administrative expenses were approximately $9,631,000 in the
fiscal year ended March 31, 2006, compared to approximately $12,190,000 in the
fiscal year ended March 31, 2005. Non-cash general and administrative expenses
for Common Stock, stock options and warrants in the fiscal year ended March 31,
2006 were approximately $151,000 as compared to approximately $5,075,000 in the
fiscal year ended March 31, 2005. Non-cash expenses in the fiscal year ended
March 31, 2006 included (i) approximately $125,000 for the reduction in the
warrant price from $15.00 to $8.80 of warrants granted to Fulcrum and the
shortening of the exercise period from December 23, 2005 to November 5, 2005 and
(ii) approximately $26,000 for the issuance of 2,000 shares of Common Stock for
settling a disputed obligation, as compared to non-cash expenses in the fiscal
year ended March 31, 2005 of (i) approximately $4,531,000 for the four year
extension of warrants initially issued to RADE Management Corporation ("RADE"),
(ii) approximately $233,000 for the issuance of options to purchase 20,000
shares of Common Stock issued to Mr. Tony Mok for consulting services in the
PRC, (iii) approximately $301,000 for the extension of the warrants granted to
Fulcrum to December 23, 2005 and (iv) approximately $10,000 for the extension of
21,400 underwriter warrants from April 24, 2004
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to May 11, 2004. Legal expenses for patents decreased from approximately
$449,000 in the fiscal year ended March 31, 2005 to approximately $442,000 in
the fiscal year ended March 31, 2006. Legal fees, primarily related to the
dispute with Neurochem concerning the Neurochem Testing Agreement (including
fees to the International Chamber of Commerce and expert witnesses), increased
from approximately $2,393,000 in the fiscal year ended March 31, 2005 to
approximately $4,778,000 in the fiscal year ended March 31, 2006. Ongoing
expenses relating to Immtech Therapeutics, Super Insight, Immtech Life Science
and Immtech HK decreased from approximately $347,000 in the fiscal year ended
March 31, 2005 to approximately $217,000 in the fiscal year ended March 31,
2006. Accounting fees increased from approximately $199,000 in the fiscal year
ended March 31, 2005 to approximately $217,000 in the fiscal year ended March
31, 2006. Payroll and associated expenses increased from approximately
$1,187,000 in the fiscal year ended March 31, 2005 to approximately $1,479,000
in the fiscal year ended March 31, 2006, due primarily to new hires. Contract
services increased from approximately $277,000 in the fiscal year ended March
31, 2005 to approximately $363,000 in the fiscal year ended March 31, 2006, due
primarily to the use of consultants and market research. Travel expenses
decreased from approximately $500,000 in the fiscal year ended March 31, 2005 to
approximately $399,000 in the fiscal year ended March 31, 2006. Insurance and
state franchise taxes increased from approximately $476,000 in the fiscal year
ended March 31, 2005 to approximately $561,000 in the fiscal year ended March
31, 2006. Marketing related expenses decreased from approximately $662,000 in
the fiscal year ended March 31, 2005 to approximately $339,000 in the fiscal
year ended March 31, 2006. All other general and administrative expenses
increased from approximately $625,000 in the fiscal year ended March 31, 2005 to
approximately $685,000 in the fiscal year ended March 31, 2006.
We incurred a net loss of approximately $15,525,000 for the fiscal year
ended March 31, 2006, as compared to a net loss of approximately $13,433,000 for
the fiscal year ended March 31, 2005.
In the fiscal year ended March 31, 2006, we also charged deficit
accumulated during the development stage of approximately $764,000 of non-cash
Preferred Stock dividends and Preferred Stock premium deemed dividends as
compared to approximately $580,000 in the fiscal year ended March 31, 2005.
3. Impact of Inflation
Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our operations, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when and if marketed.
4. Unaudited Selected Quarterly Information
The following table sets forth certain unaudited selected quarterly
information (amounts in thousands, except per share amounts):
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Fiscal Quarter Ended
----------------------------------------------------------------
March 31, December 31, September 30, June 30,
2007 2006 2006 2006
----------- ----------- ----------- ----------
Statements of Operations Data:
REVENUES................................ $ 1,339 $ 546 $ 491 $ 1,942
----------- ----------- ----------- ----------
EXPENSES:
Research and development.............. 2,674 1,862 1,755 2,469
General and administrative............ 1,881 2,630(6) 2,364 2,220(4)
Other (1,875)(5)
Total expenses........... 4,555 4,492 2,244 4,689
LOSS FROM OPERATIONS.................... (3,216) (3,946) (1,753) (2,747)
----------- ----------- ----------- -----------
OTHER INCOME(EXPENSE):
Interest income....................... 131 117 132 150
NET LOSS................................ (3,085) (3,829) (1,621) (2,597)
PREFERRED STOCK DIVIDENDS AND PREFERRED STOCK PREMIUM
DEEMED DIVIDENDS(1)................... (134) (137) (137) (143)
----------- ----------- ----------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,219) $ (3,966) $ (1,758) $ (2,740)
=========== =========== =========== ==========
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss.............................. $ (0.21) $ (0.27) $ (0.12) $ (0.19)
Preferred Stock dividends............. (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- ----------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS................... $ (0.22) $ (0.28) $ (0.13) $ (0.20)
=========== =========== =========== ==========
Fiscal Quarter Ended
----------------------------------------------------------------
March 31, December 31, September 30, June 30,
2006 2005 2005 2005
----------- ----------- ----------- ----------
Statements of Operations Data:
REVENUES................................ $ 251 $ 965 $ 880 $ 1,479
----------- ----------- ----------- ----------
EXPENSES:
Research and development.............. 1,914 2,825 2,672 2,269
General and administrative............ 1,426 2,144(3) 3,329 2,732(2)
Other
Total expenses........... 3,540 4,969 6,001 5,001
LOSS FROM OPERATIONS.................... (3,089) (4,004) (5,121) (3,522)
----------- ----------- ----------- ----------
OTHER INCOME(EXPENSE):
Interest income....................... 89 21 43 58
----------- ----------- ----------- ----------
NET LOSS................................ (3,000) (3,983) (5,078) (3,464)
PREFERRED STOCK DIVIDENDS AND PREFERRED STOCK PREMIUM
DEEMED DIVIDENDS(1)................... (432) (108) (105) (119)
----------- ----------- ----------- ----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,432) $ (4,091) $ (5,183) $ (3,583)
=========== =========== =========== ==========
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss.............................. $ (0.25) $ (0.34) $ (0.44) $ (0.30)
Preferred Stock dividends............. (0.04) (0.01) (0.01) (0.01)
----------- ----------- ----------- ----------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS................... $ (0.29) $ (0.35) $ (0.45) $ (0.31)
=========== =========== =========== ==========
--------------------------------
(1) See Note 8 to the notes to our consolidated financial statements included
in this Annual Report on Form 10-K for a discussion on the Preferred Stock
dividends.
(2) Includes $26 of costs related to the issuance of 2,000 common shares for
settling a disputed obligation.
(3) Includes $125 of costs related to the reduction of the price of the
Fulcrum warrants from $15.00 to $8.80 and the shortening of the expiration
date from December 23, 2006 to November 5, 2006.
(4) Includes $36 of costs relating to the issuance of 5,000 common shares to
Tulane University for the AQ-13 agreement and $36 of costs relating to the
issuance of 5,000 common shares under the T. Stephen Thompson retirement
agreement.
(5) Includes the award by the International Court of Arbitration of the ICC
for the breach of the Neurochem Testing Agreement and attorneys' fees and
costs of approximately $1,875,000.
(6) Includes $564 of costs relating to the issuance of 80,000 common shares to
China Pharmaceutical for the attainment of certain milestones.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure of market risk associated with risk-sensitive instruments
is not material, as our operations are conducted primarily in U.S. dollars and
we invest primarily in short-term government obligations and other cash
equivalents. We intend to develop policies and procedures to manage market risk
in the future if and when circumstances require.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear following Item 15 of this
Annual Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
A. 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 Officer and
Chief Financial Officer 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 Annual
Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer
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.
B. Internal Controls
We maintain a system of internal controls designed to provide reasonable
assurance that: (1) transactions are executed in accordance with management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit preparation of financial statements in conformity with generally
accepted accounting principles and (b) 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.
C. Management's Report on Internal Control Over Financial Reporting
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934
(the "Exchange Act"), the Company's management evaluated, with the participation
of the Chief
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Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) as of March 31, 2007. Based upon their
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were effective as of March 31, 2007 to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time period specified in the Securities and Exchange Commission rules and forms,
and to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate, to allow timely decisions
regarding required disclosure.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of March 31, 2007 has been audited by Deloitte &
Touche, LLP, an independent registered public accounting firm, as stated in
their Report on Internal Control over Financial Reporting which is included in
this Annual Report on Form 10-K on page F-2.
ITEM 9B. OTHER INFORMATION
On June 8, 2007, the Company entered into an exclusive licensing
agreement pursuant to which we have licensed to Par Pharmaceutical Companies,
Inc. ("Par") commercialization rights in the United States to pafuramidine for
the treatment of PCP in AIDS patients.
In return, we received an initial payment of $3 million. Par will also
pay us as much as $29 million in development milestones if pafuramidine advances
through ongoing Phase III clinical trials and FDA regulatory review and
approval. In addition to royalties on sales, we may receive up to $115 million
in additional milestone payments on future sales and will retain the right to
co-market pafuramidine in the United States. We have also granted Par a right of
first offer to negotiate a license agreement with us if we determine that
pafuramidine can be used for the treatment and/or prophylaxis of malaria.
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PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Information Regarding Directors and Executive Officers
The table below sets forth the names and ages of our directors and
executive officers as of June 4, 2007, as well as the positions and offices held
by such persons. A summary of the background and experience of each of these
individuals is set forth after the table. Each director serves for a term of one
year and is eligible for reelection at our next annual stockholders' meeting.
Name Age Position(s)
-------------------------------- ----- --------------------------------------------------------------------------
Eric L. Sorkin 47 President, Chief Executive Officer and Chairman of the Board of Directors
Cecilia Chan 44 Executive Director and Director
Gary C. Parks 57 Chief Financial Officer, Secretary and Treasurer
Carol Ann Olson, MD, Ph.D. 54 Senior Vice President and Chief Medical Officer
Judy Lau 46 Director
Levi H.K. Lee, MD 65 Director
Donald F. Sinex 56 Director
Eric L. Sorkin, President, Chief Executive Officer and Chairman of the
Board of Directors. In 2000, Mr. Sorkin became a director of the Registrant. In
2005, he was appointed Chairman of the Board of Directors and in January 2006,
Chief Executive Officer. He became President in May 2006. Mr. Sorkin began his
career on Wall Street in 1982 at Dean Witter, which is now a subsidiary of
Morgan Stanley. From an entry-level position, he was promoted to Managing
Director within six years. Mr. Sorkin was among the core group of professionals
at Dean Witter that developed the firm's investment portfolio to assets of over
$3 billion. Mr. Sorkin was responsible for investment selection, negotiations,
transaction and financial structuring, debt placement and asset management. Mr.
Sorkin was a Vice President, owner, and/or director of over 20 public investment
partnerships with investment funds totaling over $1 billion. In 1993, Mr. Sorkin
created his own investment firm and began making private equity investments in
the United States and in the PRC. Mr. Sorkin graduated from Yale University with
a B.A. in Economics.
Cecilia Chan, Executive Director and Director. Ms. Chan has served as a
member of the Board of Directors since November 16, 2001. She joined the
Registrant as Vice President in July, 1999 and was appointed to her current
post, Executive Director, in March, 2006. She has 20 years of experience in
making investments and in business development. She began working on our growth
strategy in 1998, spearheading our IPO in April 1999. Ms. Chan is responsible
for strategic development, fund raising and directing our uses of capital
resources. Prior to joining us, Ms. Chan was a Vice President at Dean Witter
until 1993 and thereafter concentrated her efforts as a private investor until
she joined us. During her eight years at Dean Witter, Ms. Chan completed over
$500 million in investments and was Vice-President of public partnerships having
assets in excess of $800 million. Since 1993, Ms. Chan has developed and funded
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investments in the United States and in the PRC. She graduated from New York
University in 1985 with a Bachelor of Science degree in International Business.
Gary C. Parks, Secretary, Treasurer and Chief Financial Officer. Mr.
Parks joined us in January 1994, having previously served at Smallbone, Inc.,
from 1989 until 1993, where he was Vice President, Finance. Mr. Parks was a
Division Controller with International Paper from 1986 to 1989. Prior to that,
he was Vice President, Finance, of SerckBaker, Inc., a subsidiary of BTR plc,
from 1982 to 1986 and a board member of SerckBaker de Venezuela. Mr. Parks holds
a B.A. from Principia College and an MBA from the University of Michigan.
Carol Ann Olson, MD, Ph.D., Senior Vice President and Chief Medical
Officer. Dr. Olson leads the development of our pharmaceutical products from
drug candidate status through global registration and launch, followed by
appropriate life cycle management. She is responsible for strategic planning and
execution of all aspects of the clinical development plans, including
preclinical and clinical research, chemistry, manufacturing and controls,
regulatory affairs, and regulatory compliance and quality assurance. Dr. Olson
joined the Company in October 2004 from Abbott Laboratories, where she worked
for 11 years in various functions, most recently as Global Project Head and
Global Medical Director for all Abbott antibiotics. In this capacity, Dr. Olson
handled strategic planning, execution of clinical development plans, drug
product safety, scientific communications, regulatory affairs planning and
execution, and support for the commercial success of these products. Dr. Olson
received her MD with Honors in 1986 from The Pritzker School of Medicine, The
University of Chicago, and her Ph.D. in Biochemistry in 1982 from The University
of Chicago. While at Abbot Laboratories she received the Outstanding Achievement
Award, Global Medical Affairs (2001) and the Chairman's Award (1994).
Judy Lau, Director. Ms. Lau has served as a member of the Board of
Directors since October 31, 2003. Since July 2002, Ms. Lau has served as the
Chairperson of Convergent Business Group, a Hong Kong-based investment advisory
firm with investments focused in high technology, life sciences, healthcare and
environmental engineering projects in the greater China region. From May of 2001
to July of 2002, Ms. Lau served as General Manager of China Overseas Venture
Capital Co. Ltd., a venture capital firm. From October of 2000 to April of 2001,
Ms. Lau served as Chief Executive Officer of the Good Fellow Group, a Chinese
investment firm; and from March of 1999 to September of 2000, Ms. Lau was the
Managing Director of America Online HK, an Internet Service Provider and Hong
Kong affiliate of Time Warner, Inc. From April of 1998 to February of 1999, Ms.
Lau worked as a consultant to Pacific Century Group. Ms. Lau has served in the
position of Director of Immtech HK since June, 2003. Ms. Lau was named in 2000,
one of the thirty-six most influential Business Women of Hong Kong by Capital
Magazine and is a Fellow of the Hong Kong Association for the Advancement of
Science and Technology.
Levi Hong Kaye Lee, MD, Director. Dr. Lee has served as Director since
October 31, 2003. Dr. Lee has been in private medical practice, specializing in
pediatrics, since 1971. His practice is located in Hong Kong. Dr. Lee received a
B.A. in Biochemistry from the University of California, Berkeley, in 1962, and
received his M.D. from the University of California, San Francisco, in 1966. Dr.
Lee has served in the position of Director of Immtech HK since June, 2003. He
was appointed a Diplomat of the American Board of Pediatrics in 1971.
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Donald F. Sinex, Director. Mr. Sinex has served as a Director since
October 2006. Since 1997, Mr. Sinex has been a partner with Devonwood Investors,
LLC, a private equity firm specializing in real estate and general corporate
investments. Prior to founding Devonwood Investors in 1997, Mr. Sinex was
executive vice president and managing director of JMB Realty Corporation, one of
the largest commercial real estate companies in the United States. While at JMB
Realty Corporation, Mr. Sinex managed all acquisitions and investments in New
York City, Washington, and Boston, and completed acquisitions of over $6.5
billion of assets during his tenure. Mr. Sinex received his B.A. from the
University of Delaware, a J.D. degree from the University of Miami School of
Law, and an MBA from the Harvard Business School
B. Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers and 10% stockholders of a registered class of equity securities to file
reports of ownership and reports of changes in ownership of our Common Stock and
other equity securities with the SEC. Directors, executive officers and 10%
stockholders are required to furnish us with copies of all Section 16(a) forms
they file. Based on a review of the copies of such reports furnished to us, we
believe that during the fiscal year ended March 31, 2007, our directors and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them. Dr. Carol Ann Olson was late with one Form 4 filing due to an
administrative error.
C. Board Committees
The Board of Directors has an Audit Committee, a Compensation Committee
and a nominating committee. The function, composition, and number of meetings
of each of these committees are described below.
1. Audit Committee
The Audit Committee (a) has sole authority to appoint, replace and
compensate our independent registered public accounting firm and is directly
responsible for oversight of its work; (b) approves all audit fees and terms, as
well as any permitted non-audit services; (c) meets and discusses directly with
our independent registered public accounting firm its audit work and related
matters and (d) oversees and performs such investigations with respect to our
internal and external auditing procedures and affairs as the Audit Committee
deems necessary or advisable and as may be required by applicable law. Our audit
committee's charter can be found in the "Corporate Governance" section of our
website at www.immtechpharma.com.
The members of the Audit Committee are Mr. Sinex (Chairman), Dr. Lee and
Ms. Lau. Each member of the audit committee is "independent" in accordance with
the current listing standards of the American Stock Exchange and Mr. Sinex
qualifies as an "audit committee financial expert" as defined under the rules of
the SEC.
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2. Compensation Committee
The Compensation Committee (a) annually reviews and determines salaries,
bonuses and other forms of compensation paid to our executive officers and
management; (b) selects recipients of awards of incentive stock options and
non-qualified stock options and establishes the number of shares and other terms
applicable to such awards; and (c) construes the provisions of and generally
administers the Second Amended and Restated Immtech Pharmaceuticals, Inc. 2000
Stock Incentive Plan.
The members of the Compensation Committee are Ms. Lau (Chairman), Dr.
Lee and Mr. Sinex. Each member of the compensation committee is "independent" in
accordance with the current listing standards of the American Stock Exchange.
Our compensation committee's charter can be found in the "Corporate Governance"
section of our website at www.immtechpharma.com.
3. Nominating Committee
The nominating committee has authority to review the qualifications of,
interview and nominate candidates for election to the board of directors. Our
nominating committee's charter can be found in the "Corporate Governance"
section of our website at www.immtechpharma.com. The members of the nominating
committee are Dr. Lee (Chairman), Ms. Lau and Mr. Sinex. Each member of the
nominating committee is "independent" in accordance with the current listing
standards of the American Stock Exchange.
The primary functions of the nominating committee are to:
o recruit, review and nominate candidates for election to the board
of directors;
o monitor and make recommendations regarding committee functions,
contributions and composition;
o develop the criteria and qualifications for membership on the
board of directors; and
o administer any director compensation plan.
The nominating committee will consider recommendations for director
candidates submitted in good faith by stockholders. A stockholder recommending
an individual for consideration by the nominating committee must provide (i)
evidence in accordance with Rule 14a-8 of the Exchange Act of compliance with
the stockholder eligibility requirements, (ii) the written consent of the
candidate(s) for nomination as a director, (iii) a resume or other written
statement of the qualifications of the candidate(s) and (iv) all information
regarding the candidate(s) that would be required to be disclosed in a proxy
statement filed with the SEC if the candidate(s) were nominated for election to
the board, including, without limitation, name, age, business and residence
address and principal occupation or employment during the past five years.
Stockholders should send the required information to the Company at 150 Fairway
Drive, Suite 150, Vernon Hills , Illinois 60061, Attention: Mr. Gary C. Parks.
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For board membership, the nominating committee takes into consideration
applicable laws and regulations (including those of the American Stock
Exchange), diversity, age, skills, experience, integrity, ability to make
independent analytical inquires, understanding of Immtech's business and
business environment, willingness to devote adequate time and effort to board
responsibilities and other relevant factors.
D. Communications with the Board of Directors
The board has provided a procedure for stockholders or other persons to
send written communications to the board, a board committee or any of the
directors, including complaints to the audit committee regarding accounting,
internal accounting controls, or auditing matters. Stockholders may send written
communications to the board, the appropriate committee or any of the directors
by certified mail only, c/o Audit Committee Chairman, Immtech Pharmaceuticals,
Inc., One North End Avenue, New York, NY 10282. All such written communications
will be compiled by the Chairman of the Audit Committee and submitted to the
board, a committee of the board or the individual directors, as appropriate,
within a reasonable period of time. These communications will be retained with
Immtech's corporate records.
E. Code of Ethics
We have adopted a "Code of Ethics", as defined by the SEC, that applies
to our Chief Executive Officer, Chief Financial Officer, principal accounting
officer and persons performing similar functions with Immtech and our
subsidiaries as well as all of our other employees. A copy of our Code of Ethics
is available on our Internet website (www.immtechpharma.com).
F. Family Relationships
There are no family relationships between or among any officer or
director of Immtech.
ITEM 11. EXECUTIVE COMPENSATION
A. Compensation Discussion and Analysis
1. Overview
The compensation committee of our board of directors has overall
responsibility for the compensation program for our executive officers. Our
compensation committee consists solely of independent directors, as determined
by the American Stock Exchange listing standards. The committee's
responsibilities are set forth in its charter, which you can find on our website
at www.immtechpharma.com.
The compensation committee is responsible for establishing policies and
otherwise discharging the responsibilities of the board with respect to the
compensation of our executive officers, senior management, and other employees.
In evaluating executive officer pay, the compensation committee may retain the
services of an independent compensation consultant or research firm and consider
recommendations from the chief executive officer and persons serving in
supervisory positions over a particular officer or executive officer with
respect to goals and compensation of the other executive officers. The
compensation committee assesses
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the information it receives in accordance with its business judgment. The
compensation committee also periodically is responsible for administering all of
our incentive and equity-based plans. All decisions with respect to executive
compensation are first approved by the compensation committee and then
submitted, together with the compensation committee's recommendation, to the
independent members of the board for final approval.
We believe that the compensation of our executives should reflect their
success in attaining key operating objectives. Compensation is based on growth
of operating earnings and earnings per share, return on assets, satisfactory
results of regulatory examinations, growth or maintenance of market share and
long-term competitive advantage, which lead to attaining an increased market
price for our stock. We promote asset growth and asset quality. We believe the
performance of the executives in managing our company, considering general
economic and company, industry and competitive conditions, should be the basis
for determining our executives' overall compensation. We also believe that their
compensation should not be based on the short-term performance of our stock,
whether favorable or unfavorable. The price of our stock will, in the long-term,
reflect our operating performance, and ultimately, the management of our company
by our executives. We seek to have the long-term performance of our stock
reflected in executive compensation through our stock option program.
Elements of compensation for our executives include:
o base salary (typically subject to upward adjustment annually
based on individual performance);
o stock option awards;
o 401(k) plan contributions; and
o health, disability and life insurance.
In making its recommendations to our independent directors, our
compensation committee relies upon its own judgment in making compensation
decisions, after reviewing the performance of the company and carefully
evaluating an executive's performance during the year against established goals,
leadership qualities, operational performance, business responsibilities, career
with our company, current compensation arrangements and long-term potential to
enhance shareholder value. Our compensation committee also reviews the history
of all the elements of each executive officer's total compensation over the past
several years and compares the compensation of the executive officers with that
of the executive officers in an appropriate market comparison group comprised of
other biotechnology and pharmaceutical companies similar in size, stage of
development and other characteristics. Typically, our chief executive officer
makes compensation recommendations to our compensation committee with respect to
the executive officers who report to him. Our compensation committee also
considers recommendations submitted by other persons serving in a supervisory
position over a particular officer or executive officer. Such executive officers
are not present at the time of these deliberations. The compensation committee
then makes its formal recommendations to the other independent members of our
board which then sets the final compensation for officers and executive
officers.
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We choose to pay the various elements of compensation discussed in order
to attract and retain the necessary executive talent, reward annual performance
and provide incentive for primarily long-term strategic goals, while considering
short-term performance. The amount of each element of compensation is determined
by or under the direction of our compensation committee, which uses the
following factors to determine the amount of salary and other benefits to pay
each executive:
o performance against corporate and individual objectives for the
previous year;
o difficulty of achieving desired results in the coming year;
o value of their unique skills and capabilities to support
long-term performance of the Company;
o performance of their management responsibilities;
o whether an increase in responsibility or change in title is
warranted; and
o contribution as a member of the executive management team.
Our allocation between long-term and currently paid compensation is
intended to ensure adequate base compensation to attract and retain personnel,
while providing incentives to maximize long-term value for our company and our
shareholders. We provide cash compensation in the form of base salary to meet
competitive salary norms and reward performance on an annual basis. We provide
non-cash compensation to reward performance against specific objectives and
long-term strategic goals. Our compensation package for the fiscal year ending
March 31, 2007 ranges from 100% to 53% in cash compensation and 0% to 47% in
non-cash compensation, including benefits and equity-related awards. We believe
that this ratio is competitive within the marketplace for companies at our stage
of development and appropriate to fulfill our stated policies.
2. Elements of Compensation
i. Base Salary
Our compensation committee desires to establish salary compensation for
our executive officers based on our operating performance relative to comparable
peer companies over a three year period. In recommending base salaries for the
fiscal year ending March 31, 2007, our compensation committee considered
salaries paid to executive officers of other biotechnology and pharmaceutical
companies similar in size, stage of development and other characteristics. Our
compensation committee's objective is to provide for base salaries that are
competitive with the average salary paid by our peers. In making its
recommendations, our compensation committee takes into account recommendations
submitted by persons serving in a supervisory position over a particular officer
or executive officer.
With respect to our fiscal year end March 31, 2007, the base salaries
for our executive officers are reflected in our summary compensation table
below.
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Base salaries for the current fiscal year are as follows:
--------------------------------------- --------------------------
Eric L. Sorkin $ 375,000
--------------------------------------- --------------------------
Cecilia Chan $ 201,234
--------------------------------------- --------------------------
Gary Parks $ 200,000
--------------------------------------- --------------------------
Carol Olson $ 235,000
--------------------------------------- --------------------------
ii. Bonus and Other Non-Equity Incentive Plan Compensation
Given our stage of development and our desire to conserve cash, we
generally do not award cash bonuses or provide for other non-equity incentive
plan compensation. However, Mr. Sorkin, our chief executive officer, is entitled
to a cash bonus of up to 60% of his base salary for each year of his employment
with us based on milestones to be determined by our compensation committee
pursuant to the terms of his employment agreement with us. Those milestones have
not yet been determined for the current fiscal year. iii. Stock Option and
Equity Incentive Programs
We believe that equity grants provide our executive officers with a
strong link to our long-term performance, create an ownership culture and
closely align the interests of our executive officers with the interests of our
shareholders. Because of the direct relationship between the value of an option
and the market price of our common stock, we have always believed that granting
stock options is the best method of motivating the executive officers to manage
our Company in a manner that is consistent with the interests of our Company and
our shareholders. In addition, the vesting feature of our equity grants should
aid officer retention because this feature provides an incentive to our
executive officers to remain in our employ during the vesting period. In
determining the size of equity grants to our executive officers, our
compensation committee considers our company-level performance, the applicable
executive officer's performance, the period during which an executive officer
has been in a key position with us, comparative share ownership of our
competitors, the amount of equity previously awarded to the applicable executive
officer, the vesting of such awards, the number of shares available under our
2000 Plan, the limitations under our 2000 Plan and the recommendations of
management and any other consultants or advisors with whom our compensation
committee may choose to consult.
We currently do not have any formal plan requiring us to grant, or not
to grant, equity compensation on specified dates. With respect to newly hired
executives, our practice is typically to consider stock grants at the first
meeting of the compensation committee and board, following such executive's hire
date. The recommendations of the compensation committee are subsequently
submitted to the board for approval. We intend to ensure that we do not award
equity grants in connection with the release, or the withholding, of material
non-public information, and that the grant value of all equity awards is equal
to the fair market value on the date of grant.
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We entered into an employment agreement with Mr. Sorkin in December 2006
pursuant to which we intended to grant Mr. Sorkin stock options to purchase to
purchase up to 325,000 of our shares of common stock, subject to stockholder
approval of a new equity incentive plan. In March 2007, we amended and restated
the agreement at Mr. Sorkin's request to remove the requirement that he be
granted stock options to purchase up to 325,000 shares of our common stock, and
to provide that he will be eligible for future stock options conditioned on our
achievements and milestones as determined by our compensation committee and our
other independent directors.
We granted stock options to the executive officers on October 16, 2006.
In keeping with our standard policy and practice, the exercise price of the
stock options that were awarded was $ 5.74 per share, the fair market value on
the date of grant. The options generally vest ratably over a two year period
from the date of grant and expire ten years from the date of grant. The options
that were granted are set forth in the Grants of Plan-Based Awards table below.
All options are intended to be qualified stock options as defined under Section
422 of the Internal Revenue Code of 1986, as amended, to the extent possible.
iv. Perquisites
Our executives do not receive any perquisites and are not entitled to
benefits that are not otherwise available to all of our employees. In this
regard it should be noted that we do not provide pension arrangements,
post-retirement health coverage, or similar benefits for our executives or
employees.
v. Defined Contribution Plan
We maintain a qualified retirement plan pursuant to Internal Revenue
Code Section 401(k) covering substantially all employees subject to certain
minimum age and service requirements. Our 401(k) plan allows employees to make
voluntary contributions. The assets of the 401(k) plan are held in trust for
participants and are distributed upon the retirement, disability, death or other
termination of employment of the participant.
Employees who participate in our 401(k) may contribute to their 401(k)
account up to the maximum amount that varies annually in accordance with the
Internal Revenue Code. We also make available to 401(k) plan participants the
ability to direct the investment of their 401(k) accounts in various investment
funds.
3. Employment Agreements
In general, we do not enter into formal employment agreements with our
employees, other than our chief executive officer. We have entered into an
employment agreement with Mr. Sorkin, our current president and chief executive
officer, and previously Mr. Thompson, our former president and chief executive
officer.
Our compensation committee recommended these agreements in part to
enable us to induce our chief executives to work at a small, dynamic and rapidly
growing company where their longer-term compensation would largely depend on
future stock appreciation. Our chief executive officer may from time to time
have competitive alternatives that may appear to him to
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be more attractive or less risky than working at Immtech. The change in control
and severance benefits also mitigate a potential acquisition of the company,
particularly when services of the executive officer may not be required by the
acquiring company. A description of the terms of these agreements, including
post-employment payments and triggers, is included in the section entitled
"Potential Payments Upon Termination or Change in Control."
4. Accounting and Tax Considerations
We select and implement our various elements of compensation for their
ability to help us achieve our performance and retention goals and not based on
any unique or preferential financial accounting treatment. In this regard,
Section 162(m) of the Internal Revenue Code generally sets a limit of $1.0
million on the amount of annual compensation (other than certain enumerated
categories of performance-based compensation) that we may deduct for federal
income tax purposes. Compensation realized upon the exercise of stock options is
considered performance based if, among other requirements, the plan pursuant to
which the options are granted has been approved by the a company's stockholders
and has a limit on the total number of shares that may be covered by options
issued to any plan participant in any specified period. Options granted under
our Amended & Restated 2000 Stock Incentive Plan are considered performance
based. Therefore any compensation realized upon the exercise of stock options
granted under the 2000 Plan will be excluded from the deductibility limits of
Section 162(m). While we have not adopted a policy requiring that all
compensation be deductible, we consider the consequences of Section 162(m) in
designing our compensation practices.
5. Stock Ownership Guidelines
Although we have not adopted any stock ownership guidelines, we believe
that our compensation of executive officers, which includes the use of stock
options, results in an alignment of interest between these individuals and our
stockholders.
B. Report of the Compensation Committee
The compensation committee has reviewed and discussed the Compensation
Discussion and Analysis (the "CD&A") for the year ended March 31, 2007 with
management. In reliance on the reviews and discussions referred to above, the
compensation committee recommended to the board that the CD&A be included in the
Annual Report on Form 10-K for the year ended March 31, 2007 for filing with the
Securities and Exchange Commission.
By the Compensation Committee of the Board of Directors:
Judy Lau, Compensation Committee Chair
Levi H.K. Lee, M.D., Compensation Committee Member
Donald F. Sinex, Compensation Committee Member
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C. Named Executive Officer Compensation
SUMMARY COMPENSATION TABLE
Change in
Pension
Non-equity Value and
Name and Stock Option Incentive Plan NQDC All Other
Principal Salary Bonus Awards Awards Compensation Earnings Compensation Total
Position Year $ $ $ $ (2) $ $ $ $
-------- ---- - - - - - - - -
Eric L. Sorkin(1) 2007 0 ----- ----- $201,465 ----- ----- ----- $201,465
Chief Executive
Officer and
Chairman
Cecilia Chan 2007 $201,234 ----- ----- $101,656 ----- ----- ----- $302,890
Executive
Director and
Director
Gary C. Parks 2007 $188,431 ----- ----- $111,760 ----- ----- ----- $300,191
Secretary,
Treasurer and
Chief Financial
Officer
Carol Ann Olson, 2007 $223,333 ----- ----- $200,624 ----- ----- ----- $423,957
MD, Ph.D.
Senior Vice
President and
Chief Medical
Officer
--------------------------------
(1) Mr. Sorkin became Chief Executive Officer on January 23, 2006 and
subsequently became President on May 1, 2006. Mr. Sorkin's direct
compensation started April 1, 2007 at an annual rate of $375,000.
(2) This column represents the dollar amount recognized for financial
statement reporting purposes with respect to the 2007 fiscal year for the
fair value of the stock options granted to each of the named executive
officers in 2007 and prior fiscal years, in accordance with SFAS 123(R).
The amounts shown exclude the impact of estimated forfeitures related to
service-based vesting conditions. For additional information on the
valuation assumptions with respect to the 2006 grants, please refer to the
notes in our financial statements. These amounts reflect our accounting
expense for these awards, and do not correspond to the actual value that
will be recognized by the named executive officers.
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D. Stock Option Grants and Exercises During the Fiscal Year Ended March 31
,2007
The following table sets forth information concerning stock option
grants made during the fiscal year ended March 31, 2007, to our executive
officers named in the "Summary Compensation Table" above. This information is
for illustration purposes only and is not intended to predict the future price
of our Common Stock. The actual future value of the options will depend on the
market value of the Common Stock.
GRANTS OF PLAN-BASED AWARDS
Estimated Estimated
Future Payouts Future Payouts All Other
Under Non-Equity Under Equity Stock All Other
Incentive Plan Awards Incentive Plan Awards Awards: Options Exercise
----------------------------- ---------------------------- Number Awards: or Base Grant
of Number of Price of Date Fair
Shares Securities Option Value of
of Stock Underlying Awards Option
Grant Threshold Target Maximum Threshold Target Maximum or Units Options (#) ($/Sh) Awards
Name Date ($) ($) ($) ($) ($) ($) (#) (#) (1) (2) ($) (3)
---------------- -------- ----------- -------- --------- ----------- -------- ------- ---------- ----------- ------ -------
Eric L. Sorkin 10/16/06 ---- ---- ---- ---- ---- ---- ---- 75,000 5.74 362,009
Cecilia Chan 10/16/06 ---- ---- ---- ---- ---- ---- ---- 75,000 5.74 362,009
Gary C. Parks 10/16/06 ---- ---- ---- ---- ---- ---- ---- 30,000 5.74 144,803
Carol Ann Olson 10/16/06 ---- ---- ---- ---- ---- ---- ---- 30,000 5.74 144,803
(1) These options vest and become exercisable in equal monthly installments
with the first installment vesting on October 16, 2006. The options expire
10 years from the date of grant on October 16, 2006.
(2) This column shows the exercise price for the stock options granted, which
was the closing price of our common stock on October 16, 2006, the date of
grant.
(3) This column represents the dollar amount recognized for financial
statement reporting purposes with respect to the 2007 fiscal year for the
fair value of the stock options granted to each of the named executive
officers in 2007 in accordance with SFAS 123(R). The amounts shown exclude
the impact of estimated forfeitures related to service-based vesting
conditions. For additional information on the valuation assumptions with
respect to the 2006 grants, please refer to the notes in our financial
statements. These amounts reflect our accounting expense for these awards,
and do not correspond to the actual value that will be recognized by the
named executive officers.
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The following table sets forth certain information with respect to
outstanding option and warrant awards of the named executive officers for the
fiscal year ended March 31, 2007.
OUTSTANDING EQUITY AWARDS AT MARCH 31, 2007
Option/Warrant Awards Stock Awards
------------------------------------------------------------------ --------------------------------------------
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market or
Equity Market Awards: Payout
Number of Number of Incentive Plan Value of Number of Value of
Securities Securities Awards Shares or Unearned Unearned
Underlying Underlying Number of Number of Units of Shares, Shares,
Unexercised Unexercised Securities Shares or Stock Units or Units or
Options/ Options/ Underlying Option/ Option/ Units of that Have Other Other
Warrants Warrants Unexercised Warrant Warrant Stock That Not Rights that Rights that
Exercisable Unexercisable Unearned Exercise Expiration Have Not Vested Have Not Have
Name (#)(1) (#)(1) Options (#) Price($) Date (2) Vested (#) ($) Vested (#) Vested ($)
------------------ ---------------- -------------- ------------- -------- ------------ ----------- --------- ------------ ----------
Eric L. Sorkin 36,923 (3) 0 --- 6.47 7/24/2008 --- --- --- ---
173,077 (3) 0 --- 6.47 10/12/2008 --- --- --- ---
972 0 --- 2.55 12/24/2007 --- --- --- ---
22,000 0 --- 14.29 2/2/2014 --- --- --- ---
22,000 0 --- 11.03 11/16/2014 --- --- --- ---
12,153 8,681 --- 7.85 1/25/2016 --- --- --- ---
15,625 59,325 --- 5.74 10/16/2016 --- --- --- ---
Cecilia Chan 50,123 (3) 0 --- 6.47 7/24/2008 --- --- --- ---
173,077 (3) 0 --- 6.47 10/12/2008 --- --- --- ---
22,000 0 --- 2.55 12/24/2012 --- --- --- ---
25,000 0 --- 21.66 11/6/2013 --- --- --- ---
20,000 0 --- 9.41 9/8/2014 --- --- --- ---
15,625 59,325 --- 5.74 10/16/2016 --- --- --- ---
Gary C. Parks 14,195 0 --- 1.74 4/16/2008 --- --- --- ---
10,000 0 --- 10.00 7/20/2011 --- --- --- ---
25,000 0 --- 2.55 12/24/2012 --- --- --- ---
15,000 0 --- 21.66 11/6/2013 --- --- --- ---
15,000 0 --- 9.41 9/8/2014 --- --- --- ---
11,667 8,333 --- 7.29 1/24/2016 --- --- --- ---
6,250 23,750 --- 5.74 10/16/2016 --- --- --- ---
Carol Ann Olson 26,666 (4) 13,334 (4) --- 8.38 10/18/2014 --- --- --- ---
17,500 12,500 --- 7.29 1/24/2016 --- --- --- ---
6,250 23,750 --- 5.74 10/16/2016 --- --- --- ---
(1) Except as indicated, the options granted vest and become exercisable in
monthly installments over a two year period, commencing on the date of
grant.
(2) The options expire on the date shown in this column, which is ten years
from the date of grant, with the sole exception of the December 24, 2002
grant of stock options to Mr. Sorkin with a five-year expiration term.
(3) The amount represents the shares of common stock issuable upon exercise of
the vested warrants.
(4) The options granted vest and become exercisable ratably over a three year
period, commencing on the first anniversary of the date of grant.
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OPTION/WARRANT EXERCISES
Option/Warrant Awards
---------------------------------------------
Number of
Shares Acquired Value Realized
on on Exercise
Name Exercise (#) ($)
------------------------------- ----------------------- ---------------------
Eric L. Sorkin 5,000 (3,550) (1)
4,000 5,040 (2)
Cecilia Chan 0
Gary C. Parks 500 630 (2)
Carol Ann Olson 0
----------------------
(1) Based on the market value of $5.29 per share, minus the average per share
exercise price of $6.00 multiplied by the number of shares underlying the
warrant.
(2) Based on the market value of $7.26 per share, minus the average per share
exercise price of $6.00 multiplied by the number of shares underlying the
warrant.
E. Post-Employment Compensation
1. Employment Agreement with Mr. Sorkin
Upon becoming the Company's Chief Executive Officer in January 2006, Mr.
Sorkin elected to provide services to the Company without receiving an annual
salary. On December 20, 2006, the Company and Mr. Sorkin entered into an
employment agreement pursuant to which Mr. Sorkin was engaged as the Company's
President and Chief Executive Officer through March 31, 2007, with annual
automatic renewals, unless either party provides not less than 30 days written
notice. Mr. Sorkin is entitled to receive an annual cash salary of $375,000
beginning on April 1, 2007. In connection with the employment agreement, he also
had the right to receive a stock option to purchase up to 325,000 shares of the
Company's common stock for an exercise price equal to $9.01, the closing price
of our common stock on the date the agreement was signed, subject to the
stockholders approval of a new equity incentive plan. Under the terms of the
agreement, Mr. Sorkin also may receive (i) a cash bonus of up to 60% of his base
salary beginning with the fiscal year ended March 31, 2008, based on milestones
set in the sole discretion of the Compensation Committee or in the discretion of
the Compensation Committee together with the other independent members of the
board of directors (as directed by the Board). The Agreement was amended and
restated in March 2007 at the request of Mr. Sorkin to remove the requirement
that he be granted the 325,000 stock options and to provide that he will be
eligible for future stock options conditions on the Company's achievements and
milestones as determined by the compensation committee and the other independent
directors of the Board.
If Mr. Sorkin is terminated without cause (as defined) or resigns for
good reason (as defined), then he will be entitled to receive (i) six months
severance based on his then current base salary, (ii) benefits for 12 months,
(iii) cash bonus on the date he otherwise would have received it, (iv) vesting
of all stock options and (v) the right to exercise all of his outstanding
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stock options through the end of their respective terms. In the event of Mr.
Sorkin's death, his estate is entitled to (i) 12 months of base salary, (ii)
benefits for 12 months, (iii) vesting of all outstanding stock options, (iv) pro
rata share of cash bonus through date of death, and (v) the right to exercise
the options through the end of their respective terms. If Mr. Sorkin becomes
disabled (as defined) he is entitled to receive (i) 12 months of his base salary
(paid out of disability insurance to the extent available), (ii) benefits for 12
months, (iii) pro rata share of cash bonus through the date of disability, (iv)
vesting of all outstanding stock options and (v) the right to exercise the stock
options through the end of their respective terms. In the event there is a
change in control of the Company (as defined), whether or not Mr. Sorkin's
employment is terminated, all outstanding stock options will vest.
The following table quantifies the amounts that we would owe Mr. Sorkin
upon each of the termination triggers discussed above:
EXECUTIVE PAYMENTS UPON TERMINATION AS OF MARCH 31, 2007
Eric L. Sorkin
Chairman, Chief Executive Officer and President
Termination
without
Cause or
with Good
Reason Prior
to CIC or
more than 24 CIC Whether or
Executive Benefits and Payments months after Not Services are
Upon Termination Disability Death CIC (1) Terminated
----------------------------------- ------------- --------- -------------- ----------------
Severance Payments
Base Salary $375,000(2) $375,000(2) $187,500 (3) ----
Short-Term Incentive --- (4) ---- (4) --- (5) ----
Value of Unvested Equity Awards
and Accelerated
Options 286,591 (6) 286,591 (6) 286,591 (6) 286,591 (6)
Total $661,591 $ 661,591 $ 474,091 $ 286,591
(1) "CIC" means change in control, as defined within the employment
agreement between Mr. Sorkin and the Company.
(2) 12 months base salary.
(3) 6 months base salary.
(4) Pro rata bonus.
(5) Full cash bonus otherwise payable.
(6) Vesting of all stock options.
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F. DIRECTOR COMPENSATION
Change in
Pension Value
and
Fees Earned Non-Equity Nonqualified
or Paid in Incentive Plan Deferred All Other
Cash Stock Awards Option Awards Compensation Compensation Compensation
Name ($) ($) ($) ($) Earnings ($) ($) Total
-------------------- ----------- --------------- --------------- --------------- ---------------- ------------ ------------
Harvey Colten (1) --- ---- --- ---- --- --- ---
Judy Lau --- ---- --- ---- --- --- ---
Levi H. K. Lee --- ---- --- ---- --- --- ---
Donald Sinex --- ---- 20,000 ---- --- ---
Frederick Wackerle (2) --- ---- --- ---- --- --- ---
(1) Dr. Colten passed away on May 24, 2007.
(2) Mr. Wackerle did not stand for re-election at the Company's annual
meeting of stockholders held on March 2, 2007.
1. Overview of Compensation and Procedures
We generally compensate non-employee directors for their service as a
member of the Board of Directors through the grant to each such director of
20,000 options to purchase shares of common stock upon joining the Board. In
addition, each non-employee director receives options to purchase 15,000 shares
of common stock for each subsequent year of Board service, options to purchase
3,000 shares of common stock for each year of service on each Board committee
and options to purchase 1,000 shares of common stock for each Board committee
chaired. Such options are generally granted at fair market value on the date of
grant, vest ratably over 2 years from the date of grant and expire 10 years from
the date of grant. Our practice has been to make these grants after our annual
meeting of stockholders. We have not yet made these grants with respect to
fiscal year 2007. We also reimburse the directors for out-of-pocket expenses
incurred in connection with their service as directors.
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G. Compensation Committee Interlocks and Insider Participation
All compensation decisions made for the fiscal year ending March 31,
2007 were made exclusively by the independent directors serving on the
Compensation Committee, with respect to our Chief Executive Officer, executive
officers and other officers.
The members of the Compensation Committee for the fiscal year ending
March 31, 2007 were Messrs. Lau, Colten, and Wackerle, none of whom were
officers or employees of Immtech or any of our subsidiaries for the fiscal year
ending March 31, 2007 or in any prior year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
A. Principal Stockholders
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of June 4, 2007, by (i) each of our
directors and executive officers, (ii) all directors and executive officers as a
group and (iii) each person known to be the beneficial owner of more than 5% of
our Common Stock.
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
------------------------------------ ------------------------ ------------------
Eric L. Sorkin(1)
c/o Immtech Pharmaceuticals, Inc.
One North End Ave.
New York, NY 10282 442,587 shares 2.81%
Cecilia Chan(2)
c/o Immtech Pharmaceuticals, Inc.
One North End Ave.
New York, NY 10282 379,770 shares 2.42%
Gary C. Parks(3)
c/o Immtech Pharmaceuticals, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 130,222 shares 0.84%
Carol Ann Olson, MD, Ph.D.(4)
c/o Immtech Pharmaceuticals, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 60,416 shares 0.39%
Judy Lau(5)
Room 1002, 10th Floor
Jupiter Tower
9 Jupiter Street
North Point, Hong Kong 77,875 shares 0.50%
Levi H.K. Lee, MD(6)
1405 Lane Crawford House
70 Queens Road Central,
Hong Kong 276,098 shares 1.78%
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Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
------------------------------------ ------------------------ ------------------
Donald F. Sinex(7) 69,876 shares 0.45%
All executive officers, former officer
and directors as agroup (7 persons) 1,436,844 shares 9.19%
--------------------------------
(1) Includes (i) 62,735 shares of Common Stock; (ii) 20,362 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii)
53,267 shares of Common Stock issuable upon the conversion of Series E
Preferred Stock; (iv) 217,500 shares of Common Stock issuable upon the
exercise of warrants as follows: vested warrant to purchase 36,923 shares
of Common Stock at $6.47 per share by July 24, 2008, vested warrant to
purchase 173,077 shares of Common Stock at $6.47 per share by October 12,
2008, and vested warrant to purchase 7,500 shares of Common Stock at $10.00
per share by December 13, 2008; and (v) 88,723 shares of Common Stock
issuable upon the exercise of options as follows: vested option to purchase
972 shares of Common Stock at $2.55 per share by December 24, 2007, vested
option to purchase 22,000 shares of Common Stock at $14.29 per share by
February 1, 2014, vested option to purchase 22,000 shares of Common Stock
at $11.03 by November 15, 2014, the vested portion of 15,626 shares of an
option to purchase 20,834 shares of Common Stock at $7.85 by January 24,
2016 and the vested portion of 28,125 of an option to purchase 75,000
shares of Common Stock at $5.74 by October 15, 2016.
(2) Includes (i) 53,352 shares of Common Stock; (ii) 5,781 shares of Common
Stock issuable upon the conversion of Series B Preferred Stock; (iii)
225,512 shares of Common Stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 50,123 shares of Common Stock at $6.47
per share by July 24, 2008, vested warrant to purchase 173,077 shares of
Common Stock at $6.47 per share by October 12, 2008, and vested warrant to
purchase 2,312 shares of Common Stock at $6.125 per share by September 25,
2007; and (iv) 95,125 shares of Common Stock issuable upon the exercise of
options as follows: vested option to purchase 22,000 shares of Common Stock
at $2.55 per share by December 24, 2012, vested option to purchase 25,000
shares of Common Stock at $21.66 per share by November 5, 2013, vested
option to purchase 20,000 shares of Common Stock at $9.41 per share by
September 7, 2014 and the vested portion of 28,125 of an option to purchase
75,000 shares of Common Stock at $5.74 by October 15, 2016.
(3) Includes (i) 22,515 shares of Common Stock; (ii) 2,262 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; and (iii)
105,445 shares of Common Stock issuable upon the exercise of options as
follows: vested option to purchase 14,195 shares of Common Stock at $1.74
per share by April 16, 2008, vested option to purchase 10,000 shares of
Common Stock at $10.00 per share by July 19, 2011, vested option to
purchase 25,000 shares of Common Stock at $2.55 per share by December 24,
2012, vested option to purchase 15,000 shares of Common Stock at $21.66 per
share by November 5, 2013, vested option to purchase 15,000 shares of
Common Stock at $9.41 per share by September 7, 2014, the vested portion of
15,000 shares of an option to purchase 20,000 shares of Common Stock at
$7.29 per share by January 23, 2016 and the vested portion of 11,250 of an
option to purchase 30,000 shares of Common Stock at $5.74 by October 15,
2016.
(4) Includes 60,416 shares of Common Stock issuable upon the exercise of
options as follows: the vested portion of 26,666 shares of an option to
purchase 40,000 shares of Common Stock at $8.38 per share by October 17,
2014, the vested portion of 22,500 shares of an option to purchase 30,000
shares of Common Stock at $7.29 per share by January 23, 2016 and the
vested portion of 11,250 of an option to purchase 30,000 shares of Common
Stock at $5.74 by October 15, 2016.
(5) Includes 77,875 shares of Common Stock issuable upon the exercise of
options as follows: vested option to purchase 20,000 shares of Common
Stock at $21.66 per share by November 5, 2013, vested option to purchase
21,000 shares of Common Stock at $14.29 per share by February 1, 2014,
vested option to purchase 21,000 shares of Common Stock at $11.03 by
November 15, 2014, and the vested portion of 15,875 shares of an option to
purchase 21,167 shares of Common Stock at $7.85 by January 24, 2016.
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(6) Includes (i) 142,499 shares of Common Stock; (ii) 11,312 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii)
52,037 shares of Common Stock issuable upon the conversion of Series C
Preferred Stock; and (iv) 70,250 shares of Common Stock issuable upon the
exercise of options as follows: vested option to purchase 20,000 shares of
Common Stock at $21.66 per share by November 5, 2013, vested option to
purchase 18,000 shares of Common Stock at $14.29 per share by February 1,
2014, vested option to purchase 18,000 shares of Common Stock at $11.03 by
November 15, 2014, and the vested portion of 14,250 shares of an option to
purchase 19,000 shares of Common Stock at $7.85 by January 24, 2016.
(7) Includes (i) 37,319 shares of Common Stock; (ii) 21,307 shares of Common
Stock issuable upon the conversion of Series E Preferred Stock; (iii)
3,750 shares of Common Stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 1,250 shares of Common Stock at $10.00
per share by December 13, 2008; and (iv) 7,500 shares of Common Stock
issuable upon the exercise of options as follows: the vested portion of
7,500 shares of an option to purchase 20,000 shares of Common Stock at
$5.60 by October 22, 2016.
B. Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2007, regarding
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
Number of securities
remaining available for
Number of securities to Weighted average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
warrants and rights(1) warrants and rights(1) reflected in column(a))
Plan category (in thousands) (a) (b) (c)
------------------------------------------- ---------------------------- ------------------------- ---------------------------
Equity compensation plans approved by
security holders(2).......... 1,800,609 $8.92 439,513
Equity compensation plans not approved by
security holders(3).......... 2,303,610 $8.02
Total.......................... 4,104,219 $8.41 439,513
--------------------------------
(1) As adjusted for reverse stock splits that occurred on each of July 24, 1998
and January 25, 1999.
(2) This category consists solely of options.
(3) This category consists solely of warrants.
C. Equity Compensation Plans Not Approved by Shareholders
We currently do not have any equity compensation plans that have not
received necessary stockholder approval.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Policies and Procedures with Respect to Transactions with Related
Persons
The Board of Directors has adopted a policy for the review, approval and
ratification of transactions that involve related parties and potential
conflicts of interest.
The related party transaction policy applies to each director and
executive officer of the Company, any nominee for election as a director, any
security holder who is known to own more than five percent of the Company's
voting securities, any immediate family member of any of the foregoing persons
and any corporation, firm or association in which one or more of the Company's
directors are directors or officers, or have a substantial financial interest.
Under the related party transaction policy, a related person transaction
is a transaction or arrangement involving a related person in which the Company
is a participant or that would require disclosure in the Company's filings with
the SEC as a transaction with a related person.
The related persons must disclose to the Audit Committee any potential
related person transactions and must disclose all material facts with respect to
such interest. All related person transactions will be reviewed by the Audit
Committee. In determining whether to approve or ratify a transaction, the Audit
Committee will consider the relevant facts and circumstances of the transaction
which may include factors such as the relationship of the related person with
the Company, the materiality or significance of the transaction to the Company
and the business purpose and reasonableness of the transaction, whether the
transaction is comparable to a transaction that could be available to the
Company on an arms-length basis, and the impact of the transaction on the
Company's business and operations.
During the fiscal year ended March 31, 2007, there was no transaction or
series of transactions, or any currently proposed transaction, in which the
amount involved exceeds $120,000 and in which any director, executive officer,
holder of more than 5% of our Common Stock or any member of the immediate family
of any of the foregoing persons had or will have a direct or indirect material
interest.
B. Director Independence
Currently, three of our five directors are independent. Our independent
directors are Ms. Lau, Dr. Lee and Mr. Sinex. The Board of Directors has
standing Audit, Compensation, and Nominating committees, the members of which
are all independent.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee selects our independent registered public accounting
firm for each fiscal year. During the fiscal year ended March 31, 2007, Deloitte
& Touche LLP was employed primarily to perform the annual audit and to render
other services, including audit services related to the Company's internal
control reporting to comply with Section 404 of the Sarbanes-
-88-
Oxley Act. The following table presents the aggregate fees billed for
professional services rendered by Deloitte & Touche LLP, the member firms of
Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the
"Deloitte Entities") during the fiscal years ended March 31, 2006 and 2007.
Other than as set forth below, no professional services were rendered or fees
billed by the Deloitte Entities during the fiscal years ended March 31, 2006 and
2007.
2007 2006
--------------- ---------------
Audit Fees(1).................. $218,000 $211,000
Tax Fees(2).................... 6,000 6,000
Total Fees..................... $224,000 $217,000
--------------------------------
(1) Includes fees and out-of-pocket expenses for the following services: Audit
of the consolidated financial statements, quarterly reviews, SEC filings
and consents, financial accounting and reporting consultation, and costs
in our fiscal year ended March 31, 2007 preparing the 2007 audit
requirement for compliance with Section 404 of the Sarbanes-Oxley Act and
financial testing.
(2) Includes fees and out-of-pocket expenses for tax compliance, tax planning
and advice.
All work performed by the Deloitte Entities as described above has been
approved by the Audit Committee prior to the Deloitte Entities' engagement to
perform such service. The Audit Committee pre-approves on an annual basis the
audit, audit-related, tax and other services to be rendered by the Deloitte
Entities based on historical information and anticipated requirements for the
following fiscal year. To the extent that our management believes that a new
service or the expansion of a current service provided by the Deloitte Entities
is necessary, such new or expanded service is presented to the Audit Committee
or one of its members for review and approval.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents Filed with this Report.
The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements
Our consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this report.
2. Financial Statement Schedules
None.
-89-
3. Exhibits
The information called for by this paragraph is contained in the Index
to Exhibits of this Annual Report on Form 10-K, which is incorporated herein by
reference.
-90-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
IMMTECH PHARMACEUTICALS, INC.
Date: June 13, 2007 By: /s/ Eric L. Sorkin
------------------------- -----------------------------------------
Eric L. Sorkin
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Date
--------------------------------------------------------------------------------
/s/ Eric L. Sorkin June 13, 2007
------------------------------------------------- -----------------------
Eric L. Sorkin
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Gary C. Parks June 13, 2007
------------------------------------------------- -----------------------
Gary C. Parks
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Cecilia Chan June 13, 2007
------------------------------------------------- -----------------------
Cecilia Chan
Executive Director and Director
/s/ Judy Lau June 13, 2007
------------------------------------------------- -----------------------
Judy Lau
Director
/s/ Levi H.K. Lee, MD June 13, 2007
------------------------------------------------- -----------------------
Levi H.K. Lee, MD
Director
/s/ Donald F. Sinex June 13, 2007
------------------------------------------------- -----------------------
Donald F. Sinex
Director
-91-
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company,
dated June 14, 2004 (Form 10-K for fiscal year ended March 31, 2004) *
3.2 Certificate of Correction to Certificate of Incorporation dated
December 14, 2005 (Form 8-K, dated December 14, 2005) *
3.3 Certificate of Amendment (Name Change) to Certificate of Incorporation
dated March 22, 2006 (Form 8-K, dated March 23, 2006) *
3.4 Certificate of Amendment (Number of Members of the Board of Directors)
to Certificate of Incorporation dated April 17, 2007 **
3.5 Certificate of Designation for Series A Convertible Preferred Stock
Private Placement, dated February 14, 2002 (Form 8-K, dated February
14, 2002) *
3.6 Certificate of Designation for Series B Convertible Preferred Stock
Private Placement, dated September 25, 2002 (Form 8-K, dated September
25, 2002) *
3.7 Certificate of Designation for Series C Convertible Preferred Stock
Private Placement, dated June 6, 2003 (Form 8-K, dated June 10, 2003)
*
3.8 Certificate of Designation for Series D Convertible Preferred Stock
Private Placement, dated January 15, 2004 (Form 8-K, dated January 21,
2004) *
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-92-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
3.9 Certificate of Designation for Series E Convertible Preferred Stock
Private Placement, dated December 13, 2005 (Form 8-K, dated December
14, 2005) *
3.10 Amended and Restated Bylaws of the Company effective as of June 8,
2007 (Form 8-K, dated June 12, 2007) *
4.1 Form of Common Stock Certificate (Form SB-2/A Registration Statement,
dated March 30, 1999, File No. 333-64393) *
4.2 Warrant Agreement, dated July 24, 1998, by and between the Company and
RADE Management Corporation (Form SB-2/A Registration Statement, dated
February 11, 1999, File No. 333-64393) *
4.3 Warrant Agreement, dated October 12, 1998, by and between the Company
and RADE Management Corporation (Form SB-2/A Registration Statement,
dated February 11, 1999, File No. 333-64393) *
4.8 Stock Purchase Warrant, dated September 25, 2002, for Series B
Convertible Preferred Stock Private Placement (Form 8-K, dated
September 25, 2002) *
4.11 Stock Purchase Warrant, dated January 15, 2004, for Series D
Convertible Preferred Stock Private Placement (Form 8-K, dated January
21, 2004) *
4.13 Stock Purchase Warrant, dated December 13, 2005, for Series E
Convertible Preferred Stock Private Placement (Form 8-K, dated
December 14, 2005) *
4.18 Form of Stock Purchase Warrant, dated December 14, 2006, issued to
Ferris, Baker Watts ** 4.18
10.1 Letter Agreement, dated January 15, 1997, by and among the Company,
Pharm-Eco Laboratories, Inc. and The University of North Carolina at
Chapel Hill, as amended (Form SB-2 Registration Statement, File No.
333-64393) *
10.2 (1) 1993 Stock Option and Award Plan (Form SB-2 Registration
Statement, File No. 333-64393) *
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-93-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
10.3(1) 2000 Stock Option and Award Plan (Definitive Proxy Statement,
dated August 25, 2000, File No. 000-25669) *
10.5 Indemnification Agreement, dated June 1, 1998, between the Company and
RADE Management Corporation (Form SB-2 Registration Statement, File
No. 333-64393) *
10.6 Letter Agreement, dated June 24, 1998, between the Company and
Criticare Systems, Inc. (Form SB-2 Registration Statement, File No.
333-64393) *
10.7 Letter Agreement, dated June 25, 1998, between the Company and
Criticare Systems, Inc. (Form SB-2 Registration Statement, File No.
333-64393) *
10.8 Amendment, dated January 15, 1999, to Letter Agreement among the
Company, Pharm-Eco Laboratories, Inc. and The University of North
Carolina at Chapel Hill, as amended (Form SB-2/A Registration
Statement, dated February 11, 1999, File No. 333-64393) *
10.9 Office Lease, dated August 26, 1999, by and between the Company and
Arthur J. Rogers & Co. (Form 10-K for fiscal year ended March 31,
2000, File No. 000-25669) *
10.10 License Agreement, dated August 25, 1993, by and among the University
of North Carolina at Chapel Hill and Pharm-Eco Laboratories, Inc.
(Form 10-KSB/A for fiscal year ended March 31, 2001, as amended on
July 6, 2001) *
10.11 Assignment Agreement, dated as of March 27, 2001, by and between the
Company and Pharm-Eco Laboratories, Inc. (Form 10-KSB/A for fiscal
year ended March 31, 2001, as amended on July 6, 2001) *
10.12 Clinical Research Subcontract, dated as of March 29, 2001, by and
between The University of North Carolina at Chapel Hill and the
Company (Form 10-KSB/A for fiscal year ended March 31, 2001, as
amended on July 6, 2001) *
10.14 License Agreement, dated March 10, 1998, by and between the Company
and Northwestern University (Form SB-2 Registration Statement, File
No. 333-64393) *
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-94-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
10.15 License Agreement, dated October 27, 1994, by and between the Company
and Northwestern University (Form SB-2 Registration Statement, File
No. 333-64393) *
10.16 Assignment of Intellectual Properties, dated June 29, 1998, between
the Company and Criticare Systems, Inc. (Form SB-2 Registration
Statement, File No. 333-64393) *
10.18 Assignment Agreement, dated June 26, 1998, by and between the Company
and Criticare Systems, Inc. (Form SB-2 Registration Statement, File
No. 333-64393) *
10.19 Assignment Agreement, dated June 29, 1998, by and between the Company
and Criticare Systems, Inc. (Form SB-2 Registration Statement, File
No. 333-64393) *
10.20 International Patent, Know-How and Technology License Agreement,
dated June 29, 1998, by and between the Company and Criticare Systems,
Inc. (Form SB-2 Registration Statement, File No. 333-64393) *
10.22 Funding and Research Agreement, dated September 30, 1998, by and
among the Company, NextEra Therapeutics, Inc. and Franklin Research
Group, Inc. (Form SB-2/A Registration Statement, dated February 11,
1999, File No. 333-64393) *
10.24 Employment Agreement, dated 1998, by and between NextEra and Lawrence
Potempa (Form 10-KSB for fiscal year ended March 31, 1999) *
10.29 Amendment, dated January 28, 2002, to License Agreement among the
Company, Pharm-Eco Laboratories, Inc. and The University of North
Carolina at Chapel Hill, as amended (Form 10-Q for quarter ended
December 31, 2001) *
10.35 Share Purchase Agreement and Deed of Indemnity as related to shares
in Super Insight Limited, dated November 28, 2003, by and between the
Company, Chan Kon Fung and Super Insight Limited (Form 8-K, dated
December 2, 2003) *
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-95-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
10.36 Allonge to the Share Purchase Agreement and Deed of Indemnity as
related to shares in Super Insight Limited and Immtech Hong Kong
Limited, dated November 28, 2003, by and between the Company, Chan
Kon Fung, Lenton Fibre Optics Development Limited, Super Insight
Limited, and Immtech Hong Kong Limited (Form 8-K, dated December 2,
2003) *
10.39 Form of First Amendment to Office Lease, dated August 18, 2004, by
and between the Company and Arthur J. Rogers & Co. (Form 8-K, dated
October 8, 2004) *
10.41 Amended and Restated Consortium License Agreement (Redacted) dated
March 24, 2006, among Immtech, The University of North Carolina at
Chapel Hill, Auburn University, Duke University and the Georgia State
University Research Gates Foundation, Inc. (Form 8-K, dated March 30,
2006) *
10.42 Amended and Restated Clinical Research Subcontract, dated March 28,
2006, between Immtech and The University of North Carolina at Chapel
Hill (Form 8-K, dated March 30, 2006) *
10.44(1) Form of Incentive Stock Option Agreement (Form 10-Q for quarter ended
December 31, 2006) *
10.45 (1) Form of Non-qualified Stock Option Agreement (Form 10-Q for quarter
ended December 31, 2006) *
10.46 (1) Amended and Restated Employment Agreement between the Company and
Eric L. Sorkin dated March 1, 2007 **
10.47 Placement Agency Agreement between the Company and Ferris, Baker
Watts, Incorporated dated February 7, 2007 (Form 8-K, dated February
13, 2007)*
21.1 Subsidiaries of Registrant (Form 10-K for fiscal year ended March 31,
2003) *
23.1 Consent of Deloitte & Touche LLP **
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 **
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-96-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
---------------------------------------- ---------------------------------------
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 **
* These items are hereby incorporated by reference from the exhibits of the
filing or report indicated (except) where noted, (Commission File No. 001-14907)
and are hereby made a part of this Report.
** Filed herewith.
(1) Management compensation contract
-97-
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Financial Statements as of
March 31, 2006 and 2007, for the Years
Ended March 31, 2005, 2006 and 2007 and
for the Period October 15, 1984 (Date of
Inception) to March 31, 2007 (Unaudited)
and Report of Independent Registered
Public Accounting Firm
F-i
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.....................F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2006 AND 2007,
FOR THE YEARS ENDED MARCH 31, 2005, 2006 AND 2007, AND FOR THE
PERIOD FROM OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2007
(UNAUDITED):
Balance Sheets..............................................................F-4
Statements of Operations....................................................F-6
Statements of Stockholders' Equity.......................................F-7-10
Statements of Cash Flows...................................................F-11
Notes to Financial Statements...........................................F-12-41
F-ii
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Immtech Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Immtech
Pharmaceuticals, Inc. (a development stage enterprise) and subsidiaries (the
"Company") as of March 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 2007. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of March 31,
2007 and 2006, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2007, in conformity with
accounting principles generally accepted in the United States of America.
As described in Notes 1 and 8 to the consolidated financial statements,
effective April 1, 2006, the Company changed its method for share-based
compensation to adopt Financial Accounting Standards Board (FASB) Statement No.
123 (revised 2004), Share-Based Payment.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of March 31, 2007, based
on the criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 8, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/Deloitte & Touche LLP
Milwaukee, WI
June 8, 2007
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Immtech Pharmaceuticals, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Immtech
Pharmaceuticals, Inc. (a development stage enterprise) and subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
March 31, 2007, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods
F-2
are subject to the risk that the controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of March 31, 2007, is
fairly stated, in all material respects, based on the criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2007, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2007 of the Company and our
report dated June 8, 2007, expressed an unqualified opinion on those financial
statements, and included an explanatory paragraph relating to the adoption of
Financial Accounting Standards Board (FASB) Statement No. 123 (revised 2004),
Share-Based Payment.
/s/Deloitte & Touche LLP
Milwaukee, WI
June 8, 2007
F-3
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND 2007
--------------------------------------------------------------------------------
ASSETS 2006 2007
------------------------------------------- ----------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $14,137,867 $12,461,795
Restricted funds on deposit 530,186 3,118,766
Other current assets 193,059 98,627
---------------- ------------------
Total current assets 14,861,112 15,679,188
PROPERTY AND EQUIPMENT - Net 171,799 140,263
PREPAID RENT 3,384,166 3,309,240
OTHER ASSETS 137,341 15,477
---------------- ------------------
TOTAL ASSETS $18,554,418 $19,144,168
================ ==================
See notes to consolidated financial statements.
F-4
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2007
-------------------------------------------------------------------------------- --------------- ---------------
CURRENT LIABILITIES:
Accounts payable $2,328,965 $2,585,395
Accrued expenses 226,749 375,925
Deferred revenue 395,779 1,726,673
--------------- ---------------
Total current liabilities 2,951,493 4,687,993
Total liabilities 2,951,493 4,687,993
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 3,913,000 shares authorized and
unissued as of March 31, 2006 and 2007
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 58,400 and 55,500 shares issued and
outstanding as of March 31, 2006 and 2007, respectively; aggregate liquidation
preference of $1,499,785 and $1,425,283 as of March 31, 2006 and 2007, respectively 1,499,785 1,425,283
Series B convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 240,000 shares authorized, 13,464 shares issued and outstanding
as of March 31, 2006 and 2007; aggregated liquidation preference of $348,621 as of
March 31, 2006 and 2007 348,621 348,621
Series C convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 160,000 shares authorized, 45,536 shares outstanding as of
March 31, 2006, and 2007; aggregate liquidation preference of $1,180,345 as of
March 31, 2006 and 2007 1,180,345 1,180,345
Series D convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 200,000 shares authorized, 117,200 shares outstanding as of
March 31, 2006 and 2007; aggregate liquidation preference of $3,010,914 as of
March 31, 2006 and 2007 3,010,914 3,010,914
Series E convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 167,000 shares authorized, 156,600 and 110,200 shares
outstanding as of March 31, 2006 and 2007, respectively; aggregate liquidation
preference of $3,975,528 and $2,831,116 as of March 31, 2006 and 2007, respectively 3,975,528 2,831,116
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 13,758,506 and
15,333,221 shares issued and outstanding as of March 31, 2006 and 2007, respectively 137,585 153,332
Additional paid-in capital 94,292,235 106,031,851
Deficit accumulated during the developmental stage (88,842,088) (100,525,287)
--------------- ---------------
Total stockholders' equity 15,602,925 14,456,175
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $18,554,418 $19,144,168
=============== ===============
See notes to consolidated financial statements.
F-5
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2005, 2006 AND 2007 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2007 (UNAUDITED)
---------------------------------------------------------------- -------------------------------------------------------------------
October 15, 1984
(Inception)
Years Ended March 31, to March 31,
2005 2006 2007 2007
------------- ------------ ------------- ---------------
REVENUES $5,930,696 $3,575,042 $4,318,013 $25,082,753
EXPENSES:
Research and development 7,309,102 9,680,184 8,760,379 60,113,933
General and administrative 12,190,228 9,631,018 9,094,557 63,977,357
Other (see note 10) (1,874,454) (1,874,454)
Equity in loss of joint venture 135,002
------------- ------------ ------------- ---------------
Total expenses 19,499,330 19,311,202 15,980,482 122,351,838
------------- ------------ ------------- ---------------
LOSS FROM OPERATIONS (13,568,634) (15,736,160) (11,662,469) (97,269,085)
OTHER INCOME (EXPENSE):
Interest income 135,470 210,725 529,844 1,474,031
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 135,470 210,725 529,844 1,184,645
------------- ------------ ------------- ---------------
NET LOSS (13,433,164) (15,525,435) (11,132,625) (96,084,440)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (579,816) (764,275) (550,574) (6,810,746)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM AMORTIZATION
AND DIVIDENDS 2,369,899
------------- ------------ ------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(14,012,980) $(16,289,710) $(11,683,199) $(100,525,287)
============= ============= ============= ===============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss $(1.27) $(1.31) $(0.78)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.05) (0.06) (0.04)
------------- ------------ ------------- ---------------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(1.32) $(1.37) $(0.82)
============= ============= ============= ===============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER SHARE 10,606,917 11,852,630 14,207,048
See notes to consolidated financial statements.
F-6
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 2005, 2006 AND 2007 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2007
(UNAUDITED)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------------ --------------------------
Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount
------------- --------- -------------- --------- -------------- -----------
October 15, 1984 (Inception)
Issuance of common stock to founders
Balance, March 31, 1985
Issuance of common stock
Net loss
Balance, March 31, 1986
Issuance of common stock
Net loss
Balance, March 31, 1987
Issuance of common stock
Net loss
Balance, March 31, 1988
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1989
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1990
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1991
Issuance of common stock
Provision for compensation
Issuance of stock options in exchange
for cancellation of indebtedness
Net loss
Balance, March 31, 1992
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1993
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1994
Net loss
Balance, March 31, 1995
Issuance of common stock for
compensation
Net loss
Balance, March 31, 1996
Issuance of common stock
Provision for compensation - employees
Provision for compensation - nonemployees
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common
----------------------- ------------------------ Stock
Issued and Issued and Issued and
outstanding Amount Outstanding Amount Outstanding Amount
------------- ----------- -------------- ---------- ---------------- ----------
October 15, 1984 (Inception)
Issuance of common stock to founders 113,243 $1,132
------- -------
Balance, March 31, 1985 113,243 1,132
Issuance of common stock 85,368 854
Net loss
Balance, March 31, 1986 198,611 1,986
Issuance of common stock 42,901 429
Net loss
Balance, March 31, 1987 241,512 2,415
Issuance of common stock 4,210 42
Net loss
Balance, March 31, 1988 245,722 2,457
Issuance of common stock 62,792 628
Provision for compensation
Net loss
Balance, March 31, 1989 308,514 3,085
Issuance of common stock 16,478 165
Provision for compensation
Net loss
Balance, March 31, 1990 324,992 3,250
Issuance of common stock 218 2
Provision for compensation
Net loss
Balance, March 31, 1991 325,210 3,252
Issuance of common stock 18,119 181
Provision for compensation
Issuance of stock options in exchange
for cancellation of indebtedness
Net loss
Balance, March 31, 1992 343,329 3,433
Issuance of common stock 195,790 1,958
Provision for compensation
Net loss
Balance, March 31, 1993 539,119 5,391
Issuance of common stock 107,262 1,073
Provision for compensation
Net loss
Balance, March 31, 1994 646,381 6,464
Net loss
Balance, March 31, 1995 646,381 6,464
Issuance of common stock for
compensation 16,131 161
Net loss
Balance, March 31, 1996 662,512 6,625
Issuance of common stock 12,986 130
Provision for compensation - employees
Provision for compensation - nonemployees
Deficit Accumulated Total
Accumulated Other Stockholders'
Additional During the Comprehensive Equity
Paid-in Development Income (Deficiency
Capital Stage (Loss) in Assets)
------------- --------------- ------------- --------------
October 15, 1984 (Inception)
Issuance of common stock to founders $24,868 $26,000
--------- ---------
Balance, March 31, 1985 24,868 26,000
Issuance of common stock 269,486 270,340
Net loss $(209,569) (209,569)
----------- ----------
Balance, March 31, 1986 294,354 (209,569) 86,771
Issuance of common stock 285,987 286,416
Net loss (47,486) (47,486)
----------- ----------
Balance, March 31, 1987 580,341 (257,055) 325,701
Issuance of common stock 28,959 29,001
Net loss (294,416) (294,416)
----------- ----------
Balance, March 31, 1988 609,300 (551,471) 60,286
Issuance of common stock 569,372 570,000
Provision for compensation 489,975 489,975
Net loss (986,746) (986,746)
----------- ----------
Balance, March 31, 1989 1,668,647 (1,538,217) 133,515
Issuance of common stock 171,059 171,224
Provision for compensation 320,980 320,980
Net loss (850,935) (850,935)
----------- ----------
Balance, March 31, 1990 2,160,686 (2,389,152) (225,216)
Issuance of common stock 1,183 1,185
Provision for compensation 6,400 6,400
Net loss (163,693) (163,693)
----------- ----------
Balance, March 31, 1991 2,168,269 (2,552,845) (381,324)
Issuance of common stock 85,774 85,955
Provision for compensation 864,496 864,496
Issuance of stock options in exchange
for cancellation of indebtedness 57,917 57,917
Net loss (1,479,782) (1,479,782)
----------- ----------
Balance, March 31, 1992 3,176,456 (4,032,627) (852,738)
Issuance of common stock 66,839 68,797
Provision for compensation 191,502 191,502
Net loss (1,220,079) (1,220,079)
----------- ----------
Balance, March 31, 1993 3,434,797 (5,252,706) (1,812,518)
Issuance of common stock 40,602 41,675
Provision for compensation 43,505 43,505
Net loss (2,246,426) (2,246,426)
----------- ----------
Balance, March 31, 1994 3,518,904 (7,499,132) (3,973,764)
Net loss (1,661,677) (1,661,677)
----------- ----------
Balance, March 31, 1995 3,518,904 (9,160,809) (5,635,441)
Issuance of common stock for
compensation 7,339 7,500
Net loss (1,005,962) (1,005,962)
----------- ----------
Balance, March 31, 1996 3,526,243 (10,166,771) (6,633,903)
Issuance of common stock 5,908 6,038
Provision for compensation - employees 45,086 45,086
Provision for compensation - nonemployees 62,343 62,343
F-7
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------------ --------------------------
Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount
------------- --------- -------------- --------- -------------- -----------
Issuance of warrants to purchase
common stock
Net loss
Balance, March 31, 1997
Exercise of options
Provision for compensation - employees
Provision for compensation -
nonemployees
Contributed capital - common
stockholders
Net loss
Balance, March 31, 1998
Issuance of common stock under private
placement offering
Exercise of options
Provision for compensation -
nonemployees
Issuance of common stock to Criticare
Conversion of Criticare debt to common
stock
Conversion of debt to common stock
Conversion of redeemable preferred stock
to common stock
Net loss
Balance, March 31, 1999
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial
public offering, less offering costs
of $513,000
Exercise of options and warrants
Provision for compensation -
nonemployees
Issuance of common stock for
compensation - nonemployees
Issuance of common stock for accrued
interest
Balance, March 31, 2000
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment securities
available for sale
Reclassification adjustment for loss
included in net loss
Comprehensive loss
Issuance of common stock under private
placement offering
Exercise of options
Provision for compensation -
nonemployees
Contributed capital - common
stockholder
Balance, March 31, 2001
Net loss
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash
offering costs of $153,985 160,100 $4,002,500
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends 29,400
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common
----------------------- ------------------------ Stock
Issued and Issued and Issued and
outstanding Amount Outstanding Amount Outstanding Amount
------------- ----------- -------------- ---------- ---------------- ----------
Issuance of warrants to purchase
common stock
Net loss
Balance, March 31, 1997 675,498 6,755
Exercise of options 68,167 682
Provision for compensation - employees
Provision for compensation -
nonemployees
Contributed capital - common
stockholders
Net loss
Balance, March 31, 1998 743,665 7,437
Issuance of common stock under private
placement offering 575,000 5,750
Exercise of options 40,650 406
Provision for compensation -
nonemployees
Issuance of common stock to Criticare 86,207 862
Conversion of Criticare debt to common
stock 180,756 1,808
Conversion of debt to common stock 424,222 4,242
Conversion of redeemable preferred stock
to common stock 1,195,017 11,950
Net loss
Balance, March 31, 1999 3,245,517 32,455
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial
public offering, less offering costs
of $513,000 1,150,000 11,500
Exercise of options and warrants 247,420 2,474
Provision for compensation -
nonemployees
Issuance of common stock for
compensation - nonemployees 611,250 6,113
Issuance of common stock for accrued
interest 28,147 281
----------- ----------
Balance, March 31, 2000 5,282,334 52,823
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment securities
available for sale
Reclassification adjustment for loss
included in net loss
Comprehensive loss
Issuance of common stock under private
placement offering 584,250 5,843
Exercise of options 88,661 886
Provision for compensation -
nonemployees
Contributed capital - common
stockholder
Balance, March 31, 2001 5,955,245 59,552
Net loss
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash
offering costs of $153,985
Issuance of common stock as offering
costs under private placement offerings 60,000 600
Accrual of preferred stock dividends
Deficit Accumulated Total
Accumulated Other Stockholders'
Additional During the Comprehensive Equity
Paid-in Development Income (Deficiency
Capital Stage (Loss) in Assets)
------------- --------------- ------------- --------------
Issuance of warrants to purchase
common stock 80,834 80,834
Net loss (1,618,543) (1,618,543)
------------- ------------
Balance, March 31, 1997 3,720,414 (11,785,314) (8,058,145)
Exercise of options 28,862 29,544
Provision for compensation - employees 50,680 50,680
Provision for compensation -
nonemployees 201,696 201,696
Contributed capital - common
stockholders 231,734 231,734
Net loss (1,477,132) (1,477,132)
------------- ------------
Balance, March 31, 1998 4,233,386 (13,262,446) (9,021,623)
Issuance of common stock under private
placement offering 824,907 830,657
Exercise of options 12,944 13,350
Provision for compensation -
nonemployees 2,426,000 2,426,000
Issuance of common stock to Criticare 133,621 134,483
Conversion of Criticare debt to common
stock 856,485 858,293
Conversion of debt to common stock 657,555 661,797
Conversion of redeemable preferred stock
to common stock 1,852,300 3,713,334 5,577,584
Net loss (1,929,003) (1,929,003)
------------- ------------
Balance, March 31, 1999 10,997,198 (11,478,115) (448,462)
------------- ------------
Comprehensive loss:
Net loss (11,433,926) (11,433,926)
Other comprehensive loss:
Unrealized loss on investment
securities available for sale $(1,178) (1,178)
------------
Comprehensive loss (11,435,104)
Issuance of common stock under initial
public offering, less offering costs
of $513,000 9,161,110 9,172,610
Exercise of options and warrants 424,348 426,822
Provision for compensation -
nonemployees 509,838 509,838
Issuance of common stock for
compensation - nonemployees 6,106,387 6,112,500
Issuance of common stock for accrued
interest 281,189 281,470
------------ -------------
Balance, March 31, 2000 27,480,070 (22,912,041) (1,178) 4,619,674
-------------
Comprehensive loss:
Net loss (9,863,284) (9,863,284)
Other comprehensive income (loss):
Unrealized loss on investment securities
available for sale (1,764) (1,764)
Reclassification adjustment for loss
included in net loss 2,942 2,942
------------
Comprehensive loss (9,862,106)
Issuance of common stock under private
placement offering 4,299,806 4,305,649
Exercise of options 41,922 42,808
Provision for compensation -
nonemployees 1,739,294 1,739,294
Contributed capital - common
stockholder 13,825 13,825
------------- ------------
Balance, March 31, 2001 33,574,917 (32,775,325) 859,144
Net loss (3,323,110) (3,323,110)
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash
offering costs of $153,985 754,550 (908,535) 3,848,515
Issuance of common stock as offering
costs under private placement offerings (600)
Accrual of preferred stock dividends (29,400)
F-8
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------------ --------------------------
Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount
------------- --------- -------------- --------- -------------- -----------
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2002 160,100 4,031,900
Net loss
Issuance of Series B convertible
preferred stock under private
placement offerings, less cash
offering costs of $58,792 76,725 $1,918,125
Issuance of common stock for services
provided in connection with private
placement offerings
Conversion of convertible preferred
stock to common stock (17,300) (437,396) (20,000) (515,671)
Accrual of preferred stock dividends 226,210 76,227
Payment of preferred stock dividends (152,709) (8,714)
Issuance of common stock for land-use
rights acquisition
Issuance of common stock and warrants
for services
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2003 142,800 3,668,005 56,725 1,469,967
Net loss
Issuance of Series C convertible
preferred stock under private
placement offerings, less offering
costs of $1,685,365 (including cash of
$289,000) 125,352 3,133,800
Issuance of Series D convertible
preferred stock under private
placement offerings, less cash
offering costs of $428,919
Issuance of common stock for services
provided in connection with private
placement offerings
Conversion of convertible preferred
stock to common stock (62,000) (1,566,440) (36,800) (939,231) (53,048) (1,344,792)
Accrual of preferred stock dividends 147,311 53,533 175,157
Payment of preferred stock dividends (173,626) (68,176) (89,979)
Exercise of warrants
Issuance of common stock and warrants
for services - nonemployees
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2004 80,800 2,075,250 19,925 516,093 72,304 1,874,186
Net loss
Conversion of convertible preferred
stock to common stock (20,400) (521,960) (11,852) (301,463)
Accrual of preferred stock dividends 112,758 39,849 130,988
Payment of preferred stock dividend (114,883) (39,849) (136,735)
Exercise of warrants
Extension of warrants
Issuance of common stock for secondary
offering, less offering costs of
$337,803
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2005 60,400 1,551,165 19,925 516,093 60,452 1,566,976
Net loss
Conversion of convertible preferred
stock to common stock (2,000) (51,068) (6,461) (163,249) (14,916) (375,903)
Accrual of preferred stock dividends 88,784 34,423 96,222
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common
----------------------- ------------------------ Stock
Issued and Issued and Issued and
outstanding Amount Outstanding Amount Outstanding Amount
------------- ----------- -------------- ---------- ---------------- ----------
Exercise of options 51,214 512
Provision for compensation -
nonemployees
Balance, March 31, 2002 6,066,459 60,664
Net loss
Issuance of Series B convertible
preferred stock under private
placement offerings, less cash
offering costs of $58,792
Issuance of common stock for services
provided in connection with private
placement offerings 290,000 2,900
Conversion of convertible preferred
stock to common stock 228,448 2,285
Accrual of preferred stock dividends
Payment of preferred stock dividends 45,529 456
Issuance of common stock for land-use
rights acquisition 1,260,000 12,600
Issuance of common stock and warrants
for services 8,333 83
Exercise of options 217 2
Provision for compensation - nonemployees
Balance, March 31, 2003 7,898,986 78,990
Net loss
Issuance of Series C convertible
preferred stock under private
placement offerings, less offering
costs of $1,685,365 (including cash of
$289,000)
Issuance of Series D convertible pref
offerings, less cash
offering costs of $428,919 200,000 5,000,000
Issuance of common stock for services
provided in connection with private
placement offerings 220,000 2,200
Conversion of convertible preferred
stock to common stock 887,817 8,878
Accrual of preferred stock dividends 56,712
Payment of preferred stock dividends 44,398 443
Exercise of warrants 559,350 5,594
Issuance of common stock and warrants
for services - nonemployees 201,667 2,017
Exercise of options 23,068 231
Provision for compensation -
nonemployees
Balance, March 31, 2004 200,000 5,056,712 9,835,286 98,353
Net loss
Conversion of convertible preferred
stock to common stock (39,720) (1,016,645) 295,813 2,959
Accrual of preferred stock dividends 296,220
Payment of preferred stock dividend (218,630) 42,878 429
Exercise of warrants 235,390 2,354
Extension of warrants
Issuance of common stock for secondary
offering, less offering costs of
$337,803 899,999 8,999
Exercise of options 23,000 230
Provision for compensation -
nonemployees
Balance, March 31, 2005 160,280 4,117,657 11,332,366 113,324
Net loss
Conversion of convertible preferred
stock to common stock (43,080) (1,095,429) (4,000) (101,611) 272,428 2,724
Accrual of preferred stock dividends 196,707 62,139
Deficit Accumulated Total
Accumulated Other Stockholders'
Additional During the Comprehensive Equity
Paid-in Development Income (Deficiency
Capital Stage (Loss) in Assets)
---------------- --------------- --------------- --------------
Exercise of options 18,972 19,484
Provision for compensation -
nonemployees 332,005 332,005
------------
Balance, March 31, 2002 34,679,844 (37,036,370) 1,736,038
Net loss (4,679,069) (4,679,069)
Issuance of Series B convertible
preferred stock under private
placement offerings, less cash
offering costs of $58,792 90,640 (149,432) 1,859,333
Issuance of common stock for services
provided in connection with private
placement offerings 942,200 945,100
Conversion of convertible preferred
stock to common stock 950,758 (24)
Accrual of preferred stock dividends (302,437)
Payment of preferred stock dividends 160,657 (310)
Issuance of common stock for land-use
rights acquisition 2,986,200 2,998,800
Issuance of common stock and warrants
for services 89,042 89,125
Exercise of options 126 128
Provision for compensation - nonemployees 243,150 243,150
------------
Balance, March 31, 2003 40,142,617 (42,167,308) 3,192,271
Net loss (12,845,813) (12,845,813)
Issuance of Series C convertible
preferred stock under private
placement offerings, less offering
costs of $1,685,365 (including cash of
$289,000) (565,088) (1,120,277) 1,448,435
Issuance of Series D convertible preferred
stock under private placement
offerings, less cash
offering costs of $428,919 1,544,368 (1,973,287) 4,571,081
Issuance of common stock for services
provided in connection with private
placement offerings 1,394,800 1,397,000
Conversion of convertible preferred
stock to common stock 3,841,327 (258)
Accrual of preferred stock dividends (432,713)
Payment of preferred stock dividends 330,197 (1,141)
Exercise of warrants 4,468,572 4,474,166
Issuance of common stock and warrants
for services - nonemployees 7,231,835 7,233,852
Exercise of options 10,361 10,592
Provision for compensation -
nonemployees 267,500 267,500
Balance, March 31, 2004 58,666,489 (58,539,398) 9,747,685
Net loss (13,433,164) (13,433,164)
Conversion of convertible preferred
stock to common stock 1,837,011 (98)
Accrual of preferred stock dividends (579,816) (1)
Payment of preferred stock dividend 507,934 (1,734)
Exercise of warrants 1,893,482 1,895,836
Extension of warrants 4,841,245 4,841,245
Issuance of common stock for secondary
offering, less offering costs of
$337,803 8,324,687 8,333,687
Exercise of options 21,870 22,100
Provision for compensation -
nonemployees 335,412 335,412
Balance, March 31, 2005 76,428,132 (72,552,378) 11,740,969
Net loss (15,525,435) (15,525,435)
Conversion of convertible preferred
stock to common stock 1,784,435 (101)
Accrual of preferred stock dividends (478,275)
F-9
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------------- ------------------------ --------------------------
Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount
------------- --------- -------------- --------- -------------- -----------
Accrual of preferred stock dividends 88,784 34,423 96,222
Payment of preferred stock dividend (89,096) (38,646) (106,950)
Exercise of warrants
Repricing of warrants
Issuance of Series E convertible
preferred stock under private placement
offerings, less cash
offering costs of $53,930
Issuance of common stock for secondary
offering, less offering costs of
$166,554
Issuance of common stock for services -
nonemployees
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2006 58,400 1,499,785 13,464 348,621 45,536 1,180,345
Net loss
Conversion of convertible preferred
stock to
common stock (2,900) (73,480)
Accrual of preferred stock dividends 84,773 26,928 91,072
Payment of preferred stock dividends (85,795) (26,928) (91,072)
Exercise of warrants
Issuance of common stock for secondary
offering, less cash offering costs
of $635,574
Exercise of options
Stock based compensation
Balance, March 31, 2007 55,500 $1,425,283 13,464 $348,621 45,536 $1,180,345
Series D Convertible Series E Convertible
Preferred Stock Preferred Stock Common
----------------------- ------------------------ Stock
Issued and Issued and Issued and
outstanding Amount Outstanding Amount Outstanding Amount
------------- ----------- -------------- ---------- ---------------- ----------
Accrual of preferred stock dividends 196,707 62,139
Payment of preferred stock dividend (208,021) 37,812 378
Exercise of warrants 60,000 600
Repricing of warrants
Issuance of Series E convertible
preferred stock under private placement
offerings, less cash
offering costs of $53,930 160,600 4,015,000
Issuance of common stock for secondary
offering, less offering costs of
$166,554 2,000,000 20,000
Issuance of common stock for services -
nonemployees 2,000 20
Exercise of options 53,900 539
Provision for compensation -
nonemployees
Balance, March 31, 2006 117,200 3,010,914 156,600 3,975,528 13,758,506 137,585
Net loss
Conversion of convertible preferred
stock to
common stock (46,400) (1,163,731) 181,812 1,818
Accrual of preferred stock dividends 175,800 172,001
Payment of preferred stock dividends (175,800) (152,682) 84,318 843
Exercise of warrants 150,500 1,505
Issuance of common stock for secondary
offering, less cash offering costs
of $635,574 1,000,000 10,000
Exercise of options 68,085 681
Stock based compensation 90,000 900
Balance, March 31, 2007 117,200 $3,010,914 110,200 $2,831,116 15,333,221 $153,332
Deficit Accumulated Total
Accumulated Other Stockholders'
Additional During the Comprehensive Equity
Paid-in Development Income (Deficiency
Capital Stage (Loss) in Assets)
---------------- --------------- --------------- --------------
Accrual of preferred stock dividends (478,275)
Payment of preferred stock dividend 441,187 (1,148)
Exercise of warrants 429,950 430,550
Repricing of warrants 125,042 125,042
Issuance of Series E convertible
preferred stock under private placement
offerings, less cash
offering costs of $53,930 232,070 (286,000) 3,961,070
Issuance of common stock for secondary
offering, less offering costs of
$166,554 14,693,373 14,713,373
Issuance of common stock for services -
nonemployees 25,800 25,820
Exercise of options 79,563 80,102
Provision for compensation -
nonemployees 52,683 52,683
Balance, March 31, 2006 94,292,235 (88,842,088) 15,602,925
Net loss (11,132,625) (11,132,625)
Conversion of convertible preferred
stock to
common stock 1,235,370 (23)
Accrual of preferred stock dividends (550,574)
Payment of preferred stock dividends 530,679 (755)
Exercise of warrants 901,435 902,940
Issuance of common stock for secondary
offering, less cash offering costs
of $635,574 6,104,426 6,114,426
Exercise of options 17,163 17,844
Stock based compensation 2,950,543 2,951,443
Balance, March 31, 2007 $106,031,851 $(100,525,287) $14,456,175
F-10
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2005, 2006 AND 2007 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2007 (UNAUDITED)
------------------------------------------------------------------------- ---------------------------------------------------------
October 15, 1984
Years Ended March 31, (Inception)
--------------------------------------------------- to March 31,
OPERATING ACTIVITIES: 2005 2006 2007 2007
----------------- --------------- ----------------- -----------------
Net loss $(13,433,164) $(15,525,435) $(11,132,625) $(96,084,440)
Adjustments to reconcile net loss to net cash used
in operating activities:
Compensation recorded related to issuance of common
stock, common stock options and warrants 5,176,655 203,545 2,951,443 30,692,970
Depreciation and amortization of property and equipment 128,706 155,273 152,274 1,188,694
Deferred rental obligation (14,413)
(Gain)/Loss on disposal of fixed assets 5,982 5,982
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:
Other current assets (28,124) (104,956) 94,432 (98,627)
Other assets (1,117) (120,747) 121,864 (15,477)
Accounts payable 1,076,312 282,345 256,430 2,912,930
Accrued expenses 151,317 53,050 149,176 1,038,938
Deferred revenue (516,307) (919,007) 1,330,894 1,726,673
----------------- --------------- ----------------- -----------------
Net cash used in operating activities (7,460,135) (15,975,932) (6,070,130) (59,787,675)
----------------- --------------- ----------------- -----------------
INVESTING ACTIVITIES:
Purchase of property and equipment (174,095) (55,634) (51,794) (1,617,249)
Restricted funds on deposit 110,849 1,513,893 (2,588,580) (3,118,766)
Advances to Joint Venture (135,002)
Proceeds from maturities of investments 1,800,527
Purchases of investment securities (1,803,469)
----------------- --------------- ----------------- -----------------
Net cash provided by (used in) investing activities (63,246) 1,458,259 (2,640,374) (4,873,959)
----------------- --------------- ----------------- -----------------
FINANCING ACTIVITIES:
Net 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 3,961,070 17,085,434
Payments for convertible preferred stock dividends and
for fractional shares of common stock resulting from the
conversions of convertible preferred stock (1,832) (1,249) (778) (5,592)
Net proceeds from issuance of common stock 10,251,624 15,224,025 7,035,210 53,312,900
Additional capital contributed by stockholders 245,559
----------------- --------------- ----------------- -----------------
Net cash provided by financing activities 10,249,792 19,183,846 7,034,432 77,123,429
----------------- --------------- ----------------- -----------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 2,726,411 4,666,173 (1,676,072) 12,461,795
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 6,745,283 9,471,694 14,137,867
----------------- --------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF THE YEAR $9,471,694 $14,137,867 $12,461,795 $12,461,795
SUPPLEMENTAL CASH FLOW INFORMATION (Note 12) ----------------- --------------- ----------------- -----------------
F-11
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2005, 2006 AND
2007.
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech Pharmaceuticals, Inc. (a development
stage enterprise) along with its subsidiaries (the "Company") is a
pharmaceutical company working to commercialize oral drugs to treat infectious
diseases, and the Company is expanding its targeted markets by applying its
proprietary pharmaceutical platform to treat other disorders. Immtech has
advanced clinical programs that include new oral treatments for Pneumocystis
pneumonia ("PCP"), malaria, and trypanosomiasis ("African sleeping sickness"),
and a well-defined, expanding library of compounds targeting fungal infections,
HCV and other serious diseases. Immtech holds an exclusive worldwide license to
certain patents and patent applications related to technology and products
derived from a proprietary pharmaceutical platform. The Company has worldwide
rights to commercialize and sublicense such patented technology, including a
large library of well-defined compounds from which a pipeline of therapeutic
products could be developed.
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-CH"), 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 work to commercialize the aromatic cation
pharmaceutical technology platform (the Company acquired its rights to the
aromatic cation technology platform in 1997 and promptly thereafter commenced
development of its current programs). The Company uses the expertise and
resources of strategic partners and third parties in a number of areas,
including: (i) laboratory research, (ii) animal and human 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, 2008, if at all.
Since inception, the Company has incurred accumulated net losses of
approximately $96,084,000. Management expects the Company will continue to incur
significant losses during the next several years as the Company continues
development activities, clinical trials and commercialization 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 activities will lead to
the
F-12
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
believes it will require substantial additional funds to commercialize its drug
candidates. The Company's cash requirements may vary materially from those now
planned when and if the following become known: results of research and
development efforts, results of clinical testing, responses to grant requests,
formation and development of relationships with strategic partners, changes in
the focus and direction of development programs, competitive and technological
advances, requirements in the regulatory process and other factors. Changes in
circumstances in any of the above areas may require the Company to allocate
substantially more funds than are currently available or than management 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, complete the development and commercialization of drug candidates 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 Pharmaceuticals, Inc. and its wholly owned
subsidiaries. All 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 in two accounts on deposit at a bank which are restricted for use in
accordance with (i) a clinical research subcontract agreement with UNC-CH and
(ii) a malaria drug development agreement with Medicines for Malaria Venture
("MMV").
Concentration of Credit Risk - The Company maintains its cash in
commercial banks. Balances on deposit are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to specified limits.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of March 31, 2006 and
2007, according to NextEra's
F-13
disclosure, 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 March 31, 2006 and 2007. Recognition of any investment income on
the equity method by the Company for its investment in NextEra will occur only
after NextEra has earnings in excess of previously unrecognized equity losses.
The Company does not provide, and has not provided, any financial guarantees to
NextEra.
Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to five years.
Leasehold improvements are amortized over the lesser of the life of the related
lease or their useful life.
Prepaid Rent - Prepaid rent relates to land use rights that the company
has recorded at cost and amortized using the straight line method over the
estimated useful life of 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 which is measured by the difference between the fair
value and the carrying value of the asset.
Deferred Rental Obligation - Rental obligations with scheduled rent
increases are recognized on a straight-line basis over the lease term.
Revenue Recognition - Grants to perform research are the Company's
primary source of revenue and are generally granted to support research and
development activities for specific projects or drug candidates. Revenue related
to grants to perform research and development is recognized as earned based on
the performance requirements of the specific grant. Upfront cash payments from
research and development grants are reported as deferred revenue until such time
as the research and development activities covered by the grant are performed.
Research and Development Costs - Research and development costs are
expensed as incurred and include costs associated with research performed
pursuant to collaborative agreements. Research and development costs consist of
direct and indirect internal costs related to specific projects as well as fees
paid to other entities that conduct certain research activities on the Company's
behalf.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. In addition, a valuation
allowance is recognized if it is more likely than not that some or all of the
deferred income tax assets will not be realized. A valuation allowance is used
to offset the related deferred income tax assets
F-14
due to uncertainties of realizing the benefits of certain net operating loss and
tax credit carry-forwards 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 net income (loss) per
share are computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding.
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 the basic net loss per share for the years ended March 31, 2005, 2006
and 2007, as none of the Company's outstanding common stock options, warrants
and the conversion features of Series A, B, C, D and E Convertible Preferred
Stock were dilutive.
Stock-Based Compensation - Effective April 1, 2006, the Company adopted
SFAS No. 123(R), "Share-Based Payment," using the modified prospective method.
SFAS No. 123(R) requires entities to recognize the cost of employee services in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (with limited exceptions). The cost, based on the estimated number
of awards that are expected to vest, will be recognized over the period during
which the employee is required to provide the services in exchange for the
award. No compensation cost is recognized for awards for which employees do not
render the requisite service. Upon adoption, the grant-date fair value of
employee share options and similar instruments was estimated using the
Black-Scholes valuation model. The Black-Scholes valuation requires the input of
highly subjective assumptions, including the expected life of the stock-based
award and stock price volatility. The assumptions used are management's best
estimates, but the estimates involve inherent uncertainties and the application
of management judgment. As a result, if other assumptions had been used, the
recorded and pro forma stock-based compensation expense could have been
materially different from that depicted in the financial statements.
Fair Value of Financial Instruments - The Company believes that the
carrying amount of its financial instruments (cash and cash equivalents,
restricted funds on deposit, accounts payable and accrued expenses) approximates
the fair value of such instruments as of March 31, 2006 and 2007 based on the
short-term nature of the instruments.
Segment Reporting - The Company is a development stage pharmaceutical
company that operates as one segment.
Comprehensive Loss - There were no differences between comprehensive
loss and net loss for the years ended March 31, 2005, 2006, and 2007.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
F-15
amounts of revenues and expenses during the reporting period. Actual results
could differ materially from those estimates.
New Accounting Standard - On July 13, 2006, the FASB issued
Interpretation No. 48 ("FIN No. 48") "Accounting for Uncertainty in Income
Taxes: an Interpretation of FASB Statement No. 109." This interpretation
clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." FIN No. 48 prescribes a recognition threshold and measurement
principles for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. This interpretation is effective for fiscal years
beginning after December 15, 2006. FIN 48 is effective for us in fiscal year
2008. The Company has assessed the impact of the adoption of this statement and
found that it is not material.
New Accounting Standard - In September 2006, the FASB issued Statement
No. 157 ("SFAS 157"), "Fair Value Measurements." SFAS 157 defines fair value,
establishes a framework for measuring fair value in accordance with generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 is effective for us in fiscal year 2009. The Company is
currently assessing the impact of the adoption of this statement.
New Accounting Standard - In February 2007, the FASB issued Statement
No. 159 ("SFAS 159"), "Fair Value Option for Financial Assets and Financial
Liabilities." SFAS 159 establishes the irrevocable option to elect to carry
certain financial assets and liabilities at fair value, with changes in fair
value recorded in earnings. SFAS 159 is effective for us in fiscal year 2009.
The Company is currently assessing the impact of the adoption of this statement.
2. RECAPITALIZATION, PRIVATE PLACEMENTS, INITIAL PUBLIC OFFERING AND
SECONDARY PUBLIC OFFERING
On July 24, 1998 (the "Effective Date"), the Company completed a
recapitalization (the "Recapitalization") pursuant to which, among other items:
(i) the Company's debt holders converted approximately $3,151,000 in stockholder
advances, notes payable and related accrued interest and accounts payable into
604,978 shares of common stock and approximately $203,000 in cash (see Note 11);
(ii) the Company's Series A Redeemable Preferred stockholders converted
1,794,550 shares of Series A Redeemable Preferred Stock into 578,954 shares of
common stock (see Note 11) and (iii) the Company's Series B Redeemable Preferred
stockholders converted 1,600,000 shares of Series B Redeemable Preferred Stock
into 616,063 shares of common stock (see Note 11).
Contemporaneously with the completion of the Recapitalization, the
Company issued and sold 575,000 shares of common stock at $1.74 per share, or
$1,000,000 in the aggregate, to certain accredited investors pursuant to private
placements. The placement agent, New China Hong Kong Securities Limited
("NCHK"), received $50,000 and warrants to purchase 75,000 shares of the
Company's common stock at $0.10 per share for services and expense reimbursed.
RADE Management Corporation ("RADE") received warrants to purchase 225,000
shares of the Company's common stock at $0.10 per share, which was subsequently
amended on April 22, 1999 to increase the exercise price from $0.10 per share to
$6.47 per share, for RADE's services in the Recapitalization. RADE subleases an
office facility to the Company for which the
F-16
Company pays rent directly to RADE's landlord on RADE's behalf (see Note 9).
During the years ended March 31, 2005, 2006, and 2007, the Company paid
approximately $124,000, $120,000 and $122,000 respectively, for the use of the
office facility.
On April 26, 1999, the Company issued 1,150,000 shares of common stock
in an initial public stock offering resulting in net proceeds of approximately
$9,173,000. Costs incurred of approximately $513,000 and warrants to purchase
100,000 shares of common stock issued to the underwriters for their services in
the initial public offering were netted from the proceeds of the offering .
On December 8, 2000, the Company completed a private placement offering
which raised approximately $4,306,000 of additional equity capital through the
issuance of 584,250 shares of common stock.
In February 2002, the Company completed private placement offerings
which raised approximately $3,849,000 of additional equity capital (net of
approximately $154,000 of cash offering costs) through the issuance of 160,100
shares of Series A Convertible Preferred Stock, and five-year warrants to
purchase 400,250 shares of the Company's common stock at an exercise price of
$6.00 per share (see Note 8).
In September and October 2002, the Company completed private placement
offerings which raised approximately $1,859,000 of additional equity capital
(net of approximately $59,000 of cash offering costs) through the issuance of
76,725 shares of Series B Convertible Preferred Stock and five-year warrants to
purchase 191,812 shares of the Company's common stock at an exercise price of
$6.125 per share (see Note 8).
In June 2003, the Company completed private placement offerings which
raised approximately $2,845,000 of additional equity capital (net of
approximately $289,000 of cash offering costs) through the issuance of 125,352
shares of Series C Convertible Preferred Stock. Total cash and non-cash offering
costs with respect to the issuance of the Series C Convertible Preferred Stock
was approximately $1,685,000 (see Note 8).
In January 2004, the Company completed private placement offerings which
raised approximately $4,571,000 of additional equity capital (net of
approximately $429,000 of cash offering costs) through the issuance of 200,000
shares of Series D Convertible Preferred Stock and warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $16.00 per share.
The warrants expire five years from the date of grant (see Note 8).
In July 2004, the Company completed a secondary public offering of its
common stock which raised approximately $8,334,000 of additional equity capital
(net of approximately $338,000 of cash offering costs) through the issuance of
899,999 shares of the Company's common stock which were sold to the public at
$10.25 per share (see Note 8).
In December 2005, the Company completed private placement offerings
which raised approximately $3,340,000 of additional equity capital (net of
approximately $54,000 of cash offering costs) through the issuance of 133,600
shares of Series E Convertible Preferred Stock and warrants to purchase 83,500
shares of the Company's common stock at an exercise price of $10.00 per share.
The warrants expire three years from the date of grant (see Note 8).
F-17
In February 2006, the Company completed a secondary public offering of
its common stock which raised approximately $14,880,000 of additional equity
(net of approximately $167,000 of cash offering costs) through the issuance of
2,000,000 shares of the Company's common stock which were sold to the public at
$7.44 per share (see Note 8).
In March 2006, the Company completed private placement offerings which
raised $675,000 of additional equity capital (option agreement attached to the
December 2005 offering) through the issuance of 27,000 shares of Series E
Convertible Preferred Stock (see Note 8).
In February 2007, the Company completed a secondary public offering of
its common stock which raised approximately $6,750,000 of additional equity (net
of approximately $636,000 of cash offering costs) through the issuance of
1,000,000 shares of the Company's common stock which were sold to the public at
$6.75 per share (see Note 8).
3. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
As of March 31, 2006 and 2007, the Company owned, as disclosed by
NextEra, approximately 28% of the issued and outstanding shares of NextEra
common stock. The Company does not provide, and has not provided, any financial
guarantees to NextEra. The Company has recognized an equity loss in NextEra to
the extent of the basis of its investment. Future recognition of any investment
income on the equity method by the Company for its investment in NextEra will
occur only after NextEra has earnings in excess of previously unrecognized
equity losses. As of March 31, 2006 and 2007, the Company's net investment in
NextEra is zero.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2006 and
2007:
2006 2007
------------ ------------
Research and laboratory equipment............ $ 497,328 $ 450,806
Furniture and office equipment............... 357,885 331,237
Leasehold improvements....................... 42,359 42,359
------------ ------------
Property and equipment - at cost............. 897,572 824,402
Less accumulated depreciation................ 725,773 684,139
------------ ------------
Property and equipment - net................. $ 171,799 $ 140,263
============ ============
F-18
5. PREPAID RENT
Through Immtech Pharmaceuticals, Inc.'s wholly owned subsidiary, Super
Insight Limited ("Super Insight"), and its wholly owned subsidiary,
Immtech Life Science Limited ("Immtech Life Science"), Immtech Life
Science has land-use rights through May 2051 for two floors of a
newly-constructed building (November 2002) located in the Futian Bonded
Zone, Shenzhen, in the PRC.
Prepaid rent consists of the following as of March 31, 2006 and 2007:
2006 2007
------------ ------------
Prepaid rent................................. $ 3,558,994 $ 3,558,994
------------ ------------
Less amortization............................ 174,828 249,754
------------ ------------
Prepaid rent - net $ 3,384,166 $ 3,309,240
============ ============
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of March 31, 2006 and
2007, consist of:
2006 2007
------------ ------------
Accrued research and development............. $ 150,000 $ 199,789
Accrued general and administrative........... 4,250 75,000
Accrued patents.............................. 25,000 50,000
Accrued compensation......................... 31,684 39,516
Other........................................ 15,815 11,620
------------ ------------
$ 226,749 $ 375,925
============ ============
7. INCOME TAXES
The Company has no significant deferred income tax liabilities.
Significant components of the Company's deferred income tax assets are as
follows:
March 31,
----------------------------
2006 2007
------------- --------------
Deferred income tax assets:
Federal net operating loss carryforwards........ $ 25,947,000 $ 29,090,000
State net operating loss carryforwards.......... 3,542,000 4,011,000
Federal income tax credit carryforwards......... 1,511,000 1,885,000
Deferred revenue................................ 134,000 587,000
------------- --------------
Total deferred income tax assets............ 31,134,000 35,573,000
------------- --------------
Valuation allowance............................... (31,134,000) (35,573,000)
------------- --------------
Net deferred income taxes recognized in
the accompanying balance sheets................. $ 0 $ 0
============= ==============
As of March 31, 2007, the Company had federal net operating loss
carryforwards of approximately $85,557,000 which expire from 2008 through 2027.
The Company also
F-19
has approximately $83,559,000 of state net operating loss carryforwards as of
March 31, 2007, which expire from 2009 through 2027, available to offset future
taxable income for state (primarily Illinois) income tax purposes. Because of
"change of ownership" provisions of the Tax Reform Act of 1986, approximately
$250,000 of the Company's net operating loss carryforwards for federal income
tax purposes are subject to an annual limitation regarding utilization against
taxable income in future periods. As of March 31, 2007, the Company had federal
income tax credit carryforwards of approximately $1,885,000 which expire from
2008 through 2027.
A reconciliation of the provision for income taxes (benefit) at the
federal statutory income tax rate to the effective income tax rate follows:
Years Ended March 31,
-------------------------------
2005 2006 2007
Federal statutory income tax rate.............. (34.0)% (34.0)% (34.0)%
State income taxes............................. (4.8) (4.8) (4.8)
Benefit of federal and state net operating
loss and tax credit carryforwards and other
deferred income tax assets not recognized.... 38.8 38.8 38.8
-------- -------- ---------
Effective income tax rate...................... 0.0% 0.0% 0.0%
-------- -------- ---------
8. STOCKHOLDERS' EQUITY
On January 7, 2004, the stockholders of the Company approved an increase
in the number of authorized common stock from 30 million to 100 million shares.
On June 14, 2004, the Company filed with the Secretary of State of the State of
Delaware an Amended and Restated Certificate of Incorporation implementing,
among other things, the approved authorized 70 million share common stock
increase from 30 million to 100 million shares of common stock.
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 consolidated balance sheets
are $37,783 and $39,785 of accrued preferred stock dividends at March 31, 2007
and 2006, 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 adjustments, as defined in the Series
A Certificate of Designation. During the year ended March 31, 2002, the Company
issued 160,100 shares of Series A Convertible Preferred Stock for net proceeds
of $3,849,000 (less cash offering costs of approximately $154,000). On October
15, 2006, the Company issued 7,929 shares of common stock and paid $84 in lieu
of fractional common shares as dividends on the preferred shares and on April
15, 2006, the Company issued 5,547 shares of common stock and paid $47 in lieu
of fractional common shares as dividends on the preferred shares. On October 15,
2005, the Company issued
F-20
4,213 shares of common stock and paid $206 in lieu of fractional common shares
as dividends on the preferred shares and on April 15, 2005, the Company issued
3,469 shares of common stock and paid $117 in lieu of fractional common shares
as dividends on the preferred shares. 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 and 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. During the years ended March 31, 2007,
2006 and 2005 certain preferred stockholders converted 2,900, 2,000, and 20,400
shares of Series A Convertible Preferred Stock, including accrued dividends, for
16,541, 11,409 and 116,364 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 A, provided that the closing bid price
for the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of 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 A.
The Conversion Price A is subject to certain 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, over the common stock and is pari passu with all other outstanding
series of preferred stock. Each issued and outstanding share of Series A
Convertible Preferred Stock shall be entitled to 5.6561 votes (subject to
adjustment) 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 consolidated
balance sheets are $12,021 and $12,021 of accrued preferred stock dividends as
of March 31, 2007 and 2006, respectively. Each share of Series B
F-21
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
adjustments, as defined in the Series B Certificate of Designation. During the
year ended March 31, 2003, the Company issued 76,725 shares of Series B
Convertible Preferred Stock for net proceeds of $1,859,000 (net of cash offering
costs of approximately $59,000). On October 15, 2006, the Company issued 2,542
shares of common stock and paid $26 in lieu of fractional common shares as
dividends on the preferred shares and on April 15, 2006, the Company issued
1,703 shares of common stock and paid $31 in lieu of fractional common shares as
dividends on the preferred shares. On October 15, 2005, the Company issued 1,805
shares of common stock and paid $48 in lieu of fractional common shares as
dividends on the preferred shares and on April 15, 2005, the Company issued
1,526 shares of common stock and paid $49 in lieu of fractional common shares as
dividends on the preferred shares. 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 and on April 15, 2004, the Company issued 974
shares of common stock and paid $17 in lieu of fractional common shares as
dividends on the preferred shares. During the years ended March 31, 2007, 2006,
and 2005 certain preferred stockholders converted 0, 6,461, and 0 shares of
Series B Convertible Preferred stock, including accrued dividends, for 0,
40,569, and 0 shares of common stock, respectively.
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 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 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 B.
The Conversion Price B is subject to certain 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 over the common stock and is pari passu with all other outstanding
series of preferred stock. Each issued and outstanding share of Series B
Convertible Preferred Stock shall be entitled to 6.25 votes (subject to
adjustment) 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.
F-22
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 consolidated balance sheets
are $41,945 and $41,945 of accrued preferred stock dividends as of March 31,
2007 and 2006, 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 adjustments, as defined in the Series
C Certificate of Designation. During the year ended March 31, 2004, the Company
issued 125,352 shares of Series C Convertible Preferred Stock for net proceeds
of $2,845,000 (net of approximately $289,000 of cash offering costs). Total cash
and non-cash offering costs with respect to the issuance of the Series C
Convertible Preferred Stock were approximately $1,685,000. 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 year ended March 31, 2004. On October 15, 2006, the company issued
8,602 shares of common stock and paid $62 in lieu of fractional common shares as
dividends on the preferred shares and on April 15, 2006, the Company issued
5,761 shares of common stock and paid $95 in lieu of fractional common shares as
dividends on the preferred shares. On October 15, 2005, the Company issued 4,483
shares of common stock and paid $148 in lieu of fractional common shares as
dividends on the preferred shares and on April 15, 2005, the Company issued
4,625 shares of common stock and paid $212 in lieu of fractional common shares
as dividends on the preferred shares. 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 and on April 15, 2004, the Company issued
3,534 shares of common stock and paid $397 in lieu of fractional common shares
as dividends on the preferred shares. During the years ended March 31, 2007,
2006, and 2005 certain preferred stockholders converted 0, 14,916, and 11,852
shares of Series C Convertible Preferred Stock, including accrued dividends, for
0, 84,708, and 67,454 shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares
of Series C Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into which the
Series C Convertible Preferred Stock are convertible are registered pursuant to
an effective registration statement, as defined. The number of shares of common
stock to be received by the holders of the Series C Convertible Preferred Stock
upon a mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price C provided that the closing bid price
for the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of 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 C.
The Conversion Price C is subject to certain adjustments, as defined in the
Series C Certificate of Designation.
F-23
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, over the common stock and is pari passu with all other outstanding
series of preferred stock. Each issued and outstanding share of Series C
Convertible Preferred Stock shall be entitled to 5.6561 votes (subject to
adjustment) 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 consolidated balance sheets
are $80,914 and $80,914 of accrued preferred stock dividends as of March 31,
2007 and 2006, respectively. Each share of Series D Convertible Preferred Stock
may be converted by the holder at any time into shares of common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any accrued
and unpaid dividends (the "Liquidation Price"), by a $9.00 conversion price (the
"Conversion Price D"), subject to certain adjustments, as defined in the Series
D Certificate of Designation. During the year ended March 31, 2004, the Company
issued 200,000 shares of Series D Convertible Preferred Stock for net proceeds
of approximately $4,571,000 (net of approximately $429,000 of cash offering
costs). On October 15, 2006, the Company issued 16,611 shares of common stock
and paid $86 in lieu of fractional common shares as dividends on the preferred
shares and on April 15, 2006, the company issued 11,134 shares of common stock
and paid $79 in lieu of fractional common shares as dividends on the preferred
shares. On October 15, 2005, the Company issued 8,472 shares of common stock and
paid $235 in lieu of fractional common shares as dividends on the preferred
shares and on April 15, 2005, the Company issued 9,219 shares of common stock
and paid $135 in lieu of fractional common shares as dividends on the preferred
shares. 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 and 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 years ended March 31, 2007, 2006, and 2005 certain preferred
stockholders converted 0, 43,080, and 39,720 shares of Series D Convertible
Preferred Stock, including accrued dividends, for 0, 114,581, and 111,995 shares
of common stock, respectively.
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
F-24
registered pursuant to an effective registration statement, as defined. The
number of shares of common stock to be received by the holders of the Series D
Convertible Preferred Stock upon a mandatory conversion by the Company is
determined by (i) dividing the Liquidation Price by the Conversion Price D
provided that the closing bid price for the Company's common stock exceeds
$18.00 for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met, the
number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price D. The Conversion Price D is subject
to certain adjustments, as defined in the 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, over the
common stock and is pari passu with all other series of preferred stock. Each
issued and outstanding share of Series D Convertible Preferred Stock shall be
entitled to 2.7778 votes (subject to adjustment) 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.
Series E Convertible Preferred Stock - On December 13, 2005, the Company
completed a private placement of 133,600 shares its Series E Convertible
Preferred Stock, $0.01 par value ("Series E Stock") at $25.00 per share, which
resulted in gross proceeds to the Company of approximately, $3,340,000, or
$3,286,000 of additional equity capital (net of approximately $54,000 of cash
offering costs). Each purchaser of the Series E Stock was granted (i) an option
to purchase, at $25.00 per share, up to an additional 25% of the number of
shares of Series E Stock purchased on December 13, 2005 (the option period
terminated on March 10, 2006) and (ii) a warrant to purchase one share of common
stock for each $40 of Series E Stock purchased on December 13, 2005. The
Warrants are exercisable during the three-year period commencing on December 13,
2005, at an exercise price of $10.00, subject to adjustment for stock splits,
dividends and similar events. On March 10, 2006, the Company completed a private
placement of 27,000 shares of its Series E Stock at $25.00 per share, which
resulted in gross proceeds to the Company of approximately $675,000 of
additional equity capital as a result of Series E holders exercising their
options.
On December 13, 2005, the Company filed a Certificate of Designation
with the Secretary of State of the State of Delaware designating 167,000 shares
of the Company's 5,000,000 authorized shares of preferred stock as Series E
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 E Convertible Preferred Stock in the
accompanying consolidated balance sheets are $76,116 and $60,528 of accrued
preferred stock dividends as of March 31, 2007 and 2006, respectively. Each
share of Series E 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 $7.04 conversion price (the "Conversion Price E"), subject to
certain adjustments, as defined in the Series E Certificate of Designation. On
October 15, 2006, the Company issued 15,670 shares of
F-25
common stock and paid $111 in lieu of fractional common shares as dividends on
the preferred shares. On April 15, 2006, the Company issued 8,819 shares of
common stock and paid $134 in lieu of fractional common shares as dividends on
the preferred shares. During the years ended March 31, 2007 and 2006 certain
preferred stockholders converted 46,400 and 4,000 shares of Series E Convertible
Preferred Stock, including accrued dividends, for 165,271 and 14,418 shares of
common stock, respectively.
The Company may at any time after December 1, 2006, require that any or
all outstanding shares of Series E Convertible Preferred Stock be converted into
shares of our common stock, provided that the shares of common stock into which
the Series E 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 E Convertible Preferred
Stock upon a mandatory conversion by us is determined by (i) dividing the
Liquidation Price by the Conversion Price E provided that the closing bid price
for the Company's common stock exceeds $10.56 for 20 out of 30 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 E.
The Conversion Price E is subject to certain adjustments, as defined in the
Certificate of Designation.
The Series E Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends, over the
common stock and is parri passu with all other outstanding series of preferred
stock. Each issued and outstanding share of Series E Convertible Preferred Stock
is entitled to 3.5511 votes (subject to adjustment) 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 E Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
The Company will, on December 13, 2008, at the Company's election, (i)
redeem the Series E Convertible Preferred Stock plus any accrued and unpaid
interest for cash, (ii) convert the Series E Convertible Preferred Stock and any
accrued and unpaid interest into common stock, or (iii) redeem and convert the
Series E Convertible Preferred Stock in any combination of (i) or (ii).
Common Stock -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 $8,334,000. The
shares were sold to the public at $10.25 per share. Jeffries & Company, Inc.
acted as the sole book-running manager and underwriter of this offering.
In February 2006, the Company completed a secondary public offering of
its common stock which raised approximately $14,880,000 of additional equity
(net of approximately $167,000 of cash offering costs) through the issuance of
2,000,000 shares of the Company's common stock which were sold to the public at
$7.44 per share. Ferris, Baker Watts, Incorporated acted as the sole
book-running manager and underwriter of this offering.
F-26
On May 26, 2006, restricted shares in the amount of 5,000 shares of
common stock were issued and expensed with a grant date value of approximately
$36,000 to Tulane University as part of the Tulane License Agreement granting to
us an exclusive license to develop, manufacture and commercialize a group of
4-aminoquinoline drugs for treatment, prophylaxis and diagnosis of infectious
diseases.
On May 26, 2006, restricted shares in the amount of 5,000 shares of
common stock were issued and expensed with a grant date value of approximately
$36,000 to T. Stephen Thompson as part of his retirement and consulting
agreement dated May 1, 2006.
On November 28, 2006, restricted shares in the amount of 80,000 shares
of common stock were expensed and issued to China Pharmaceutical Investments
Limited ("China Pharmaceutical") with a grant date fair value of approximately
$564,000 as part of the agreement signed August 28, 2006 between Immtech
Pharmaceuticals, Inc. and China Pharmaceutical. China Pharmaceutical achieved
milestone payments of common stock for identification of a site deemed suitable
by the Company for building a pharmaceutical plant and for completing the
feasibility study to be submitted to the appropriate governmental agencies.
In February 2007, the Company completed a secondary public offering of
its common stock which raised approximately $6,750,000 of additional equity (net
of approximately $636,000 of cash offering costs) through the issuance of
1,000,000 shares of the Company's common stock which were sold to the public at
$6.75 per share. Ferris, Baker Watts, Incorporated acted as the placement agent.
Incentive Stock Programs - 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. During the
year ended March 31, 2007, 103,430 options previously granted under the 2000
Stock Incentive Plan expired and were available to be reissued.
The Company has granted options to purchase common stock to individuals
who have contributed to the Company in various capacities. The options contain
various provisions regarding vesting periods and expiration dates. The purchase
price of shares must be at least equal to the fair market value of the common
stock on the date of grant, and the maximum term of an option is 10 years. The
options generally vest over periods ranging from zero to four years. As of March
31, 2007, there were a total of 439,513 shares available for grant.
During the year ended March 31, 2005, the Company issued options to
purchase 20,000 shares of common stock to non-employees and recognized expense
of approximately $335,000 related to such options and certain other options
issued in prior years which vest over a four-year service period. During the
year ended March 31, 2006, the Company issued options to purchase 40,000 shares
of common stock to non-employees and recognized expense of approximately $53,000
related to such options and certain other options issued in prior years which
vest over a two or four-year service period. During the year ended March 31,
2007, the Company issued options to purchase 76,000 shares of common stock to
non-employees and recognized expense of approximately $315,000 related to such
options and certain other options issued in prior years which vest over a one to
four-year service period. The expense was determined based on the estimated fair
value of the options using the Black-Scholes option valuation model and
assumptions regarding volatility of the Company's common stock, risk-free
interest rates, and life of the option of the Company's common stock all at the
date such options were issued. Additionally, the Company granted 5,000
restricted stock awards during the year ended March 31, 2007 and recognized
expense of approximately $36,000.
During the year ended March 31, 2005, the Company issued options to
purchase 371,000 shares of common stock to employees and directors which vest
over two years. During the year ended March 31, 2006, the company issued options
to purchase 324,001 shares of common stock to employees and directors which vest
over two years. During the year ended March 31, 2007, the Company issued options
to purchase 345,000 shares of common stock to employees and directors which vest
over two years and recognized expense of approximately $2,001,000 related to
such options and certain other options issued in prior years
F-27
which vest over a two to four-year service period. The expense was determined
based on the estimated fair value of the options using the Black-Scholes option
valuation model.
The activity during the years ended March 31, 2005, 2006 and 2007 for
the Company's stock options is summarized as follows:
Weighted Average
Remaining
Number of Stock Options Price Weighted Average Contractual
Shares Range Exercise Price Life-Years
------------------- --------------------- --------------------- ------------------
Outstanding as of March 31, 2004....... 962,574 0.34 - 21.66 8.63
Granted.............................. 391,000 8.15 - 14.24 10.34
Exercised............................ (23,517) 0.46 - 4.42 1.30
Expired..............................
------------------- --------------------- --------------------- ------------------
Outstanding as of March 31, 2005....... 1,330,057 0.34 - 21.66 9.26 6.77
Granted.............................. 364,001 7.29-12.38 8.02
Exercised............................ (62,844) 0.46 - 2.55 1.63
Expired.............................. (76,834) 2.55-21.66 9.86
------------------- --------------------- --------------------- ------------------
Outstanding as of March 31, 2006....... 1,554,380 0.34 - 21.66 9.25 5.75
Granted.............................. 421,000 5.60- 7.35 5.97
Exercised............................ (87,605) 0.46 - 4.75 2.05
Expired.............................. (87,166) 4.75 -12.33 5.27
------------------- --------------------- --------------------- ------------------
Outstanding as of March 31, 2007....... 1,800,609 $0.34 - 21.66 $8.92 6.90
=================== ===================== ===================== ==================
Exercisable as of March 31, 2005....... 874,360 0.34 - 21.66 8.42 5.56
Exercisable as of March 31, 2006....... 1,115,167 0.34 - 21.66 9.56 5.75
Exercisable as of March 31, 2007....... 1,307,610 0.34 - 21.66 9.76 6.19
On April 1, 2006, the company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") no. 123 (revised 2004), "Share-Based Payment,"
which requires that the fair value of share-based awards be recorded in the
results of operations. Under the revised standard, awards issued prior to April
1, 2006 are charged to expense under the prior rules, and awards issued after
that date are charged to expense under the revised rules. Total non-cash
compensation expense charged against income for the year ended March 31, 2007
for share-
F-28
based plans totaled approximately $2,316,000. Through March 31, 2006,
the Company measured compensation cost using the intrinsic value-based method of
accounting for stock options granted to employees and directors. The Company
used the modified prospective method of adoption. Under this method, prior
years' financial results do not include the impact of recording stock options
using fair value. Had compensation cost been determined using the fair
value-based accounting method in the years ended March 31, 2005 and 2006, pro
forma net income and earnings per share ("EPS") amounts would have been as
follows:
2005 2006
--------------- --------------
Net loss attributable to common shareholders -
as reported $ (14,012,980) $ (16,289,710)
Deduct: total stock-based compensation expense
determined under fair value method for awards to
employees and directors (3,414,407) (3,575,570)
--------------- --------------
Net loss attributable to common stockholders -
pro forma $ (17,427,387) $ (19,865,280)
=============== ==============
Basic and diluted net loss per share attributable
to common stockholders - as reported $ (1.32) $ (1.37)
=============== ==============
Basic and diluted net loss per share attributable
to common stockholders - pro forma $ (1.64) $ (1.68)
=============== ==============
The weighted-average grant-date fair value of options granted during the
years ended March 31, 2005, 2006 and 2007 was $10.34, $8.02 and $5.97,
respectively. The intrinsic value of options exercised during the years
ended March 31, 2005, 2006 and 2007 was approximately $299,000, $553,000 and
$492,000, respectively. The intrinsic value of stock options vested during
the years ended March 31, 2005, 2006 and 2007 was approximately $4,740,000,
$2,197,000 and $1,038,000, respectively. The intrinsic value of stock
options outstanding during the years ended March 31, 2005, 2006 and 2007 was
approximately $6,013,000, $2,286,000 and $1,043,000, respectively. As of the
year ended March 31, 2007, there is approximately $2,451,000 of unrecognized
compensation cost related to non-vested stock option compensation
arrangements granted under the 2000 Plan that is expected to be recognized
as a charge to earnings over a weighted-average period of 1.2 years. As of
the year ended March 31, 2007, 1,737,717 options have vested or are expected
to vest with a weighted average exercise price of $11.88, a weighted average
remaining life of 6.9 years, and with an aggregate intrinsic value of
approximately $1,022,000. The fair value of an option grant was estimated
using the Black-Scholes option pricing model with the following assumptions:
F-29
2005 2006 2007
Risk free interest rate 4.47% 4.59% 4.80%
Average life of options (years) 9.7 10.0 9.5
Volatility 112% 70% 78%
Dividend yield -0- -0- -0-
The average risk-free interest rate is based on the U.S. Treasury
security rate in effect over the estimated life at the grant date. The average
life of the options is based upon historical data. The Company determined
expected volatility in the Black-Scholes model based upon two year historical
data at the year ended March 31, 2005, and implied volatility based upon
exchange traded options for the Company's common stock for the years ended March
31, 2006 and 2007. Implied volatility better reflects future market conditions
and better indicates expected volatility than purely historical volatility.
There is no dividend yield.
Warrants - On January 31, 2002, the Company entered into a one year
consulting agreement with Yorkshire Capital Limited ("Yorkshire") for services
related to identifying investors and raising funds in connection with the
February 2002 private placement and assistance to be provided by Yorkshire to
the Company with respect to financial consulting, planning, structuring,
business strategy, public relations and promotions, among other items. In
connection with the closing of the private placement, the Company granted
Yorkshire warrants to purchase 360,000 shares of the Company's common stock at
prices ranging from $6.00 to $12.00 per share. The warrant to purchase 100,000
shares of the Company's common stock at an exercise price of $6.00 per share
vested upon the closing of the private placement. The remaining warrants did not
vest and were cancelled. The vested warrant expired on February 14, 2007.
In February 2002, the Company, in connection with the Series A
Convertible Preferred Stock private placement, issued warrants to purchase
400,250 shares of the Company's common stock at an exercise price of $6.00 per
share of common stock to the purchasers of the Series A Convertible Preferred
Stock. The warrants expired in February 2007.
On February 1, 2002, the Company entered into an introductory brokerage
agreement with Ace Champion, Ltd. ("Ace") and Pacific Dragon Group, Ltd.
("Pacific Dragon") (collectively, the "Introductory Brokers") for assistance to
be provided by the Introductory Brokers to the Company with respect to obtaining
funds in connection with the aforementioned February 2002 private placement to
the purchaser of the Series B Convertible Preferred Stock (see Note 3). As
compensation for such services, Ace and Pacific Dragon received warrants to
purchase 100,000 shares and 300,000 shares, respectively, of the Company's
common stock at an exercise price of $6.00 per share, subject to certain
conditions. The warrants expired on February 22, 2007.
In September 2002, in connection with the Series B Convertible Preferred
Stock private placement offering, the Company issued to the purchaser of the
Series B Convertible Preferred Stock warrants to purchase 191,812 shares of the
Company's common stock at an exercise price
F-30
of $6.125 per share of common stock. The warrants expire at various dates in
September 2007. The warrant exercise period commenced immediately upon issuance
of the warrant. The Company may, upon 20 days' notice, redeem any unexercised
portion of any warrants for a redemption fee of $0.10 per share of common stock
underlying the warrants. During the 20-day notice period, if the warrants are
then exercisable as a result of the conversion or redemption of the Series B
Convertible Preferred Stock, such warrant holder may then exercise all or a
portion of the warrants by tendering the appropriate exercise price.
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 the PRC. As consideration for these services, the Company granted China
Harvest an immediately exercisable five year warrant to purchase 600,000 shares
of common stock from the Company at $6.08 per share. During the year ended March
31, 2004, 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.
In January 2004, in connection with the Series D Convertible Preferred
Stock private placement, the Company issued to the purchasers of Series D
Convertible Preferred Stock warrants to purchase 200,000 shares of the Company's
common stock at an exercise price of $16.00 per share of common stock. The
warrants expire at various dates in January 2009. The warrant exercise period
commenced immediately upon issuance of the warrant. The Company may, upon 20
days' notice, redeem any unexercised portion of any warrants for a redemption
fee of $0.10 per share of common stock underlying the warrants provided that the
closing bid price of the Company's common stock exceeds $18.00 for 20
consecutive trading days within 180 days prior to the notice of conversion.
During the 20-day notice period, if the warrants are then exercisable as a
result of the conversion or redemption of the Series D Convertible Preferred
Stock, such warrant holder may then exercise all or a portion of the warrants by
tendering the appropriate exercise price.
The warrants issued in January 2004 to the holders of the Series D
Convertible Preferred Stock were valued using the Black-Scholes option valuation
model and the amount recorded of $1,973,287 was determined by applying the
relative fair value method in relation to the estimated fair value of Series D
Convertible Preferred Stock resulting in a $1,973,287 preferred stock deemed
dividend calculated in accordance with EITF Issue No. 00-27. The deemed dividend
on the Series D Convertible Preferred Stock was charged to deficit accumulated
during the development stage immediately upon issuance, as the preferred stock
is immediately convertible. The preferred stock deemed dividend of $1,973,287
was reported as a dividend in determining the net loss attributable to common
stockholders in the accompanying statement of operations for the year ended
March 31, 2004.
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 date for these warrants, which have an
exercise price of $6.47 per share, was extended from July 24, 2004 to July 24,
2008; the Company therefore recorded a non-cash charge during the year ended
March 31, 2005 of $1,032,000, determined using the Black-Scholes option
F-31
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 Company therefore recorded a non-cash charge during the year ended March 31,
2005 of $3,498,000, determined using the Black-Scholes option pricing model. The
expiration date for these warrants, which have an exercise price of $6.47 per
share, was extended from October 12, 2004 to October 12, 2008.
In connection with 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
anti-dilution protection for stock splits, dividends and similar events.
On March 18, 2005, the Company's board of directors approved an exercise
extension from March 21, 2005 to December 23, 2005 on warrants to purchase
125,000 shares of the Company's common stock at $15.00 per share which were
originally issued to Fulcrum on March 21, 2003; the Company therefore recorded a
non-cash charge during the year ended March 31, 2005 of $300,000, determined
using the Black-Scholes option pricing model. On November 2, 2005, the Company's
board of directors approved a reduction in the exercise price of these warrants
from $15.00 to $8.80 while shortening the expiry date from December 23, 2005 to
November 5, 2005. The Company recorded a non-cash charge of $125,000, determined
using the Black-Scholes option pricing model. Fulcrum exercised 35,000 warrants
resulting in proceeds to the Company of $308,000. The remaining 90,000 warrants
expired.
In connection with services rendered to us by Ferris, Baker Watts,
Incorporated, effective July 13, 2005, the Company issued warrants to purchase
100,000 shares of our common stock. The warrants are exercisable at $13.11 per
share (the exercise price was set by calculating a 15% premium over the
Company's common stock volume weighted average price for the 10 day period
immediately preceding July 12, 2005). The warrants are exercisable beginning on
July 13, 2006 through July 12, 2010. The Company may redeem any outstanding
warrants, at $0.01 per share underlying each warrant, upon 30 day prior notice
if at any time prior to the expiration of the warrant the market closing price
of the Company's common stock meets or exceeds $26.22 for 20 consecutive trading
days. The warrant holder may exercise the warrant, pursuant to its terms, during
the 30 day notice period.
In December 2005, in connection with the Series E Convertible Preferred
Stock private placement, the Company issued to the purchasers of Series E
Convertible Preferred Stock warrants to purchase 83,500 shares of the Company's
common stock at an exercise price of $10.00 per share of common stock. The
warrants expire on December 13, 2008. The warrant exercise period commenced
immediately upon issuance of the warrant. The Company may, upon 20 days' notice
after the first anniversary of the date of grant, redeem any unexercised portion
of any warrants for a redemption fee of $0.10 per share of common stock
underlying the warrants provided that the closing bid price of the Company's
common stock exceeds $15.00 for 20 of 30 consecutive trading days. During the
20-day notice period, if the warrants are then exercisable as a result of the
conversion or redemption of the Series E Convertible Preferred Stock, such
warrant holder may then exercise all or a portion of the warrants by tendering
the appropriate exercise price.
F-32
In connection with the Series E Convertible Preferred Stock offering of
December 13, 2005, the Company entered into an Introductory Agreement with
Ableguard Investment Limited ("Ableguard") pursuant to which Ableguard assisted
the Company to identify qualified investors. For its services, the Company
granted to Ableguard a warrant to purchase 68,000 shares of common stock. The
warrant is exercisable during the three-year period commencing on December 13,
2005, at an exercise price of $10.00, subject to adjustment for stock splits,
dividends and similar events.
In connection with services rendered to us by Ferris, Baker Watts,
Incorporated, effective January 16, 2007, the Company issued warrants to
purchase 100,000 shares of our common stock. The warrants are exercisable at
$9.18 per share (the exercise price was set by calculating a 15% premium over
the Company's common stock volume weighted average price for the 10 day period
immediately preceding January 15, 2007). The warrants are exercisable beginning
on January 16, 2008 through January 16, 2012. The Company may redeem any
outstanding warrants, at $0.01 per share underlying each warrant, upon 30 day
prior notice if at any time prior to the expiration of the warrant the market
closing price of the Company's common stock meets or exceeds $18.36 for 20
consecutive trading days. The warrant holder may exercise the warrant, pursuant
to its terms, during the 30 day notice period.
The activity during the years ended March 31, 2005, 2006 and 2007 for
the Company's warrants to purchase shares of common stock is summarized as
follows:
Warrants Weighted Average
Number of Shares Price Range Exercise Price
------------------ ------------------- ------------------
Outstanding as of March 31, 2004.... 2,987,710 6.00-16.00 7.70
Granted........................... 80,100 6.00-16.00 12.81
Cancelled (75,000) 16.00 16.00
Exercised......................... (252,400) 6.00-16.00 8.87
------------------ ------------------- ------------------
Outstanding as of March 31, 2005.... 2,740,410 6.00-16.00 7.51
Granted........................... 251,500 10.00-13.11 11.24
Cancelled......................... (90,000) 8.80 8.80
Exercised......................... (51,800) 6.47-8.80 8.04
------------------ ------------------- ------------------
Outstanding as of March 31, 2006.... 2,850,110 6.00-16.00 7.52
Granted........................... 100,000 9.18 9.18
Cancelled......................... (496,000) 6.00 6.00
Exercised......................... (150,500) 6.00 6.00
------------------ ------------------- ------------------
Outstanding as of March 31, 2007.... 2,303,600 $6.00-16.00 $8.02
================== =================== ==================
Exercisable as of March 31, 2005.... 2,730,410 6.00-16.00 7.53
Exercisable as of March 31, 2006.... 2,740,110 6.00-16.00 7.34
Exercisable as of March 31, 2007.... 2,293,610 6.00-16.00 8.05
F-33
The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2007:
Exercise Price Per Share Warrants Outstanding Expiration Date
------------------------------ ----------------------- -----------------
6.00...................... 10,000 7/31/07
6.08...................... 600,000 7/16/08
6.13...................... 101,310 9/25/07
6.13...................... 2,500 10/28/07
6.47...................... 208,200 7/24/08
6.47...................... 750,000 10/12/08
9.18...................... 100,000 1/16/12
10.00..................... 151,500 12/13/08
12.81..................... 80,100 7/30/09
13.11..................... 100,000 7/13/10
16.00..................... 200,000 1/22/09
-----------------------
Total Warrants Outstanding.. 2,303,610
=======================
9. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenue 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 advance cash funding, an allowance for management overhead,
and may also earn additional fees for the attainment of certain milestones.
The Company initially acquired its rights to the aromatic cation
technology platform developed by a consortium of universities consisting of
UNC-CH, Georgia State University, Duke University and Auburn University pursuant
to an agreement, dated January 15, 1997 (as amended, the "Consortium Agreement")
among the Company, UNC-CH and a third-party (to which each of the other members
of the scientific consortium shortly thereafter joined) (the "original
licensee"). 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 the original licensee 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, the Company, with
respect to the Current Compounds, and UNC-CH, (on behalf of the Scientific
Consortium), with respect to Current Compounds and Future Compounds, would enter
into license agreements for the intellectual property rights relating to the
Compounds pursuant to which the Company would pay royalties and other payments
based on revenues received for the sale of products based on the Compounds.
F-34
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000 thereby earning a worldwide license and exclusive rights
to commercially use, manufacture, have manufactured, promote, sell, distribute,
or otherwise dispose of any products based directly or indirectly on all of the
Current Compounds and Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate
of 611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to the original licensee or
persons designated by the original licensee.
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 the aromatic cation
technology platform 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, the original licensee transferred to the Company the worldwide
license and exclusive right to commercially use, manufacture, have manufactured,
promote, sell, distribute or otherwise dispose of any and all products based
directly or indirectly on aromatic cations developed by the Scientific
Consortium on or prior to January 15, 1997 and previously licensed (together
with related technology and patents) to the third-party.
The Consortium Agreement provides that the Company is required to pay to
UNC-CH on behalf of the Scientific Consortium reimbursement of patent and
patent-related fees, certain milestone payments and royalty payments based on
revenue derived from the Scientific Consortium's aromatic cation technology
platform. Each month on behalf of the inventor scientist or university, as the
case may be, UNC-CH submits an invoice to the Company for payment of
patent-related fees related to current compounds or future compounds incurred
prior to the invoice date. The Company is also required to make milestone
payments in the form of the issuance of 100,000 shares of its common stock to
the Consortium when it files its first initial New Drug Application ("NDA") or
an Abbreviated New Drug Application ("ANDA") based on Consortium technology. We
are also required to pay to UNC-CH on behalf of the Scientific Consortium (other
than Duke University) (i) royalty payments of up to 5% of our net worldwide
sales of "current products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively) and (ii) a
percentage of any fees we receive under sublicensing arrangements. With respect
to products or licensing arrangements emanating from Duke University technology,
the Company is required to negotiate in good faith with UNC-CH (on behalf of
Duke University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and defend
patents so long as the Company chooses to retain the license to such patents.
In July 2004, the Company was awarded a Small Business Innovation
Research ("SBIR") grant from the National Institutes of Health ("NIH") of
$107,000 as a grant to research on "Aromatic Dication Prodrugs for CNS
Trypanosomiasis." During the year ended March 31, 2005, the Company recognized
revenues and expenses of approximately $63,000 from this grant.
F-35
Approximately $33,000 of these expenses were paid to UNC-CH and other Scientific
Consortium universities for contracted research related to this grant.
During the years ended March 31, 2005, 2006 and 2007, the Company
expensed approximately $730,000, $978,000 and $1,012,000 respectively, of other
payments to UNC-CH and certain other Scientific Consortium universities for
patent related costs and other contracted research. Total payments expensed to
UNC-CH and certain other Scientific Consortium universities were approximately
$763,000, $978,000 and $1,012,000 during the years ended March 31, 2005, 2006
and 2007, respectively. Included in accounts payable as of March 31, 2006 and
2007, was approximately $44,000 and $174,000 respectively, due to UNC-CH and
certain other Scientific Consortium universities.
In November 2000, The Bill & Melinda Gates Foundation ("Foundation")
awarded a $15,114,000 grant to UNC-CH to develop new drugs to treat human
Trypanosomiasis (African sleeping sickness) and leishmaniasis. On March 29,
2001, UNC-CH entered into a clinical research subcontract agreement with the
Company, whereby the Company was 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 related to the Foundation award.
In April 2003, the Foundation awarded a supplemental grant of
approximately $2,700,000 to UNC-CH for the expansion of Phase IIB/III clinical
trials to treat human Trypanosomiasis (African sleeping sickness) and improved
manufacturing processes. The Company has received, pursuant to the clinical
research subcontract with UNC-CH, inclusive of its portion of the supplemental
grant, a total amount of funding of approximately $11,700,000. Grant funds paid
in advance of the Company's delivery of services are treated as restricted funds
and must be segregated from other funds and used only for the purposes
specified. As of March 31, 2006, approximately $11,700,000, relating to the
clinical research subcontract, had been received by the Company. In March 2006,
the Company amended and restated the clinical research subcontract with UNC-CH
and UNC-CH in turn obtained an expanded funding commitment for the Company of
approximately $13,601,000 from the Foundation. Under the amended and restated
agreement, the Company received on May 24, 2006 the first payment of
approximately $5,649,000 of the five year approximately $13,601,000 contract.
During the years ended March 31, 2005, 2006 and 2007, the Company
received installment payments under the November 2000, April 2003 and March 2006
grants of approximately $2,995,000, 0 and $5,649,000, respectively, and
approximately $3,592,000, $2,758,819 and $2,795,000 was utilized for clinical
and research purposes conducted and expensed during the years ended March 31,
2005, 2006 and 2007, respectively. The Company recognized revenues of
approximately $3,592,000, $869,000 and $3,922,000 during the years ended March
31, 2005, 2006 and 2007, respectively, for services performed under the
agreement. The remaining amount (approximately $1,727,000 as of March 31, 2007)
has been deferred and will be recognized as revenue over the term of the
agreement as services are performed.
On November 26, 2003, the Company entered into a testing agreement
("Testing Agreement") with Medicines for Malaria Venture ("MMV"), a foundation
established in Switzerland, and UNC-CH, pursuant to which the Company, with the
support of MMV and
F-36
UNC-CH, conducted a proof of concept study of the dicationic first drug
candidate pafuramidine for the treatment of malaria.
Under the terms of the Testing Agreement, MMV committed to pay for human
clinical trials and, subject to certain milestones, regulatory preparation and
filing costs for the approvals to market pafuramidine to treat malaria. 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. An affordable price is defined in the Testing
Agreement to mean a price not to 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 Testing
Agreement and amounts funded under a related discovery agreement between MMV and
UNC-CH is refunded to MMV at face value. The Company and MMV agreed to terminate
the Testing Agreement effective as of February 10, 2006. The Company has
received approximately $5,636,000 under this contract.
The Company recognized revenues of approximately $2,275,000, $2,663,000
and $396,000 during the years ended March 31, 2005, 2006, and 2007,
respectively, for expenses incurred related to activities within the scope of
the Testing Agreement. At March 31, 2006 and 2007, the Company has approximately
$396,000 and $0, respectively, recorded as deferred revenue with respect to this
agreement.
10. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In October 2004, the Company entered into an
amendment to the lease of its main office and research facility under an
operating lease that requires lease payments starting in March 2005 of
approximately $8,200 per month through March 2008 and $8,600 from April 2008
through March 2010. The Company is required to pay certain real estate and
occupancy costs. In July 1999, the Company began leasing an additional office
facility from RADE, a consultant who previously provided services to the
Company, on a month-to-month basis, for approximately $10,100 per month. Total
rent expense was approximately $305,000, $252,000 and $256,000 for all leases
during the years ended March 31, 2005, 2006, and 2007, respectively.
As of March 31, 2007, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
Year Ending March 31, Lease Payments
----------------------- -------------------
2008 98,000
2009 103,000
2010 99,000
Total $300,000
Other Contingencies - On August 12, 2003, the Company filed a lawsuit
against Neurochem, Inc. ("Neurochem") alleging that Neurochem misappropriated
the Company's trade secrets by filing a series of patent applications relating
to compounds synthesized and developed by the Consortium, with whom Immtech has
an exclusive licensing agreement. The
F-37
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 (the
"Neurochem Testing Agreement"). Pursuant to the terms of the Neurochem Testing
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 invention was discovered and to cooperate with
Immtech and its counsel in filing any patent applications.
In its complaint, the Company also alleged, among other things, that
Neurochem fraudulently induced the Company into signing the Neurochem Testing
Agreement, and breached numerous provisions of the Neurochem 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 alleged that
Neurochem has prevented the public from obtaining the potential benefit of new
drugs for the treatment of Alzheimer's disease, which would compete with
Neurochem's Alzhemed drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company agreed to have a three member ICC arbitration
panel (the "Arbitration Panel") hear and rule on the dispute on the expectation
that the Arbitration Panel would reach a more timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005. Final papers
were filed by both parties on November 2, 2005. The ICC tribunal closed the
hearing on April 17, 2006.
On June 9, 2006, the International Court of Arbitration of the ICC
notified the parties that (i) the Arbitral Tribunal found that Neurochem
breached the Neurochem Testing Agreement and awarded Immtech approximately $1.9
million in damages and attorneys' fees and costs, which was received, and (ii)
denied all of Neurochem's claims against Immtech.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors alleging breaches of a stock lock-up agreement, option agreements and
a technology license agreement by the Company, as well as interference with the
Von der Ruhr Plaintiffs' contracts with the Company by its officers. The
complaint sought unspecified monetary damages and punitive damages, in addition
to equitable relief and costs. In 2005, one of the counts in the case was
dismissed upon the Company's motion for summary judgment. A preliminary
pre-trial conference was held on October 26, 2006 and the court granted the
Company's motions in limine to exclude plaintiffs' claim for lost profits
damages and to prohibit plaintiff Gerhard Von der Ruhr from offering expert
testimony at trial. The court subsequently granted a motion to sever the trial
on Count V, regarding a technology license agreement, from the trial on the
remaining counts. A pretrial order was submitted to the court in April 2007,
however, the date for trial of the four counts remaining in the Amended
Complaint has not yet been set.
F-38
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years
ended March 31, 2005, 2006 and 2007.
(c) Non-Cash Transactions
During the years ended March 31, 2005, 2006 and 2007, the Company issued
common stock, common stock options and warrants or modified existing
arrangements as compensation for services and also engaged in certain other
non-cash investing and financing activities. The amounts of these transactions
are summarized as follows:
Year Ended March 31,
--------------------------------------
2005 2006 2007
------------ ------------ ------------
Convertible preferred stock dividends recorded....... 579,816 478,275 550,574
Issuance of common stock as payment of
convertible preferred stock dividends.............. 508,362 441,565 531,522
Issuance of common stock for conversions
of convertible preferred stock..................... 1,839,971 1,787,159 1,237,188
12. SUBSEQUENT EVENT
On June 8, 2007, the Company entered into an exclusive licensing
agreement pursuant to which we have licensed to Par Pharmaceutical Companies,
Inc. ("Par") commercialization rights in the United States to pafuramidine for
the treatment of PCP in AIDS patients.
In return, we received an initial payment of $3 million. Par will also
pay us as much as $29 million in development milestones if pafuramidine advances
through ongoing Phase III clinical trials and FDA regulatory review and
approval. In addition to royalties on sales, we may receive up to $115 million
in additional milestone payments on future sales and will retain the right to
co-market pafuramidine in the United States. We have also granted Par a right of
first offer to negotiate a license agreement with us if we determine that
pafuramidine can be used for the treatment and/or prophylaxis of malaria.
* * * * * *
F-39