06/26/03
Fiscal year ended March 31, 2003
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, 2003.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from [___] to [___].
Commission file number 000-25669
IMMTECH INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1523370
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
150 Fairway Drive, Suite 150,
Vernon Hills, Illinois 60061
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (847) 573-0033
Securities registered pursuant to Section 12(b) of the Act:
None
-------------------------
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of class)
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 (ss.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. |_|
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the Common Stock held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such Common
Stock as of June 16, 2003, was $41,950,205.
As of June 16, 2003, the total number of shares of the registrant's
Common Stock outstanding was 8,529,115 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
IMMTECH INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I.
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES....................................................35
ITEM 3. LEGAL PROCEEDINGS.............................................36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........36
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...........................................37
ITEM 6. SELECTED FINANCIAL DATA.......................................40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...........................45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...........................53
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............54
ITEM 11. EXECUTIVE COMPENSATION........................................56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................64
ITEM 14. CONTROLS AND PROCEDURES.......................................64
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................65
PART IV.
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K......................................................65
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 "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) our
technology is in the research and development stage and therefore its potential
benefits for human therapy are unproven, (iii) the possibility that favorable
relationships with collaborators cannot be established or, if established, will
be abandoned by the collaborators before completion of product development, (iv)
the possibility that we or our collaborators will not successfully develop any
marketable products, (v) the possibility that advances by competitors will cause
our product candidates not to be viable, (vi) uncertainties as to the
requirement that a drug product be found to be safe and effective after
extensive clinical trials and the possibility that the results of such trials,
if completed, will not establish the safety or efficacy of our drug product
candidates, (vii) risks relating to requirements for approvals by governmental
agencies, such as the Food and Drug Administration, before products can be
marketed and the possibility that such approvals will not be obtained in a
timely manner or at all or will be conditioned in a manner that would impair our
ability to market our product candidates successfully, (viii) the risk that our
patents could be invalidated or narrowed in scope by judicial actions or that
our technology could infringe upon the patent or other intellectual property
rights of third parties, (ix) the possibility that we will not be able to raise
adequate capital to fund our operations through the process of commercializing a
successful product or that future financing will be completed on unfavorable
terms, (x) the possibility that any products successfully developed by us will
not achieve market acceptance and (xi) other risks and uncertainties that may
not be described herein. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
Overview
Immtech International, Inc. is a pharmaceutical company focused on
the development and commercialization of oral drugs to treat infectious
diseases. The Company has development programs that include fungal infections,
Malaria, Tuberculosis, Hepatitis C, Pneumocystis carinii pneumonia and tropical
medicine diseases, including African sleeping sickness (a parasitic disease also
known as Trypanosomiasis) and Leishmaniasis (a parasitic disease that destroys
the liver). We hold worldwide patents, patent applications, licenses and rights
to license worldwide patents, patent applications and technologies from a
scientific
consortium and exclusive rights to commercialize products from those patents and
licenses that are integral to our business.
Since our formation in October 1984, we have engaged in research and
development programs, expanding our network of scientists and scientific
advisors, licensing technology agreements and advancing the commercialization of
the dication technology platform. We use the expertise and resources of
strategic partners and third parties in a number of areas, including (i)
laboratory research, (ii) pre-clinical and human clinical trials and (iii)
manufacture of pharmaceutical drugs. We have licensing and exclusive
commercialization rights to a dicationic pharmaceutical platform and are
developing drugs intended for commercial use based on that platform. Dication
pharmaceutical drugs work by blocking life-sustaining enzymes from binding to
key sites in the "minor groove" of an organism's deoxyribonucleic acid ("DNA"),
killing the infectious organisms that cause fungal, parasitic, bacterial and
viral diseases. The key site on an organism's DNA is an area where enzymes
interact with the infectious organism's DNA as part of their normal life cycle.
Structurally, dications are chemical molecules that have two positively charged
ends held together by a chemical linker. The composition of the dications, with
positive charges on both ends (shaped like molecular barbells), allows dications
to bind (similar to a band-aid) to the negatively charged key sites of an
infectious organism's DNA. The bound dications block life sustaining enzymes
from attaching to the DNA's key sites, thereby killing the infectious organism.
The dication technology is the result of a research program
developed by scientists at The University of North Carolina at Chapel Hill
("UNC"), Georgia State University ("Georgia State"), Duke University ("Duke
University") and Auburn University ("Auburn University") (collectively, the
"Scientific Consortium"). We entered into an agreement with the Scientific
Consortium, dated January 15, 1997, as amended, and a License Agreement, dated
as of January 28, 2002 (collectively, the "Consortium Agreement"), to
commercialize product candidates resulting from the Scientific Consortium's
research, including the dication technology.
We have commenced a 350-patient, open label Phase IIb human clinical
trial with our first oral drug candidate, DB289, to treat African sleeping
sickness (Trypanosomiasis). In an open label clinical trial, all patients in the
study receive the active compound and no patients receive a placebo. Assuming
results consistent with our prior trials, we believe we will be able to accept
orders for sales of DB289 for limited distribution in certain African countries
in the fourth quarter of calendar year 2003 or first quarter 2004. We believe we
will be able to synthesize and deliver commercial quantities of DB289 within
nine months after orders for sales are accepted. We anticipate engaging our
existing and new pharmaceutical manufacturers to produce DB289 for the above
referenced sales. We will concurrently seek final foreign regulatory approvals
to distribute the product into the selected countries which we expect may take
several months or longer to complete.
We have entered into an arrangement with a Hong Kong entity, whereby
we acquired real property located in a "free trade zone" in the People's
Republic of China ("PRC") on which we have the option, through an entity named
Immtech Hong Kong Limited, to construct a pharmaceutical manufacturing facility
to produce our future products. We do not
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have any commercially available products, nor do we expect to have any
commercially available products for sale until after March 31, 2004, if at all.
For the fiscal year ended March 31, 2003, we had revenues of
$1,608,849 and a net loss of $4,679,069. The management of the Company believes
it has sufficient capital for operations through August 2004. There is no
guarantee that we will not need additional funds before then or that sufficient
funds will be available after June 2004 to fund further operations.
A predecessor of the Company was incorporated under the laws of the
State of Wisconsin on October 15, 1984, and subsequently merged into the current
Delaware corporation on April 1, 1993. Our executive offices are located at 150
Fairway Drive, Suite 150, Vernon Hills, Illinois 60061, telephone number (847)
573-0033 or toll-free (877) 898-8038.
We file annual, quarterly and current reports, proxy statements and
other documents with the 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 450 Fifth Street, N.W., 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.immtech-international.com, our annual, quarterly
and current reports, and, if applicable, amendments to those reports, filed or
furnished pursuant to Section 13(a) of the 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.
Generally, when we use the words "we," "our," "us," "Company" or
"Immtech" in this report, we are referring to Immtech International, Inc.
Grants and Funding
Gates Foundation Grant to the Research Group
In November 2000, The Bill & Melinda Gates Foundation ("The Gates
Foundation") awarded a $15.1 million grant to a research group led by UNC to
develop under a research agreement new drugs to treat African sleeping sickness
and Leishmaniasis.
In April 2003, The Gates Foundation granted to the research group an
additional $2.7 million to accelerate DB289 testing to treat African sleeping
sickness.
Trypanosomiasis is a parasitic disease that is spread by tsetse
flies in sub-Sahara Africa where 60 million people live. There are an estimated
750,000 new cases of African sleeping sickness in this region each year. It is
estimated by Doctors Without Borders that 65,000 people die each year from the
disease. Existing treatments for Trypanosomiasis can be highly toxic and cannot
be administered orally. Trypanosomiasis is fatal if left untreated.
Leishmaniasis is a parasitic disease that affects more than twelve
million people in arid and tropical regions of the world. The leishmania
parasite is often spread by sand flies.
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The Gates Foundation grant funds research and development of
potential treatments for these two diseases through a research group led by UNC
and consisting of Immtech and five other universities and research centers
around the world which collectively employ scientists considered to be the
foremost experts in one or both of these diseases.
Clinical Research Subcontract with UNC
On March 29, 2001, we entered into a clinical research subcontract
("Clinical Research Subcontract") with UNC, funded by The Gates Foundation $15.1
million grant, under which UNC is to pay to us $9.8 million in installments over
a period not to exceed five years based on our achieving certain milestones
(approximately $7.7 million of which has been paid to us to date). Under the
terms of the Clinical Research Subcontract, we are responsible for the oversight
of Phase II and Phase III human clinical trials of the drug candidate DB289 for
potential use to treat Trypanosomiasis. 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 for treatment
of Trypanosomiasis. We have or will receive The Gates Foundation grant funds
under the Clinical Research Subcontract as follows: (a) $4.3 million has been
received to fund Phase II clinical trials to test DB289's effectiveness against
Trypanosomiasis in 30 to 40 patients, (b) $1.4 million was paid to us in
September 2002 upon the successful completion of our Phase IIa clinical trial,
(c) $2.0 million was paid to us in December 2002 upon the delivery the final
Phase IIa report in respect of the Phase II clinical trial and (d) we anticipate
receipt of $2.1 million to fund Phase IIb and Phase III clinical trials to test
compound DB289's effectiveness against Trypanosomiasis on a larger, more diverse
group of patients in calendar years 2003 and 2004.
We have received a $1,025,201 initial payment of a $2,466,475
million research sub-contract from UNC based on the $2.7 million grant from The
Gates Foundation to be used to accelerate the development of DB289 to treat
African sleeping sickness (Trypanosomiasis). These funds will be used to (i)
expand on-going Phase IIb/III clinical trials of DB289 for treatment of African
sleeping sickness by adding additional clinical sites and increasing patient
enrollment in several sub-Sahara African nations, (ii) implement an improved
method of synthesizing DB289 to reduce drug manufacturing costs and (iii)
improve DB289's formulation to facilitate increased drug delivery concentration
into blood circulation.
In September 2002, we completed our Phase IIa study of DB289 in the
Democratic Republic of the Congo for treatment of Trypanosomiasis. Initial
results showed that the compound was well tolerated and over 95% of the patients
treated were cured (patients evaluated three and six months after treatment were
still parasite free). Based upon the promising results obtained in the Phase IIa
clinical trials, The Gates Foundation granted an additional $2.7 million to
accelerate the enrollment of the Phase IIb/III clinical trials.
In the ongoing Phase IIb Trypanosomiasis human clinical trials,
patients are being monitored to determine DB289's safety and effectiveness.
Phase IIb monitoring includes EKG monitoring, blood sampling to check clinical
chemistry and hematology parameters and various other clinical measurements and
tests (including the clearance of parasites from blood). The Phase IIb
Trypanosomiasis trial is an open label randomized study currently conducted in
approximately 350 patients at two large clinical sites in Maluku and Vanga in
the Democratic
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Republic of the Congo. At the conclusion of these trials, we intend to commence
a Phase III trial that will include patients from additional sites in Africa.
Three new sites in remote villages will be added after 80 patients have
completed their treatment in the two larger centers. We intend the clinical
sites in the remote villages to have up to 250 patients enrolled with lower
levels of monitoring applied.
We hope obtain governmental approvals for compassionate use to
commercially distribute DB289 to treat Trypanosomiasis in several African
nations (the nations where we currently are conducting human trials) before the
end of 2004. Prior to obtaining such approval, we anticipate receiving from
charitable foundations a purchase order and advance payment for DB289 with
expected delivery of commercial quantities four to eight months after order,
subject to obtaining at least one governmental approval.
We expect later this year, based on input from the scientists who
conducted pre-clinical animal studies of certain dication compounds and on other
factors, including our economic appraisals of the leading compound candidates,
to select a compound to be tested for potential use against Leishmaniasis. If a
compound is not selected, The Gates Foundation has allowed the UNC led research
group to drop the program and invest the funds ear-marked for this project in
other research programs that are agreed to by The Gates Foundation.
The Clinical Research Subcontract will continue in effect until
November 17, 2005, unless otherwise terminated by a material breach by either
party.
Research Agreement
On January 15, 1997, we entered into a Consortium Agreement with UNC
and Pharm-Eco Laboratories, Inc. ("Pharm-Eco") (to which each of Georgia State,
Duke University and Auburn University agreed shortly thereafter to become a
party). The Consortium Agreement provided for dications developed by the
Scientific Consortium-members to be exclusively licensed to us for global
commercialization. As contemplated by the Consortium Agreement, on January 28,
2002, we entered into a License Agreement with the Scientific Consortium whereby
we received the exclusive license to commercialize all future technology and
compounds developed or invented by one or more of the Scientific Consortium
scientists after January 15, 1997, and which also incorporated into such License
Agreement our license with the Scientific Consortium with regard to compounds
developed on or prior to January 15, 1997. The Consortium Agreement provides
that we are required to pay to UNC on behalf of the Scientific Consortium
reimbursement of patent and patent-related fees, certain milestone payments and
royalty payments based on revenue derived from any commercialized products.
The Scientific Consortium members have thus far designed,
synthesized and tested approximately 1,600 dications and are continuing to
develop more dications using proprietary technology. One or more of the
universities comprising the Scientific Consortium have patents covering the
molecular structure of the dications, as well as in some cases particular uses
of a compound for potential treatment of a disease or infection. Pursuant to the
Consortium Agreement, Pharm-Eco agreed to transfer to us the worldwide exclusive
license to use, manufacture, have manufactured, promote, sell, distribute or
otherwise dispose of any and all products based directly or indirectly on
dications developed by the Scientific Consortium on or
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prior to January 15, 1997 and previously licensed (together with related
technology and patents) to Pharm-Eco. In March 2001, Pharm-Eco assigned the
license to us. The January 28, 2002, License Agreement grants to us a similar
worldwide exclusive license covering products based on dicationic technology
developed by the Scientific Consortium after January 15, 1997 and incorporates
the exclusive license assigned to us by Pharm-Eco in March 2001. The Consortium
Agreement has provided us with rights to the Scientific Consortium's library of
approximately 1,600 existing dications and to all future technology be designed
by the Scientific Consortium. The Scientific Consortium scientists are
considered to be among the world's leading experts in infectious diseases,
computer modeling of dicationic pharmaceutical drugs and computer-generated drug
designs.
Members of the Scientific Consortium have laboratory testing systems
for screening dications for activity against specific microorganisms (using both
laboratory and animal models). UNC and Georgia State have over 25 years of
experience in making dication compounds and have developed proprietary computer
models which simulate the binding of dications to DNA. Georgia State's
proprietary computer modeling technology enhances the understanding of how
dications bind to DNA, which improves our ability to custom design drugs with
anti-infective activity against specific diseases. Generally, patents for the
dication structures and uses are issued to the scientist who "invents" the
dication or use. Then, pursuant to the scientist's employment arrangements, the
patents are assigned to the employing university, and, through the License
Agreement, to us through an exclusive worldwide license to such dication
structures or use for commercialization. Under the License Agreement, we must
reimburse the cost of obtaining patents and assume liability for future costs to
maintain and defend patents so long as we choose to retain the license to such
patents.
Confidentiality, Testing and Option Agreement with Neurochem, Inc.
On April 22, 2002, we entered into a Confidentiality, Testing and
Option Agreement (the "Confidentiality, Testing and Option Agreement") with
Neurochem, Inc. ("Neurochem"), a Canadian corporation, to supply Neurochem with
selected cationic compounds for the testing, evaluation and potential future
licensing of such compounds for (i) the treatment and diagnosis of amyloidosis
and the related underlying conditions of Alzheimer's Disease, cerebral amyloid
angiopathy, primary amyloidosis, diabetes and rheumatic diseases and (ii) the
treatment of conditions related to secondary amyloidosis. Prior to entering into
this Confidentiality, Testing and Option Agreement, Neurochem had identified
certain of our patented cationic compounds with positive activity regarding the
above diseases and diagnostic programs. Pursuant to the terms of the
Confidentiality, Testing and Option Agreement, Neurochem had ten months to
exercise its right to license for the uses identified any or all of the tested
compounds that showed positive activity in exchange for certain milestone and
royalty payments to us.
On April 4, 2003, Immtech sent a letter to Neurochem indicating that
the Confidentiality, Testing and Option Agreement had expired. In addition,
Immtech notified Neurochem that it discovered that Neurochem had, in breach of
the terms of the Confidentiality, Testing and Option Agreement, filed a patent
application without Immtech's knowledge or consent that contained information
concerning compounds delivered to Neurochem pursuant to the Confidentiality,
Testing and Option Agreement. Immtech informed Neurochem that it
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intended to investigate Neurochem's actions and reserved all of its legal
rights. Since April 4, 2003, Immtech has held discussions with Neurochem to
attempt to understand and resolve the situation. Immtech has since discovered
that Neurochem has filed other patents, which may affect Immtech and the
Scientific Consortium's intellectual property rights. Immtech has retained
litigation and patent counsel and intends to vigorously defend its property and
rights.
Clinical Trial Sites
On March 28, 2002, the Food and Drug Administration ("FDA") approved
the export of the drug candidate DB289 to the Democratic Republic of the Congo
("DRC") for Phase IIb testing of the effectiveness of the dicationic compound
against African sleeping sickness. The Phase IIb clinical trial will be
conducted in 5 sites in the DRC, including two larger sites currently performing
extensive monitoring of patients; and three future sites in smaller remote
commercial villages, that will perform less extensive monitoring of patients.
The added testing sites will permit increased enrollment patent rates for the
Phase IIb and III clinical trials.
In April 2002, we received approval from the government of Peru and
completed a pilot Phase IIa clinical trial of DB289 to treat Pneumocystis
carinii pneumonia ("PCP"). PCP is a fungus that overgrows the air sacs in the
lungs of immunosuppressed patients, causing pneumonia that can be
life-threatening if not treated. A second Peruvian trial in 30 to 40 PCP
patients is being conducted using a higher drug dosage than the pilot study. We
believe the increased dosage will reduce the time it takes for patients to
demonstrate lung capacity improvement. We expect to have sufficient patient
subscription to evaluate the effectiveness of DB289 for treatment of PCP by the
end of June 2003.
A third Phase IIa trial to treat Malaria patients with the drug
DB289 was commenced in Thailand in June 2003. We expect the Thailand Malaria
clinical trial in 32 patients to take approximately four months to complete.
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+ acre commercial real estate parcel located in a "free-trade
zone" called the Futian Free Trade Zone, Shenzhen, in the PRC. The company
operates under the name Immtech Hong Kong Limited and plans to construct and
operate a pharmaceutical manufacturing facility capable of producing commercial
quantities of our future pharmaceutical products on the commercial property. We
believe Immtech Hong Kong Limited will benefit by constructing its manufacturing
plant in the Futian Free Trade Zone because it will be allowed to import
equipment and materials, export products and sell products produced there in the
PRC all on a tax-free basis. We intend, once the facility is built and
government approvals are obtained, to engage Immtech Hong Kong Limited to
manufacture for commercial distribution our pharmaceutical products intended for
sale in Asia, Africa and other selected regions.
We purchased an 80% interest in Lenton pursuant to the terms of a
Share Purchase Agreement by issuing to the investor 1,200,000 unregistered
shares of our Common
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Stock, $0.01 par value ("Common Stock"). The parties have also entered into a
Shareholders' Agreement that sets forth the parties' agreement as to the affairs
of Immtech Hong Kong Limited and the conduct of its business.
Market Listing
On December 2, 2002, we were notified by a NASDAQ Listing
Qualifications Panel (the "Panel") that the Panel had determined to delist our
Common Stock from the NASDAQ SmallCap Market effective with the open of business
on December 3, 2002. In its notice, the Panel stated that we failed to maintain
NASDAQ SmallCap Market continued listing requirements and failed to meet the
terms of an exception under which we had remained listed. Our Common Stock
commenced trading on the NASDAQ OTC Bulletin Board on December 3, 2002.
Product Candidates
Pharmaceutical Products - Dications
Our pharmaceutical program focuses on the development and
commercialization of oral drugs to treat fungal, parasitic, bacterial and viral
diseases. This technology is the result of extensive research at several
universities focused on understanding how dications bind to the "key sites" in
the "minor groove" of the DNA of infectious microorganisms. Dications have two
positively charged ends that are held together by a chemical linker. The
structure of the dications, with positive charges on both ends (shaped like
molecular barbells), allows dications to bind to the negatively charged key
sites in the minor groove (the sites where enzymes interact with DNA) of an
organism's DNA (covering the site like a band-aid). When dications bind to the
DNA key sites, life-sustaining enzymes that interact with the DNA are prevented
from attaching, thus killing the infectious organism.
Pentamidine (a drug marketed by several pharmaceutical companies)
was the prototype drug used by researchers at UNC to understand the mechanism by
which dications interact with DNA. Pentamidine, which can only be administered
intravenously or via inhalation, is difficult to administer and distribute and
has a narrow dosage margin of safety and tolerance. Pentamidine has been shown
to be toxic if incorrectly administered and after prolonged use.
Researchers at UNC discovered that much of Pentamidine's toxicity
was the result of bi-products formed when the drug breaks down within the body.
This discovery led Scientific Consortium researchers to design a new class of
compounds with a more stable molecular structure. Laboratory and animal testing
demonstrated that the compound we have chosen to treat PCP and Trypanosomiasis
is less toxic than Pentamidine. These newly designed dications also proved in
laboratory and animal tests to be more effective in some cases than Pentamidine.
The methodology used by UNC and the other Scientific Consortium researchers to
develop these new dications evolved into the Scientific Consortium's platform
technology for designing dications. The Scientific Consortium is using this
platform technology to design new treatments for a wide range of infectious
diseases.
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We completed a multi-dose Phase I human clinical trial of our lead
dication DB289 in May 2001. In this trial, DB289 was shown to be safe to humans
at dosage levels expected to be effective in treatment of the diseases targeted.
In the DB289 Phase I study, of the 72 volunteers who completed the study, 26
were given a single oral dose, 24 multiple oral doses, and 22, a placebo. The
study was designed to evaluate the safety and pharmacokinetics (pharmacokinetics
is the study of a drug's effect on the body from absorption until excretion) of
three dosage levels of DB289 administered twice a day over a period of six days.
In addition to the safety studies, 12 of the approximately 40 volunteers that
were given the active drug participated in a secondary study to determine
whether food affected absorption through the digestive membranes. The studies
showed that DB289 passed easily through the digestive membrane and the drug was
active (as designed) for several hours in the bloodstream. In addition,
volunteers tested at the highest dosage levels in the multi-dose segment of the
trial did not display any specific side effects, and the post-test EKGs,
clinical chemistry and hematology parameters of those volunteers were all within
normal ranges. The drug concentration levels in the blood were similar to levels
that showed effectiveness in animal models on both PCP and Trypanosomiasis.
In September 2002, we completed Phase IIa human clinical trials of
DB289 to treat Trypanosomiasis. Initial trial results demonstrated that DB289
was well tolerated by trial participants and approximately 95% of the patients
treated were cured. Phase IIa trial participants were requested to attend a
follow-up exam three and six months after the conclusion of their treatment; all
the patients who returned continued to be free of the Trypanosomiasis parasite.
The remainder of the patients studied did not return for the three and six month
exams and were therefore excluded from the "percentage cured"; actual results
are unknown.
We have commenced a Phase IIb human clinical trial of DB289 in the
Democratic Republic of the Congo and are planning to add sites in several other
African nations. The Phase IIb human clinical trial is to be conducted at five
testing sites, one of which recently concluded the Phase IIa human clinical
trial and at one new site near an industrial center. The original site and the
new site near the industrial center commenced testing in March 2003 and will
continue high level testing and monitoring of patients. The other three sites
will be added in the second and third calendar quarters of 2003 and will be
located in remote villages, where a lower level of monitoring is planned. We
intend to include approximately 350 patients in the Phase IIb, open label,
randomized clinical trial.
"Prodrug" Technology
One of our most significant research developments was the discovery
of drug delivery technology to make dication drugs orally deliverable. This
proprietary technology temporarily masks the positive charges of the dication,
enabling the active compound to move easily across digestive membranes into
blood circulation. Once the drug is in blood circulation, the masking charges
are removed by naturally occurring enzymes (found in the blood) thereby
releasing the active drug. Dications do not readily pass through digestive
membranes without this proprietary "Prodrug" technology because the stomach
lining is also negatively charged and therefore most dications would remain in
the intestinal tract and in time be excreted from the body. Until now, the
inability to deliver the active compound across the digestive membrane into the
bloodstream had reduced the attractiveness of dications as oral treatments for
diseases
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via the body's bloodstream. Scientists from Scientific Consortium universities
have patented four Prodrug synthesis methods that temporarily mask or reduce
dications' positive charges while in the digestive system. This oral delivery
system has made dications as a group significantly more attractive for
commercial development.
On February 26, 2003, Scientific Consortium members were granted a
patent by the U.S. Patent Office entitled "Prodrugs for Antimicrobial Amidines"
for a new proprietary technology to synthesize and manufacture dication and
other compounds with Prodrug technology. This patent protects a substantially
advanced process for economically producing orally deliverable drugs designed to
treat infectious diseases such as fungal infections, Malaria, Tuberculosis,
Hepatitis C, Pneumocystis carinii pneumonia and tropical medicine diseases,
including African sleeping sickness (Trypanosomiasis) and Leishmaniasis.
Application of Prodrug technology is not limited to our products, and the
Company may sub-license the Prodrug process to other drug manufacturers for use
on other compounds designed to be ingested and then activated in the blood
stream.
DB289
DB289 is a dication that utilizes Prodrug oral delivery technology
to deliver the active drug to the blood circulation. With Prodrug technology,
DB289 is designed to be self-administered making it practical in developing
countries and substantially less expensive to administer than drugs like
Pentamidine, which may only be delivered either through inhalation or
intravenously. In May 2001, we completed a Phase I safety trial of DB289 in
human volunteers. The single and multi-dose trials demonstrated that DB289 was
well tolerated by the volunteers. The drug reached blood levels in the Phase I
volunteers that were equivalent to those shown to be effective in animal trials
of disease treatment. We are conducting the following DB289 Phase II human
trials:
-------------------------------------------------------------------------------
Clinical Trial Trial Design / Phase Expected Result Sites
-------------------------------------------------------------------------------
DB289
Trypanosomiasis o Phase IIb o Safety o Democratic
o 350 patients - stage 1 o Clearance of Republic of
disease parasite from blood the Congo
o Oral dosing for 5 days (5 sites)
(BID)
o Open label - randomized
comparison to
pentamidine
o Malaria o Phase IIa o Safety o Thailand
o 30-40 patients o Clearance of
o Oral dosing for 5 days parasite from blood
o Open label
o PCP o Phase IIa o Safety o Peru
o 30 patients who failed o Improved lung
standard treatment function
o Oral dosing up to 21 o Improved clinical
days signs
o Multiple dose levels
Based upon successful results of the Trypanosomiasis Phase II/III
clinical trials currently underway, we believe we will obtain regulatory
approval to deliver DB289 for treatment of Trypanosomiasis in the countries
where our clinical test sites are located and in
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other African nations. Pending regulatory approval, the Company believes that
charitable foundations will purchase commercial quantities of DB289 to
distribute in those countries where Trypanosomiasis is endemic. We anticipate
commencing a Phase III trial of DB289 for treatment of Trypanosomiasis at the
conclusion of the Phase IIb trial expected in late 2003. This Phase III trial is
to test the drug's effectiveness in a larger population of patients in different
regions of Africa.
DB075
DB075, the parent drug of DB289, is a dication compound designed to
be active in the intestinal tract to treat the infectious disease
Cryptosporidiosis (one of the most common infections of the intestinal tract).
DB075 is made up of two positively charged ions connected by a chemical linker
and since it is desirable for DB075 to remain and be active in the intestinal
tract, the natural negative charge of digestive membranes prevents high levels
of absorption of the drug candidate into the blood stream.
We are seeking a governmental or foundation sponsor to support a
Phase I human trial of DB075 for treatment of Cryptosporidiosis. Subject to
obtaining funding support, DB075 is scheduled to begin clinical trials in 2003
according to the parameters listed below.
--------------------------------------------------------------------------------
Clinical Trial Trial Design / Phase Expected Result
--------------------------------------------------------------------------------
DB075 (parent
drug of DB289)
Diarrhea/Cryptosporidiosis o Phase I/IIa o Safety
(outside funding o 30-40 people in normal o Pharmacokinetics
required) health (absorption and
o Oral dosing - dose levels distribution in the
o Multiple dose (5-10 days) body)
o Decrease severity and
length of diarrhea
Strategy
Our strategy is to develop oral drugs effective against infectious
diseases by utilizing the dicationic platform technology. 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 World Health
Organization. Relatively few new drugs for treatment of infectious diseases have
been brought to market during this period. New antibiotics are needed to
overcome the problems of multi-drug resistance and the increasing number of new
pathogens that are causing diseases in the world.
We intend to proceed with the development and commercialization of
dications for drug products pursuant to our agreement with the Scientific
Consortium as follows:
o Conclude DB289 Phase II and Phase III trials targeting PCP and
Trypanosomiasis;
o Conclude Phase IIa trials of DB289 for treatment of Malaria before
evaluating next steps;
o Generate revenues through the sales of drug products;
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o Identify additional dications to take into human clinical trials to
further our TB and antifungal programs;
o Create joint ventures with pharmaceutical and biotechnology companies
interested in developing treatments with the dicationic platform to
treat other diseases; and
o Co-develop our pharmaceutical cancer program with a joint venture
partner or a pharmaceutical company partner.
Our strategy is to commercialize dications and generate revenues
first in niche markets through selling drugs for compassionate use and taking
advantage of fast track FDA or corollary foreign approvals where permitted and
to work with academic institutions and foundations to support drug development.
We seek to simultaneously develop treatments for infectious diseases, such as
fungal infections, with substantial markets that afflict large populations of
people through strategic joint ventures. We believe that our first product
candidates demonstrate the power and versatility of the dication and Prodrug
platform technologies to expedite acceptance and regulatory approval of our
product candidates in "main stream" markets.
We will continue to manage and oversee the results of research by
the Scientific Consortium and to use business-sponsored research programs,
government grants, strategic joint ventures and other forms of collaborative
programs to advance product commercialization. We consider our current
collaborative relationships significant to the successful development of our
business and we plan to enter into additional arrangements in the future to
develop, manufacture and market not only the product candidates on which we are
currently focused, but also those dications which the Scientific Consortium
members are developing for future commercialization.
Target Markets
Trypanosomiasis
The World Health Organization estimates that there are 500,000 to
750,000 active cases of human Trypanosomiasis in central Africa and another 60
million people that are at risk of contracting the disease. A World Health
Organization survey suggests that an "epidemic situation" for Trypanosomiasis
exists in the sub-Sahara region of Africa. Epidemic levels are also being
approached in Angola, Sudan, Uganda and the Democratic Republic of the Congo.
Trypanosomiasis is fatal if left untreated.
In September 2002, we completed a Phase IIa study of DB289 for
treatment of Trypanosomiasis in the Democratic Republic of the Congo. In this
study, we confirmed the effectiveness of DB289 to treat Trypanosomiasis; over
95% of the patients treated were cured (patients evaluated three and six months
after treatment were still parasite free). UNC, through the Clinical Research
Subcontract funded by The Gates Foundation, advanced approximately $3.4 million
in milestone payments to us for the continuation of this study on an additional
300 to 350 patients. The Gates Foundation has also granted an additional $2.7
million to a research group led by UNC (of which the Company is to receive under
the Clinical Research Subcontract
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$2.4 million), in addition to the $15.1 million granted to UNC, to accelerate
the enrollment of our Phase IIb study.
If results of our Phase IIb clinical trials for Trypanosomiasis
currently underway are similar to our previous human trial results, we believe
we will obtain regulatory approval to deliver DB289 in the countries where our
clinical test sites are located and in other African nations for treatment of
Trypanosomiasis. Pending such regulatory approvals, we believe that charitable
foundations will commit to purchasing commercial quantities of DB289 from the
Company to distribute in countries where Trypanosomiasis is endemic.
Malaria
In June 2003, we commenced a Phase IIa clinical trial of DB289
targeting the Malaria parasite (Plasmodium vivax and Plasmodium falciparum, the
most common and drug-resistant deadly strains) at a clinical site in Thailand.
In safety and efficacy studies conducted in humans and in vitro studies
performed at the Swiss Tropical Institute, DB289 reached levels in the blood
expected to be effective to treat Malaria in humans. DB289 demonstrated positive
activity against several forms of Malaria used as surrogates for the human
disease in animal model studies (mice). DB289 has shown positive activity
against both common and known drug resistant strains of Malaria, including
activity against chloroquine-resistant strains of Malaria. Chloroquine is the
drug most frequently used to treat Malaria in developing countries. The dose
proposed for the Phase IIa trial is similar to the dosage proven safe in our
Trypanosomiasis studies.
Malaria is the second most deadly infectious disease in the world
and is a significant problem for over 2.4 billion people in the world exposed to
the mosquito-borne disease. Malaria, which affects 300 to 500 million people
each year, is especially devastating to children under the age of five. In
Africa and other areas of the world with high incidences of Malaria, the
fatality rate in children is very high. It is estimated by the World Health
Organization that over one million children die every year from Malaria in
countries where the disease is endemic. The Global Fund to Fight AIDS,
Tuberculosis and Malaria, of which The Gates Foundation is a member, is
supporting the development of new oral drugs for safe and effective treatment of
patients with drug-resistant forms of Malaria.
We have received a funding commitment of approximately $668,000 from
Medicine for Malaria Ventures and in June 2003 we commenced Phase IIa human
clinical trials of DB289 for treatment of Malaria in Thailand.
Antifungal Program
In cooperation with scientists from Duke University, UNC and Georgia
State, we are progressing on the selection of a new antifungal drug candidate.
Scientific Consortium scientists have identified several compounds with
potential to treat both Candida and Aspergillus, two infections that in the
aggregate account for over 90% of the systemic fungal infection drug market. Our
goal is to advance a lead compound into pre-clinical development in 2003.
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In vitro laboratory studies conducted at Duke University have
identified over 30 dications that display positive antifungal activity across
three types of fungi (Candida, Aspergillus and Cryptococcus), including activity
against fungi which had previously been shown to be drug resistant. Duke has
developed animal models for testing these lead dication candidates for
antifungal activity in laboratory and computer model studies.
Duke researchers have developed an animal model of Aspergillus and
are testing dication compounds in this model. In addition, Duke University
continues to evaluate new compounds in an animal model of Candida. Our goal is
to identify an active compound in 2003 that will be advanced to human clinical
trials.
The market for an effective antifungal drug is estimated in 2003 to
be $4 billion annually and growing rapidly 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 being treated in a hospital) caused by fungi has increased
drastically and is now the third most common cause of sepsis, replacing
Escherichia coli ("E. coli"). Sepsis is an infection that quickly overwhelms the
immune system and can lead to sudden death. Recently, strains of fungi have
developed that are resistant to currently available treatments. There is a
significant opportunity for new orally-deliverable drugs effective against
specific strains of fungi as well as drugs with broad spectrum effectiveness
across fungal strains.
Tuberculosis
We are working with Dr. Scott G. Franzblau's laboratory, The
Institute for Tuberculosis Research at the University of Illinois-Chicago
("UIC"), to develop a new drug to combat drug-resistant strains of Mycobacterium
Tuberculosis ("TB"). Tests conducted at Dr. Franzblau's laboratory have
identified dication compounds with positive activity against the most common and
drug resistant forms of TB. We are working with UIC to obtain grants to further
its TB research and ongoing studies with dication compounds.
TB is the world's number one killer among infectious diseases and is
the cause of over two million deaths per year worldwide, according to the World
Health Organization and the U.S. Centers for Disease Control (the "CDC"). The
CDC reports that about two billion people, including 15 million Americans, are
infected with TB. The disease is spreading rapidly in developing countries in
Asia, Africa and South America, and is becoming increasingly problematic in
developed countries. Japan declared TB as its most threatening disease. Even the
United States is seeing an alarming increase in TB cases. The combination of the
rapid spread of TB and the appearance of multi-drug resistant strains of the TB
organism make TB a major health threat throughout the world. TB is an elusive
infection to treat. The organisms that cause the disease can "hide" inside white
blood cells and tissues where exposure to drugs is avoided. To be effective, a
drug must locate and eliminate the TB organisms inside those white blood
Trypanosomiasis
The World Health Organization and the National Institutes of Health
("NIH") have significantly increased research efforts to discover drugs to treat
TB. Their research is focused on developing oral drugs that are effective
against drug resistant strains of TB and the
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creation of therapies to shorten the treatment period required to eradicate the
disease. Their overall target is to reduce the current nine- to 18-month
treatment period down to a two- to six- month period.
NIH researchers have screened over 500 of the Scientific
Consortium's dication compounds as potential treatments of TB. NIH screening
tests have identified approximately 10 to 15 dications with activity comparable
or superior in performance to drugs currently available to treat TB. Our goal is
to identify an oral drug candidate potent against TB and safe to the patient
within the next 12 months.
Dr. Franzblau is a leading expert in TB treatment. For six years
prior to joining the UIC, Dr. Franzblau led the NIH-funded, anti-TB screening
program at the National Hansen's Disease Center at Louisiana State University.
Georgia State and UNC are designing and synthesizing the compounds for testing
at UIC based on the substantial information gleaned from in vitro and in vivo
testing of various compounds.
Cryptosporidiosis parvum
Cryptosporidiosis parvum is one of the most common infections of the
intestinal tract. Cryptosporidium is a parasite that causes severe diarrhea and
wasting and is often fatal in immunosuppressed patients. Currently, no drug is
available to treat Cryptosporidiosis. DB075, the parent drug of DB289, is
designed to block life-sustaining enzymes from binding to the key sites of
Cryptosporidium's DNA, thereby killing the organism. DB075, which is not a
Prodrug (Prodrug is a drug delivery technology designed to make dications orally
deliverable), is designed to remain and work directly in the digestive tract
where the Cryptosporidiosis parasite is resident, with limited absorption across
the digestive membranes into the bloodstream. Restricting DB075 to the digestive
tract substantially reduces the possibility of adverse side effects. We have
specifically targeted finding a treatment for Cryptosporidiosis because the FDA
permits "fast-track" approvals of drugs that treat diseases like
Cryptosporidiosis for which there currently exists no acceptable treatment.
Hepatitis C
A report by the CDC found that 4.5 million people in the United
States are infected with the HCV, the most common chronic blood-borne infection
in the United States and a leading cause of liver disease. The World Health
Organization has estimated that 170 million people worldwide have chronic HCV
infections and that five million people in Western Europe are chronically
infected with the HCV. The prevalence of the disease is expected to remain high
for several decades due to the lack of drugs to treat or a vaccine to prevent
transmission of the disease, according to the Medscope Resource Center.
Currently, no test exists which will accurately predict the
effectiveness of a drug for treatment of HCV. Scientists at Auburn have screened
some of the Consortium's dicationic compounds using a bovine viral diarrhea
virus ("BVDV") as a surrogate virus for HCV to gauge the potential effectiveness
of dications. Auburn scientists have screened over 150 of those compounds using
the surrogate assay to identify dications with potential activity against HCV.
The Company plans to screen the active compounds identified at Auburn in a newly
developed
-15-
HCV assay developed by the National Institutes of Health ("NIH"). The NIH assay
replicates a part of the HCV virus that can be used to identify compounds which
have activity against the human HCV virus. The screening program with the NIH
should be completed in calendar year 2003.
Leishmania
Over 355 million people in 88 countries are exposed to Leishmania
and 12 million people in arid and tropical countries have the disease.
Leishmania is caused by a parasite spread by sand flies that bite and infect
humans.
As part of the Clinical Research Subcontract under The Gates
Foundation grant, we are working with The London School of Hygiene and Tropical
Medicine in England ("The London School"), Ohio State University ("Ohio State"),
UNC and Georgia State to develop a drug to treat Leishmaniasis. Initial work on
Leishmania was sponsored by a grant from the Walter Reed Hospital, U.S. Army.
The U.S. military is interested in developing a new treatment for Leishmaniasis
because U.S. soldiers are often sent to places where the Leishmania parasite is
prevalent and soldiers sometimes return home infected with the disease. The
London School and Ohio State have subcontracted with the Scientific Consortium
to screen drug candidates supplied by UNC and Georgia State. The London School
and Ohio State researchers have performed laboratory screening of 150 Scientific
Consortium compounds for activity, have tested over 20 dicationic compounds for
activity in animal tests and have identified several compounds with activity
equivalent to drugs currently used to treat Leishmaniasis. The program
scientists will evaluate drug candidates through 2003 and if a suitable
candidate is not then identified, the grant funds otherwise allocated to the
Leishmania program will be used to support one of our other grant-restricted
programs.
Manufacturing
Pharmaceutical Products
We have an agreement with Regis Technologies, Inc. ("Regis") to
produce eight kg of good manufacturing practices ("GMP") grade DB289 for
clinical testing and early commercialization needs. Regis has produced a one
kilogram GMP batch of DB289 which we are using in clinical trials for
Trypanosomiasis, PCP and other diseases. Regis is a full-service drug synthesis
and chemical services company that has synthesized numerous compounds and
advanced them into clinical testing and commercialization. Regis is known
internationally for providing quality contract manufacturing services to large
pharmaceutical firms. Regis has experience in manufacturing pharmaceuticals
under FDA guidelines.
Scientific Consortium
Scientific Consortium members, specifically the combinatorial
chemistry laboratory at Georgia State University and the synthetic chemistry
laboratory at UNC, have the capability to produce and inventory small quantities
of all of the dications under license to us. To date, Georgia State University
and UNC have produced and supplied all of the dications requested in the
quantities required under the testing agreement with a third party. The third
party tested over 100 dication compounds for activity against and diagnosis of
amyloidosis and
-16-
the related underlying conditions of Alzheimer's Disease, cerebral amyloid
angiopathy, primary amyloidosis, diabetes, rheumatic diseases and treatment of
conditions related to secondary amyloidosis. We believe Scientific Consortium
members will produce and deliver small quantities of compounds as needed for
testing and commercialization purposes.
Immtech Hong Kong Limited
We have entered into an arrangement with an investor, whereby we
acquired an 80% interest in a Hong Kong company that holds title to developable
commercial real property located in a "free trade zone" in the PRC on which we
intend, through the entity Immtech Hong Kong Limited, to construct and operate a
pharmaceutical manufacturing facility to produce commercial quantities of our
future products.
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 product
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 product candidates prior to profitability.
Our 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 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 pre-clinical 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, complete pre-clinical 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 potential
indications for which our product candidates are developed and ultimately
approved by regulatory authorities. We rely on our collaborations with the
Scientific Consortium members and other joint venture partners to enhance our
competitive edge by providing manufacturing, testing and commercialization
support.
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Patents and Licenses
Our pharmaceutical dications, including DB289 and DB075, are
protected by patents secured by members of the Scientific Consortium. We have,
pursuant to the terms of the Consortium Agreement, assumed the defense of all
patents covering the dications we license.
We consider the protection of our proprietary technologies and
products to be important to the success of our business and rely on a
combination of patents, licenses, copyrights and trademarks to protect these
technologies and products. To date, we have obtained exclusive licensing rights
to 181 dication patents. As of June 2003, we had been issued 101 patents in the
United States and in various global markets and have numerous patent
applications pending. Generally, U.S. 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. 132 of our patents, owned and licensed, including 33 U.S. patents,
were submitted after June 8, 1995, including patents covering DB289, DB075 and
our latest Prodrug formulation processes.
Our policy is to file patent applications and defend the patents
licensed to us covering the technology we consider important to our business in
all countries where such protection is available and feasible. We intend to
continue to file and defend patent applications we license or develop. 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 the claims
of any of our potential products. Because of the time delay in patent approval
and the secrecy afforded the U.S. patent applications, 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 at least several months. 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. 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. Employees and consultants sign agreements to assign
to us their interests in patents and copyrights arising from their work for us.
Key employees also agree not to engage in unfair competition with us after their
employment by using our confidential information. 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
-18-
breach of our confidentiality agreements, or our trade secrets could be
independently developed by our competitors.
Patents
Patents and patent applications for the chemical substance and use
of pharmaceutical compounds to treat infections caused by PCP, TB,
Cryptosporidium parvum, Giardia lamblia, Leishmania mexicana amazonesis,
Trypanosoma brucei rhodesienes, various fungi, Plasmodium falciparum, HCV, BVDV
and HIV have been filed by the scientists of the Scientific Consortium members.
We have exclusively licensed, or have the right to exclusively license, any of
such patents for commercialization. We are obligated to reimburse or pay for
patent protection of any such drugs that we license for commercialization.
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 a patent for a new method for making chemical compounds that form dimers when
they are bound to DNA. Dimers are two identical chemical molecules that attach
to a DNA's key site in series to cover a larger section (double) of a DNA's key
site.
On February 26, 2003, Scientific Consortium members were granted a
patent by the U.S. Patent Office entitled "Prodrugs for Antimicrobial Amidines"
for a proprietary technology to synthesize and manufacture Prodrugs. The patent
protects a substantially advanced process for economically producing orally
deliverable drugs. This newly patented process, licensed to Immtech under the
Consortium Agreement, reduces the number of steps required to make dications
orally available and thereby reduces the cost to manufacture Prodrug enhanced
drugs. We are investigating the potential to sub-license this new Prodrug
process to other drug manufacturers for use with their compounds designed to be
taken orally and then activated in the blood stream.
a) Patent Licenses
Pursuant to the Consortium Agreement, licenses and options to
license patents for the dications developed by the Scientific Consortium prior
to January 15, 1997, which were previously licensed or optioned to Pharm-Eco,
were transferred to us by Pharm-Eco as of March 2001. In accordance with the
terms of the Consortium Agreement, we have obtained license rights to the
patents covering the technology platform for making dicationic pharmaceutical
drugs and to treat certain microbial infections with such products. To date, we
have exclusively licensed 181 patents, which includes 51 U.S. patents. All of
the patents on our dicationic product candidates have been filed by UNC jointly
with the other academic institutions of the Scientific Consortium.
b) Patent Rights
Since January 1997, as required under the Consortium Agreement, we
have filed, together with Scientific Consortium members, approximately 94 patent
applications, of which approximately 34 have been granted. The Consortium
Agreement grants us the right to license for commercialization product
candidates underlying the patents and patent applications for dications produced
by the Scientific Consortium.
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Government Regulation
The development, manufacture and commercialization of drug products
is subject to extensive regulation by both U.S. federal and, to a lesser extent,
state governments and foreign governmental authorities in the areas in which our
product candidates are tested and manufactured, and in which potential products
may be manufactured or sold. The Federal Food, Drug and Cosmetic Act ("FDCA")
and other federal statutes and regulations govern or influence, among other
things, the development, testing, manufacture, safety, labeling, storage,
recordkeeping, approval, advertising, promotion, sale and distribution of
pharmaceutical drugs. Pharmaceutical manufacturers are also subject to certain
recordkeeping and reporting requirements, establishment registration and product
listing, as well as FDA inspections.
With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective manufacturer must
submit a full New Drug Application ("NDA"), including complete reports of
pre-clinical, clinical and other studies, to prove the product's safety and
efficacy. A full NDA may also need to be submitted for a drug product with a
previously approved active ingredient if, among other things, the drug will be
used to treat an indication for which the drug was not previously approved, or
if the abbreviated procedure is otherwise not available. A manufacturer
intending to conduct clinical trials in humans for a new drug may be required
first to submit a Notice of Claimed Investigational Exception for an
Investigational New Drug ("IND") to the FDA containing information relating to
pre-clinical and clinical studies. INDs and full NDAs may be required to be
filed to obtain approval of certain of our products, including those that do not
qualify for abbreviated application procedures. The full NDA process, including
clinical development and testing, is expensive and time consuming.
Products being developed by us for sale in the United States may be
regulated by the FDA as drugs or biologics. New drugs are subject to regulation
under the FDCA, and biologics, in addition to being subject to certain
provisions of the FDCA, are regulated under the Public Health Service Act. We
believe that drug products developed by us or our collaborators will be
regulated either as biologics or as new drugs. Both statutes and the regulations
promulgated thereunder govern, among other things, the testing, manufacturing,
safety, effectiveness, labeling, storage, record keeping, advertising and other
promotional practices involving biologics or new drugs. FDA approval or other
clearances must be obtained before clinical testing and before manufacturing and
marketing of biologics and drugs.
Obtaining FDA approval has historically been a costly and time
consuming process. Generally, in order to gain FDA pre-market approval, a
developer first must conduct pre-clinical studies in the laboratory and in
animals to gain preliminary information on a drug candidate's effectiveness and
to identify any safety problems. The results of these studies are submitted as a
part of an IND application, which the FDA must review before human clinical
trials of a drug candidate can begin. The IND application includes a detailed
description of the pre-clinical data and investigations to be undertaken.
In order to commercialize any potential product, we or our
collaborators must sponsor and file an IND and be responsible for initiating and
overseeing clinical studies that demonstrate the safety and effectiveness
necessary to obtain FDA approval. For Company or
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collaborator-sponsored INDs, the sponsor will be required to select qualified
investigators (usually physicians within medical institutions) to supervise the
administration of the products and ensure that the investigations are conducted
and monitored in accordance with FDA regulations, including the general
investigational plan and protocols contained in the IND. Clinical trials are
normally done in three phases, although the phases may overlap. Phase I trials
are concerned primarily with the safety of the drug, involve fewer than 100
subjects and may take from six months to over one year to complete. Phase II
trials normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side-effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to evaluate
the overall benefit-risk relationship of the drug and to gather additional
information for proper dosage and labeling of the drug. In total, clinical
trials generally take two to five years to complete, but may take longer. The
FDA receives reports on the progress of each phase of clinical testing and the
FDA may require the modification, suspension or termination of a clinical trial
if it concludes that an unwarranted risk is presented to patients.
If clinical trials of a new product are completed successfully, then
the product sponsor may seek FDA marketing approval. If the product is regulated
as a biologic, the FDA will require the submission and approval of both a
Product License Application ("PLA") and an Establishment License Application
("ELA") before commercial marketing can commence. If the product is classified
as a new drug, then the product sponsor must file an NDA with the FDA and
receive approval before commencing commercial marketing. The NDA or PLA and ELA
must include detailed information about the pharmaceutical drug or biologic and
its manufacture and the results of product development, pre-clinical studies and
clinical trials. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. NDAs and PLAs submitted to the FDA can take, on
average, two to five years to receive approval. If questions arise during the
FDA review process, then approval can take more than five years. Notwithstanding
the submission of relevant data, the FDA may ultimately decide that the NDA or
PLA does not satisfy the FDA's regulatory criteria for approval and deny
approval or require additional clinical studies. In addition, the FDA may
condition marketing approval on the conduct of specific post-marketing studies
to further evaluate safety and effectiveness. Even if FDA regulatory clearances
are obtained, a marketed product is always subject to continual review and later
discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market, as well as possible
civil or criminal sanctions.
The Drug Price Competition and Patent Restoration Act of 1984, known
as the Waxman-Hatch Act, established abbreviated NDA ("ANDA") procedures for
obtaining FDA approval for generic versions of many non-biological drugs for
which patent or marketing exclusivity rights have expired and which are
bioequivalent to previously approved drugs. "Bioequivalence" for this purpose,
with certain exceptions, generally means that the proposed generic formulation
is absorbed by the body at the same rate and extent as a previously approved
"reference drug." Approval to manufacture these drugs is obtained by filing
abbreviated applications, such as ANDAs. As a substitute for clinical studies,
the FDA requires data indicating the ANDA drug formulation is bio-equivalent to
the previously approved reference
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drug. The advantage of the ANDA approval mechanism, compared to an NDA, is that
an ANDA applicant is not required to conduct pre-clinical and clinical studies
to demonstrate that the product is safe and effective for its intended use and
may rely, instead, on studies demonstrating bioequivalence to a previously
approved reference drug.
In addition to establishing ANDA approval mechanisms, the
Waxman-Hatch Act fosters pharmaceutical innovation through such incentives as
non-patent exclusivity and patent restoration. This Act provides two distinct
exclusivity provisions that either preclude the submission or delay the approval
of an ANDA. A five-year exclusivity period is provided for new chemical
compounds and a three-year marketing exclusivity period is provided for changes
to previously approved drugs that are based on new clinical investigations
essential to the approval. The three-year marketing exclusivity period may be
applicable to the approval of a novel drug delivery system. The marketing
exclusivity provisions apply equally to patented and non-patented drug products.
These provisions do not delay or otherwise affect the approvability of full NDAs
even when effective ANDA approvals are not available. For drugs covered by
patents, patent extension may be provided for up to five years as compensation
for reduction of the effective life of the patent resulting from time spent in
conducting clinical trials and in FDA review of a drug application.
In addition to obtaining pre-market approval for certain of our
products, we will be required to maintain all facilities that produce our
product candidates for commercial consumption in the United States in compliance
with the FDA's current Good Manufacturing Practice ("cGMP") requirements. In
addition to compliance with cGMP, each pharmaceutical manufacturer's facilities
must be registered with the FDA. Manufacturers must also be registered with the
Drug Enforcement Agency, or DEA, and similar state and local regulatory
authorities if they handle controlled substances, and with the Environmental
Protection Agency, or EPA, and similar state and local regulatory authorities if
they generate toxic or dangerous wastes. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and distribution, refusal of the government to
enter into supply contracts or to approve NDAs, ANDAs or other applications and
criminal prosecution. The FDA also has the authority to revoke for cause drug
approvals previously granted.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals substantially the
same as those in the United States. In connection with any future marketing,
distribution and license agreements that we may enter, our licensees may accept
or assume responsibility for such foreign regulatory approvals. The time and
cost required to obtain these international market approvals may be greater or
lesser than those required for FDA approval.
Product development and approval within this regulatory framework
takes a number of years, involves the expenditure of substantial resources and
is uncertain. Many drug products ultimately do not reach the market because they
are not found to be safe or effective or cannot meet the FDA's other regulatory
requirements. In addition, the current regulatory framework may change and
additional regulations may arise at any stage of our product development that
may affect approval, delay the submission or review of an application or require
additional expenditures by us. We may not be able to obtain necessary regulatory
-22-
clearances or approvals on a timely basis, if at all, for any of our products
under development, and delays in receipt or failure to receive such clearances
or approvals, the loss of previously received clearances or approvals or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on our business.
Research and Development
Our future success will depend in large part on our ability to
commercialize products based upon the platform technology for developing
dications currently licensed to us through the Consortium Agreement and future
dications for which we have the exclusive worldwide rights to license from the
Scientific Consortium.
In November 2000, The Gates Foundation awarded $15,114,000 in a
grant to a research group led by UNC to develop new drugs to treat African
sleeping sickness and Leishmaniasis. On March 29, 2001, UNC entered into an
agreement with us whereby $9,800,000 will be paid to us over a five- year period
to conduct certain studies ("Clinical Research Subcontract"). On March 29, 2001,
we received the first installment of $4,300,000, on September 24, 2002, we
received approximately $1,364,000, and on December 31, 2002, we received
approximately $2,016,000, of which approximately $791,000, $2,946,000 and
$1,389,000 was utilized for clinical and research purposes and expensed during
the fiscal years ended March 31, 2001, 2002 and 2003, respectively. In August
2001, we were awarded an additional Small Business Innovation Research Grant
("SBIR grant") from the NIH, in the amount of approximately $144,000, as the
third year grant to continue research on "Novel Procedures for Treatment of
Opportunistic Infections." During the years ended March 31, 2002 and 2003,
approximately $65,000 and $70,000, respectively, was utilized for clinical and
research purposes and expensed.
In June 2003, the Gates Foundation awarded $2.7 million in a grant
to a research group led by UNC to (i) expand ongoing Phase IIb/III clinical
trials of DB289 for treatment of African sleeping sickness by adding additional
clinical sites and increasing patient enrollment in several sub-Sahara African
nations, (ii) implement an improved method of synthesizing DB289 to reduce drug
manufacturing costs and (iii) improve DB289's formulation to facilitate
increased drug delivery concentration in blood circulation. Under the research
subcontract, we are to receive $2,466,475 million, $1,025,201 of which has been
received for our part to advance the tasks set forth above.
During the past three fiscal years, we estimate that we have spent
approximately $5,340,000, $581,000 and $1,111,000, respectively, in fiscal years
ended March 31, 2001, 2002 and 2003, on Company sponsored research and
development and approximately $1,355,000, $3,377,000 and $1,459,000,
respectively, in fiscal years ended March 31, 2001, 2002 and 2003, on research
and development sponsored by others. All research and development activity for
fiscal years ended March 31, 2002 and 2003 have been in support of our
pharmaceutical commercialization effort.
-23-
Experts
We independently conduct research and development and benefit from
the Scientific Consortium's work directed by Dr. Richard Tidwell of UNC. Many of
the world's leading experts in opportunistic infections are affiliated with
members of the Scientific Consortium, including:
o Dr. Dave Boykin and Dr. Dave Wilson of Georgia State (for the chemical
design, synthesis and molecular characterization of novel
anti-infective drugs);
o Dr. John Perfect of Duke University (for fungal diseases);
o Dr. James E. Hall of UNC (for parasitology - Trypanosomiasis and
Leishmaniasis diseases);
o Dr. Byron Blagburn of Auburn University (for parasitic diseases and
animal husbandry);
o Dr. Christine Dykstra of Auburn University (for the molecular and
biochemical effects of dications on DNA and for viral disease);
o Dr. Scott G. Franzblau of University of Illinois at Chicago (for
Tuberculosis disease);
o Dr. Reto Brun, Swiss Tropical Institute (Trypanosomiasis, Leishmania
and Malaria diseases);
o Dr. Simon Croft, The London School (Leishmania diseases);
o Dr. Christian Burri, Swiss Tropical Institute (Clinical trials in
Africa); and
o Dr. Karl Werbovetz, Ohio State (Screening compounds for Leishmania).
Pharmaceutical Products
We are seeking to commercialize dications for treatment of
infectious diseases. Positive results from the Phase I and Phase II trials of
DB289 have paved the way for us to advance our Malaria, TB and antifungal
programs.
We are conducting multiple clinical trials using dication drugs.
Specifically:
o In May 2001, we completed a Phase I safety trial on DB289 as an
orally active Prodrug formulation to treat African sleeping sickness
and PCP.
o In May 2003, we received approval and began Phase IIa testing of the
drug on 30 to 40 patients with PCP in South America. This Phase II
test of DB289 is being conducted on PCP-infected AIDS patients who
have failed treatment with other therapies.
-24-
o Phase IIb tests of DB289 targeting Trypanosomiasis in 300-350
patients has commenced in the Democratic Republic of the Congo.
o In June 2003, a third Phase IIa trial to treat Malaria patients with
the drug DB289 was commenced in Thailand.
o Subject to obtaining foundation or government support, we plan a
safety Phase I trial of DB075 for oral treatment of patients
afflicted with severe diarrhea caused by the intestinal parasite
Cryptosporidium parvum. Final plans are in place for synthesis,
final toxicology testing prior to human use, absorption,
distribution, metabolism and excretion analyses, formulation for
administration, and regulatory approvals of DB075. This study is
intended to establish that DB075 reduces the duration of
Cryptosporidium caused diarrhea, associated weight loss and the
number of Cryptosporidium parvum organisms excreted in the patient's
stool.
Employees
We currently have 11 employees, five of whom hold advanced degrees.
Through our agreement with the Scientific Consortium, approximately 55
scientists are engaged in the research and development of the dications. We
expect to add new employees in our regulatory and clinical development
departments as our programs advance.
Risk Factors
There is no assurance that we will successfully develop a commercially viable
product.
We are at an early stage of human, clinical and in some cases
pre-clinical development activities required for drug approval and
commercialization. Since our formation in October 1984, we have engaged in
developing research programs, recruiting scientific advisors and scientists,
negotiating and consummating technology licensing agreements and sponsoring
research and development activities. We have generated no revenue from product
sales and do not have any products currently available for sale, and none are
expected to be commercially available for sale until after March 31, 2004, if at
all. There can be no assurance that the research we fund and manage will lead to
commercially viable products.
We have a history of losses and an accumulated deficit; 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,
development, clinical trial and commercialization efforts. As of March 31, 2003,
we had an accumulated deficit of approximately $42,167,000.
We will need substantial additional funds in future years.
Our operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to continue in the foreseeable
future. Our cash requirements may vary materially from those now planned because
of results of research and
-25-
development, results of pre-clinical and clinical testing, responses to our
grant requests, relationships with strategic partners, changes in the focus and
direction of our research and development programs, competitive and
technological advances, the FDA and foreign regulatory process and other
factors. In any of these circumstances, we may require substantially more funds
than we currently have available or currently intend to raise to continue our
business. We 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. 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
product candidates, forego desired opportunities or license third parties to
commercialize our products or technologies that we would otherwise seek to
develop internally. To the extent we raise additional capital by issuing equity
securities, ownership dilution to existing stockholders will result.
Our dependence on key personnel could adversely affect our business.
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 technicians at
UNC, Georgia State, Duke University and Auburn University (collectively, the
"Scientific Consortium") who have entered into a Consortium Agreement, dated
January 15, 1997, and a License Agreement, dated as of January 28, 2002, with us
by which the Scientific Consortium has given us exclusive rights to
commercialize certain pharmaceutical product candidates developed in the
Scientific Consortium members' laboratories related to the dication technology.
There can be no assurance that the loss of certain members of management or the
scientists, researchers and technicians from the Scientific Consortium
universities would not materially adversely affect our business. We do not have
"key-man" life insurance policies on any of our executives.
Additional research grants may not be available.
We will continue to apply for new grants to support continuing
research and development of our dication platform technology and other product
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.
Our product candidates are in early stage clinical trials.
All of our product candidates, including DB289 and DB075, require
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 product candidates will be successfully developed, prove to be safe
and effective in human clinical trials, meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs, be
eligible for third party reimbursement from governmental or private insurers, be
successfully marketed or achieve market acceptance.
-26-
There are substantial uncertainties related to clinical trials.
In order to obtain required regulatory approvals for the commercial
sale of our product candidates, we must demonstrate through human clinical
trials that such product candidates are safe and effective for their intended
uses.
We may find, at any stage of our research and development, that
product 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. The results of our pre-clinical testing and
early human clinical trials may not be predictive of results obtained in 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
human clinical trials. Completion of the clinical trials may be delayed by many
factors, including slower than anticipated patient enrollment, difficulty in
securing sufficient supplies of clinical trial materials or adverse events
occurring during clinical trials. Completion of testing, studies and trials 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, any IND 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 to date and
there can be no assurance that our future testing and development schedules will
be met.
We do not have manufacturing capability, which could impair our ability to
develop commercially viable products at reasonable costs.
Our ability to conduct clinical trials and to commercialize product
candidates will depend in part upon our ability to have manufactured the product
candidates, 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 our product 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.
Construction and operation of a pharmaceutical manufacturing plant
with Immtech Hong Kong Limited in the PRC is subject to various governmental
approvals, which may be difficult or impossible to obtain. There can be no
guarantee that products manufactured at this facility, if built, will be
accepted in the countries where we desire to sell our future products.
We are dependent on third-party relationships for critical aspects of our
business.
We follow a business strategy of utilizing the expertise and
resources of third parties in a number of areas, including the research and
development of potential products, the manufacture of compounds for clinical
trials, the conduct of pre-clinical and human clinical trials
-27-
and the future development and manufacture of commercialized drugs. 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.
We may seek additional third-party relationships in certain areas,
particularly in clinical testing, marketing, manufacturing and other areas where
pharmaceutical and biotechnology company collaborators will enable us to develop
particular products or geographic markets that are otherwise beyond our
resources and/or capabilities. There is no assurance that we will be able to
obtain any such collaboration or any other research and development,
manufacturing or clinical trial arrangements. Our inability to obtain and
maintain satisfactory relationships with third parties may have a material
adverse effect on our business.
We are uncertain about the ability to protect or obtain necessary patents and
protect our proprietary information.
There can be no assurance that any particular patent will be granted
or that issued patents will provide us, directly or through licenses, with the
intellectual property protection contemplated. Patents and licenses of patents
can be challenged, invalidated or circumvented. 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
product candidates may have a material adverse effect on our business.
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, product
candidates 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 in the United
States are confidential until patents are issued 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
-28-
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, 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.
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 U.S.
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. Even if we
prevail in an interference proceeding or a lawsuit, substantial resources,
including the time and attention of our officers, will be required.
We also rely on trade secrets, know-how and technological
advancement to maintain our competitive position. Although we use
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.
Our business has significant competition; our product candidates may
become obsolete prior to commercialization due to alternative technologies.
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 for treatment of the same diseases as we are. New developments in
molecular cell biology, molecular pharmacology, recombinant DNA technology and
other pharmaceutical and biological processes 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.
-29-
We are aware of other companies and institutions dedicated to the
development of therapeutics similar to those we are developing, including Eli
Lilly and Company, Hoffman-LaRoche Ltd., Chiron Corporation, Cubist
Pharmaceuticals, Inc., Schering-Plough Corporation and Abbott Laboratories. 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 drugs and biologics. Many of
these competitors are also more experienced with regard to pre-clinical testing,
human clinical trials and obtaining regulatory approvals. The current or future
existence of competitive products may also adversely affect the marketability of
our product candidates.
There is no assurance that we will receive FDA or corollary foreign approval for
any of our product candidates; government regulation may impede, delay or
prevent the commercialization of our product candidates.
All new pharmaceutical drugs and biologics, including our product
candidates, are subject to extensive and rigorous regulation by the federal
government, principally the FDA under the FDCA and other laws including, in the
case of biologics, the Public Health Services Act, and by state, local and
foreign governments. Such regulations govern, among other things, the
development, testing, manufacture, labeling, storage, pre-market clearance or
approval, advertising, promotion, sale and distribution of pharmaceutical drugs
and biologics. If drug products or biologics 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.
We have not received regulatory approval in the United States or any foreign
jurisdiction for the commercial sale of any of our product candidates.
The process of obtaining FDA and other required 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 product
candidates will be cleared 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 prior to completing
the regulatory review process for our current and future product candidates.
Failure to receive FDA approval for our product candidates would preclude us
from marketing and selling such products in the United States. Therefore, the
failure to receive FDA approval would have a material adverse effect on our
business. 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 then be subject to ongoing FDA
obligations and continued regulatory review. In particular, we, or our third
party manufacturers, will be required to adhere to regulations setting forth
GMP, which require us (or our third party manufacturers) to
-30-
manufacture products and maintain records in a prescribed manner with respect to
manufacturing, testing and quality control activities. Further, we (or our third
party manufacturers) must pass a manufacturing facilities pre-approval
inspection by the FDA 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 pre-clinical
testing or clinical trials and changes in labeling of the product.
Prior to the submission of an application for FDA approval, our
product candidates must undergo rigorous pre-clinical and clinical testing,
which may take several years and the expenditure of substantial financial and
other resources. Before commencing clinical trials in humans, 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 product
candidates under development or other future product candidates would 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 product candidates
under development is completed, any such drug compounds will be accepted for
formal review by the FDA or any foreign regulatory body or approved by the FDA
for marketing in the United States or by any such foreign regulatory bodies for
marketing in foreign jurisdictions. Future federal, state, local or foreign
legislation or administrative acts could also prevent or delay regulatory
approval of our product candidates.
Prior to the submission of an application for FDA approval, our
pharmaceutical drugs and biologics must undergo rigorous pre-clinical and
clinical testing, which may take several years and the expenditure of
substantial resources. Before commencing clinical trials in humans in the United
States, we must submit to the FDA and receive clearance of an IND. If clinical
trials of a new product are completed successfully, then we may seek FDA
marketing approval. If the product is regulated as a biologic, the FDA will
require the submission and approval of both a PLA and an ELA before commercial
marketing can commence. The PLA must include detailed information about the
biologic, its manufacture and the results of product development, pre-clinical
studies and clinical trials. The FDA's time to review PLAs and ELAs averages two
to five years. The FDA may ultimately decide that the PLA and ELA do not satisfy
the regulatory criteria for approval and deny approval or require additional
clinical studies. Future federal, state, local or foreign legislation or
administrative acts could also prevent or delay regulatory approval of our
pharmaceutical drug and biologic candidates.
There is uncertainty regarding the availability of health care reimbursement for
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.
Our ability to commercialize any of our product candidates will
depend in part on the extent to which reimbursement for the costs of the
resulting drug or biologic will be available from government health
administration authorities, private health insurers and others. 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
-31-
coverage enabling us to establish and maintain price levels sufficient for
realization of a profit on our investment in developing pharmaceutical drugs and
biologics. 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 or biologic 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.
Health care reform proposals have previously been introduced in
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. There can be no assurance that any implemented reforms
will not have a material adverse effect on our business. Such reforms, if
enacted, may affect the availability of third-party reimbursement for our
anticipated products as well as the price levels at which we are able to sell
such products. 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.
Confidentiality agreements may not adequately protect our intellectual
property.
We require our employees and consultants 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.
Potential adverse effect of shares eligible for future sale.
Sales of our Common Stock (including the issuance of shares upon
conversion of preferred stock and the exercise of outstanding options and
warrants at prices substantially below our current market price) in the public
market could materially and adversely affect the market price of shares of our
Common Stock. Such sales also might make it more 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 16, 2003, we had 8,529,115 shares of Common Stock
outstanding (not including 598,415 shares of Common Stock reserved for
conversion of Series A Convertible Preferred Stock, 209,531 shares of Common
Stock reserved for conversion of Series B Convertible Preferred Stock, 709,004
shares of Common Stock reserved for conversion of Series C Convertible Preferred
Stock, 710,474 shares of Common Stock reserved for exercise of outstanding
options and 2,426,227 shares of Common Stock reserved for exercise of
outstanding warrants held by certain investors). Of the shares outstanding,
5,399,261 shares of Common
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Stock are freely tradable without restriction. All of the remaining 3,129,854
shares are restricted from resale, except pursuant to certain exceptions under
the Securities Act of 1933, as amended.
Potential adverse effect of outstanding Common Stock options and warrants.
We have outstanding options and warrants for the purchase of shares
of our Common Stock, which may adversely affect our ability to consummate future
equity financings. Further, 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 outstanding shares of our Common Stock will be
diluted.
The listing of our Common Stock has been transferred to the OTC Bulletin Board.
On December 2, 2002, we received notice from a NASDAQ listing review
panel that our stock would be transferred from the NASDAQ SmallCap Market
effective December 3, 2002. On December 3, 2002, our Common Stock began trading
on the NASDAQ OTC Bulletin Board. Trading on the NASDAQ OTC Bulletin Board may
result in a reduced market for our Common Stock and, consequently, reduced
liquidity for our stockholders.
Our Common Stock may become subject to the SEC's "penny stock" rules, which may
make shares of our Common Stock more difficult to sell.
SEC rules require brokers to provide certain information to
purchasers of securities traded at less than $5.00 and not traded on a national
securities exchange or quoted on the NASDAQ Stock Market (a "penny stock"). If
our Common Stock becomes a penny stock that is not exempt from these SEC rules,
these disclosure requirements may have the effect of reducing trading activity
in our Common Stock and making it more difficult for investors to sell our
Common Stock. The rules require a broker to deliver a risk disclosure document
that provides information about penny stocks and the nature and level of risks
in the penny stock market. The broker must also give bid and offer quotations
and broker and salesperson compensation information to the customer orally or in
writing before or with the confirmation. The SEC rules also require a broker to
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction before completion of the transaction.
The market price of our Common Stock may experience 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 and biotechnology companies have been and can be
expected to be especially volatile. Announcements of technological innovations
or new products by us or our competitors, developments or disputes concerning
patents or proprietary 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 or biologics and economic and other external factors, as
well as period-to-period fluctuations in our financial
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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 do not pay dividends on our Common Stock.
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 Convertible Preferred Stock, Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock earn dividends of 6%, 8% and 8% 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. On April 15, 2002, October 15, 2002 and April 15, 2003, we paid
dividends to the holders of our Series A Convertible Preferred Stock and on
October 15, 2002 and April 15, 2003, we paid dividends to the holders of our
Series B Convertible Preferred Stock in shares of Common Stock, with fractional
shares paid in cash.
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 by 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 and directors and may indemnify our
employees and other agents to the fullest extent permitted by law. We have
entered into indemnification agreements with our officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions under Delaware law. The indemnification agreements
may require us, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance, if available on reasonable terms. 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.
Product liability exposure may expose us to significant liability.
We face an inherent business 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
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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 that could hurt our financial performance.
Changes to financial accounting standards may affect our reported results of
operations.
We prepare our financial statements in conformity with U.S.
accounting principles generally accepted in the United States, or GAAP. GAAP are
subject to interpretation by the American Institute of Certified Public
Accountants, the SEC and various bodies formed to interpret and create
appropriate accounting policies. A change in those policies can have a
significant effect on our reported results and may even affect our reporting of
transactions completed before a change is announced. Accounting policies
affecting many other aspects of our business, including rules relating to the
carrying value of long-lived assets, employee stock option grants and revenue
recognition have recently been revised or are under review. Changes to those
rules or the questioning of current practices may adversely affect our reported
financial results or the way we conduct our business. In addition, our
preparation of financial statements in accordance with GAAP requires that we
make estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting
period. A change in the facts and circumstances surrounding those estimates
could result in a change to our estimates and could impact our future operating
results. Additionally, certain provisions of the Sarbanes-Oxley Act of 2002 will
impact our business. In particular, the creation by the SEC of an independent
accounting oversight board to oversee and regulate audits will affect us and all
public companies.
ITEM 2. PROPERTIES
Our administrative offices and research laboratories 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,
2005. Our annual rent for the Vernon Hills facility was $12,100 per month
through March 2003, increasing to $12,800 from April 2003 through March 2005. We
are also charged by the landlord a portion of the real estate taxes and common
area operating expenses. Our New York offices are located at One North End
Avenue, New York, New York 10282. We pay rent of approximately $8,800 per month,
on a month-to-month basis, for approximately 2,500 square feet of space for our
New York office. (See Item 13. "Certain Relationships and Related
Transactions.") 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.
We purchased an 80% interest in a Hong Kong entity that holds a
commercial real estate parcel located in a "free-trade zone" called the Futian
Free Trade Zone, Shenzhen, in the PRC. We intend to operate the Hong Kong entity
under the name Immtech Hong Kong Limited and to construct and operate a
pharmaceutical manufacturing facility capable of producing commercial quantities
of our future pharmaceutical drugs on the commercial real estate parcel.
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ITEM 3. LEGAL PROCEEDINGS
We are parties to the following legal proceeding:
Dale M. Geiss v. Immtech International, Inc. and Criticare
Systems, Inc.:
On January 14, 2002 plaintiff filed a complaint in the Circuit Court
of the Nineteenth Judicial Circuit, Lake County, State of Illinois against the
Company and Criticare Systems, Inc. ("Criticare"). Plaintiff's complaint alleged
that defendants refused to authorize the Company's transfer agent to remove the
restrictive legends from plaintiff's Immtech stock certificates. Plaintiff
sought relief in the form of monetary compensation in excess of $364,000,
punitive damages, prejudgment interest and costs.
On April 5, 2002, the Company and Criticare each filed a motion to
dismiss the plaintiff's January 14, 2002 complaint. On May 9, 2002, plaintiff
filed opposition papers to the Company's and Criticare's motions to dismiss. The
Company and Criticare each filed a reply memorandum on May 30, 2002.
On June 13, 2002, the Court granted Immtech's motion to dismiss,
without prejudice. Plaintiff was given thirty days within which to file and
serve an amended complaint, which plaintiff so filed on July 10, 2002, alleging
the same claims previously filed.
On September 19, 2002 the Court granted Immtech's motion to dismiss
plaintiff's amended complaint, but gave plaintiff another opportunity to file
and serve an amended complaint, if he so chooses. Plaintiff filed a Second
Amended Complaint dated November 1, 2002 against the Company and Criticare
alleging the same allegations as before. On December 6, 2002, the Company and
Criticare again filed motions to dismiss plaintiff's Second Amended Complaint.
On February 6, 2003, the Court denied the motions to dismiss and granted
Criticare and Immtech 30 days to answer or otherwise plead to the Second Amended
Complaint.
On June 5, 2003, the Company served an Answer and Affirmative
Defenses to the plaintiff's Second Amended Complaint. The Company believes the
plaintiff's claims are meritless and intends to vigorously defend against this
proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders in the
fiscal quarter ended March 31, 2003.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our Common Stock is quoted on the NASDAQ OTC Bulletin Board under
the symbol "IMMT" (our Common Stock was quoted on the NASDAQ National Market
System under the Symbol "IMMT" from April 26, 1999 to March 8, 2002, and on the
NASDAQ SmallCap Market from March 9, 2002 to December 2, 2002). 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 June 30, 2000.
High Low
------------ -------------
2000
Quarter ended June 30, 2000 $ 28.500 $ 10.563
Quarter ended September 30, 2000 $ 23.000 $ 11.563
Quarter ended December 31, 2000 $ 17.500 $ 8.625
2001
Quarter ended March 31, 2001 $ 11.750 $ 5.750
Quarter ended June 30, 2001 $ 11.210 $ 4.050
Quarter ended September 30, 2001 $ 11.500 $ 5.000
Quarter ended December 31, 2001 $ 7.485 $ 4.250
2002
Quarter ended March 31, 2002 $ 7.400 $ 4.000
Quarter ended June 30, 2002 $ 5.990 $ 2.800
Quarter ended September 30, 2002 $ 5.150 $ 2.390
Quarter ended December 31, 2002 $ 3.800 $ 2.120
2003
Quarter ended March 31, 2003 $ 4.850 $ 1.580
Shareholders
As of June 16, 2003, there were approximately 215 shareholders of
record of our Common Stock and the number of beneficial owners of shares of
Common Stock as of such date
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was approximately 1,007. As of June 16, 2003, there were approximately 8,529,115
shares of Common Stock issued and outstanding.
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 Convertible Preferred Stock, Series B Convertible Preferred Stock and
Series C Convertible Preferred Stock earn dividends of 6%, 8% and 8% 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. On April 15, 2002, October 15, 2002 and April 15, 2003, we paid
dividends to the holders of our Series A Convertible Preferred Stock and on
October 15, 2002 and April 15, 2003, we paid dividends to the holders of our
Series B Convertible Preferred Stock in shares of Common Stock, with fractional
shares paid in cash.
Recent Sales of Unregistered Securities
We issued unregistered securities in the following transactions
during the fiscal quarter ended March 31, 2003:
o On January 13, 2003, 1,200,000 unregistered shares of Common Stock
were issued to Mr. Chan Kon Fung for an 80% interest in Lenton Fibre
Optics Development Limited, the Hong Kong company operating under the
name Immtech Hong Kong Limited.
o In connection with the Immtech Hong Kong Limited arrangement mentioned
above, on January 13, 2003, we issued 30,000 shares of Common Stock to
each of Pacific Dragons Group, Ltd. ("Pacific Dragons") and Champion
Traders Investment Limited ("Champion"), respectively, for their
assistance with the agreement. We have agreed to use reasonable
efforts to register the resale by Pacific Dragons and Champion of the
Common Stock and to keep the registration effective for the lesser of
two years or until all of such shares of Common Stock are sold.
o On March 21, 2003, we entered into an agreement with Wyndham
Associates Limited ("Wyndham") for assistance to be provided to
identify potential strategic partners and to assist us to raise up to
$20 million in equity financing. For its services, Wyndham was granted
(i) 100,000 shares of our Common Stock, (ii) a cash fee of equal to 4%
of funds raised prior to June 30, 2003 through sales of our Series C
Convertible Preferred Stock, (iii) 40,000 shares of Common Stock for
each full $1 million invested prior to June 30, 2003 through sales of
our Series C Convertible Preferred Stock to investors introduced to us
by Wyndham and (iv) a cash fee equal to 8% of any equity investment,
other than Series C Convertible Preferred Stock (on terms acceptable
to us in our sole discretion), after June 30, 2003 by investors
introduced to us by Wyndham if such investors invest at least $10
million in equity. We have agreed to use our best efforts to register
on Form S-3 all shares of Common Stock issued or issuable to Wyndham
under the agreement.
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o On March 21, 2003, we entered into media production agreements with
"winmaxmedia," an operating division of Winmax Trading Group, Inc.
("Winmax"), to produce digital and video media materials to be used in
connection with our fundraising efforts. In connection with the
services rendered we (i) issued 100,000 shares of our Common Stock to
Gladden Consultants, Ltd., one of the vendors providing services under
the media production agreement and (ii) accrued expenses of
approximately $80,000 in the aggregate to various entities providing
location production services for reimbursement of expenses.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2003,
regarding compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance.
Number of
securities
remaining
available for
future issuance
Number of under equity
securities to be compensation
issued upon Weighted average plans
exercise of exercise price of (excluding
outstanding outstanding securities
options, warrants options, warrants reflected in
Plan category (in and rights and rights(1) column(a))
thousands) (a) (b) (c)
----------------------- ------------------- ------------------- ----------------
Equity compensation 698,474 $4.49 630,750
plans approved by
security holders(2)
Equity compensation 2,426,227 $7.07 0
plans not approved by
security holders(3)
Total 3,124,701 $6.49 630,750
------------------- ------------------- ----------------
(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.
Series C Convertible Preferred Stock Private Placements
On June 6, 2003, we filed a Series C Convertible Preferred Stock
Certificate of Designation ("Series C Certificate of Designation") with the
Secretary of State of the State of Delaware, designating 160,000 shares of our
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 ("Series C
Preferred Stock"). Dividends on the Series C Preferred Stock accrue at a rate of
8% 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. We have the
option to pay the dividend either in
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cash or in equivalent shares of Common Stock. If Common Stock is to be used to
pay the dividend, such Common Stock is to be valued at the 10-day volume-weighed
average price immediately prior to the date of payment.
Each share of Series C Preferred Stock is convertible by the holder
at any time into shares of our Common Stock at a conversion rate determined by
dividing the $25.00 stated value, plus any accrued and unpaid dividends (the
"Liquidation Price"), by a $4.42 conversion price (the "Conversion Price"),
subject to antidilution adjustment. We may at any time after the first
anniversary of the date of issuance require that any or all outstanding shares
of Series C Preferred Stock be converted into shares of our Common Stock,
provided that the shares of Common Stock into which the Series C Preferred Stock
is convertible is registered pursuant to an effective registration statement.
The number of shares of Common Stock will be determined by (i) dividing the
Liquidation Price by the Conversion Price, provided that the closing bid price
for our Common Stock exceeds $9.00 for 20 consecutive tracking days within 180
days prior to notice of conversion, or (ii) if the requirements of (i) above are
not met, the number of shares of Common Stock is determined by dividing 110% of
the Liquidation Price by the Conversion Price. The Conversion Price is subject
to antidilution adjustments, as set forth in the Series C Certificate of
Designation.
We may, upon 30 days' notice, redeem any or all outstanding shares
of the Series C Preferred Stock by payment of the Liquidation Price to the
holder of such shares, provided that the holder does not convert the Series C
Preferred Stock into shares of Common Stock during the 30-day period. The Series
C Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share of
Series A Preferred Stock is entitled to 5.6561 votes with respect to any and all
matters presented to our stockholders for their action or consideration. Except
as provided by law or by the provisions establishing any other series of
preferred stock, holders of our Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Preferred Stock vote together with the
holders of our Common Stock as a single class.
From June 6, 2003 through June 18, 2003, we issued an aggregate of
125,352 shares of our Series C Preferred Stock in private placements to certain
accredited and non-U.S. investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act of 1933, as amended (the "Securities
Act"). The gross proceeds of the offering were $3,133,800 as of June 18, 2003.
The securities were sold pursuant to exemptions from registration under the
Securities Act and we intend to register the shares under the Securities Act.
Subject to adjustment for dilution, each share of Series C Preferred
Stock is convertible into 5.6561 shares of Common Stock.
ITEM 6 SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data that
was derived from our financial statements:
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(in thousands except for per share data)
------------------------------------------------------------------------
Years Ended March 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ------------ ------------ ------------ -------------
Statement of Operations:
REVENUES ...................................... $ 1,609 $ 3,522 $ 1,355 $ 369 $ 267
--------------- ------------ ------------ ------------ -------------
EXPENSES:
Research and development ................... 2,570 3,958(6) 6,695 10,255(4) 739
General and administrative ................. 3,732(8) 2,928 4,719(5) 1,732 2,685(1)
Equity in loss of joint venture ............ 135
--------------- ------------ ------------ ------------ -------------
Total expenses ....................... 6,302 6,886 11,414 12,122 3,424
LOSS FROM OPERATIONS .......................... (4,693) (3,364) (10,059) (11,753) (3,157)
--------------- ------------ ------------ ------------ -------------
OTHER INCOME(EXPENSE):
Interest income ............................ 14 41 199 319 6
Interest expense ........................... (68)
Loss on sales of investment
securities - net ......................... (3)
Cancelled offering costs ...................
Gain on extinguishment of debt 1,428(2)
--------------- ------------ ------------ ------------ -------------
Other income (expense) - net ......... 14 41 196 319 1,366
--------------- ------------ ------------ ------------ -------------
NET LOSS ...................................... (4,679) (3,323) (9,863) (11,434) (1,791)
CONVERTIBLE PREFERRED STOCK DIVIDENDS ......... (452) (938)(7)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS ................. 3,575(3)
NET (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (5,131) $ (4,261) $ (9,863) $ (11,434) $ 1,784
============== =========== =========== ============ =============
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(in thousands except for per share data)
------------------------------------------------------------------------
Years Ended March 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ------------ ------------ ------------ -------------
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net loss ...................................... (0.71) (0.55) (1.78) (2.27) (0.73)
Convertible preferred stock dividends ......... (0.07) (0.16)
Redeemable preferred stock conversion, premium
amortization and dividends ................. 1.46
--------------- ------------ ------------ ------------ -------------
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS ........ $ (0.78) $ (0.71) $ (1.78) $ (2.27) $ 0.73
============== ============ ============ ============ =============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC
AND DILUTED LOSS PER SHARE ................. 6,565,495 6,011,416 5,545,190 5,036,405 2,446,297
-42-
(in thousands except for per share data)
------------------------------------------------------------------------
Years Ended March 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------------- ------------ ------------ ------------ -------------
Balance Sheet Data:
Cash and cash equivalents ..................... 112 2,038 2,098 4,596
Restricted funds on deposit ................... 2,740 602 3,813
Investment securities available for sale ...... 1,361
Working capital (deficiency) .................. (115) 1,567 663 4,402 (992)
Total assets .................................. 6,610 2,876 6,168 6,224 552
Convertible preferred stock ................... 5,138 4,032
Deficit accumulated during
development stage .......................... (42,167) (37,036) (32,775) (22,912) (11,478)
Stockholders' equity (deficiency) ............. 3,192 1,736 859 4,620 (448)
--------------------
(1) Includes $2,220 of costs related to the issuance of warrants to purchase
750,000 shares of Common Stock to RADE Management Corporation as compensation
for management consulting, market analysis and strategic advisory services.
(2) See Note 10 to Notes to Financial Statements for discussion on the
extraordinary gain on extinguishment of debt.
(3) Includes $3,713 of benefit related to the difference between the carrying
value of the redeemable preferred stock and the estimated fair value of shares
of Common Stock exchanged which was credited to deficit accumulated during the
development stage upon conversion (see Note 10 to Notes to Financial
Statements).
(4) Includes $6,113 of research and development costs related to the acquisition
of rights to technology and dications which were acquired through the issuance
of 611,250 shares of Common Stock (see Note 8 to Notes to Financial Statements).
(5) Includes $1,288 of costs related to the issuance of warrants to purchase
300,000 shares of Common Stock as compensation for financial consulting services
(see Note 7 to Notes to Financial Statements).
(6) Includes $1,159 credit to (reduction in) research and development costs for
the settlement of certain disputed costs previously expensed during the year
ended March 31, 2000 (see Note 8 to Notes to Financial Statements).
(7) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(8) Includes $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; and $188 of costs related to
the issuance of 40,000 shares of Common Stock to
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The Gabriele Group, L.L.C., for assistance with respect to management
consulting, strategic planning, public relations and promotions.
-44-
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a pharmaceutical company focused on the development and
commercialization of oral drugs to treat infectious diseases. We have
development programs that include fungal infections, Malaria, Tuberculosis,
Hepatitis C, Pneumocystis carinii pneumonia and tropical medicine diseases,
including African sleeping sickness (Trypanosomiasis) and Leishmaniasis. We hold
worldwide patents, patent applications, licenses and rights to license worldwide
patents, patent applications and technologies from a scientific consortium and
exclusive rights to commercialize products from patents and licenses that are
integral to our business.
Since our formation in October 1984, we have engaged in research and
development programs, expanding our network of scientists and scientific
advisors, licensing technology agreements and advancing the commercialization of
the dication technology platform. We use the expertise and resources of
strategic partners and third parties in a number of areas, including (i)
laboratory research, (ii) pre-clinical and human clinical trials and (iii)
manufacture of pharmaceutical drugs. We have licensing and exclusive
commercialization rights to a dicationic anti-infective pharmaceutical platform
and are developing drugs intended for commercial use based on that platform.
Dication pharmaceutical drugs work by blocking life-sustaining enzymes from
binding to the key sites in the "minor groove" of an organism's DNA, thereby
killing the infectious organisms that cause fungal, parasitic, bacterial and
viral diseases. The key site on an organism's DNA is an area where enzymes
interact with the infectious organism's DNA as part of their normal life cycle.
Structurally, dications are chemical molecules that have two positively charged
ends held together by a chemical linker. The composition of the dications, with
positive charges on both ends (shaped like molecular barbells) allows dications
to bind (similar to a band-aid) to the negatively charged key sites of an
infectious microorganism's DNA. The bound dications block the life-sustaining
enzymes from attaching to the DNA's key sites, thereby killing the infectious
organism. We do not have any commercially available products nor do we expect to
have any commercially available products until after March 31, 2004, if at all.
With the exception of certain research funding agreements and
certain grants, we have not generated any revenue from operations. For the
period from inception (October 15, 1984) to March 31, 2003, we incurred
cumulative net losses of approximately $43,147,000. We have incurred additional
losses since such date and we expect to incur additional operating losses for
the foreseeable future. We expect that our cash sources for at least the next
year will be limited to:
o research grants, such as Small Business Technology Transfer
Program ("STTR") grants and Small Business Innovation Research
("SBIR") grants;
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o payments from The University of North Carolina at Chapel Hill,
charitable foundations and other research collaborators under
arrangements that may be entered into in the future; and
o borrowing funds or the issuance of securities.
The timing and amounts of grant and payment revenues, if any, will
likely fluctuate sharply and depend upon the achievement of specified
milestones, and results of operations for any period may be unrelated to the
results of operations for any other period.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the
Notes to the Financial Statements. These financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these 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 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.
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 expense, 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.
Stock Based Compensation
We use the intrinsic-value method of accounting for stock based
awards granted to employees in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We record stock based
compensation expense for non-employees at the fair value of the options granted
in accordance with Statement of Financial Accounting Standards No. 123 ("SFAS
123") and Emerging Issues Task Force No. 96-18 ("EITF 96-18"). The fair value of
options granted to non-employees is estimated using a Black-Scholes option
valuation model. The model considers a number of factors, including the market
price and volatility of our common stock at the date of measurement. We
periodically re-measure the compensation expense for options granted to
non-employees as the underlying options vest. The compensation
-46-
expense related to all grants is being amortized using the graded vesting
method, in accordance with SFAS 123, EITF 96-18 and FASB Interpretation No. 28,
over the vesting period of each respective stock option.
We believe that the accounting policies affecting these estimates
are our critical accounting policies.
Liquidity and Capital Resources
From inception through March 31, 2003, we have financed our
operations with:
o proceeds from various private placements of debt and equity
securities, an initial public offering and other cash contributed
from stockholders, which in the aggregate raised approximately
$28,755,000,
o payments from research agreements, foundation grants and SBIR
grants and STTR program grants of approximately $8,843,000, and
o the use of stock, options and warrants in lieu of cash
compensation.
From June 6, 2003 through June 18, 2003, we issued an aggregate of
125,352 shares of our Series C Preferred Stock in private placements to certain
accredited and non-U.S. 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 we intend to register
the shares under the Securities Act. The gross proceeds of the offering were
$3,133,800.
On September 25, 2002 and October 28, 2002, we issued an aggregate
of 76,725 shares of our Series Convertible B Preferred Stock and 191,812 related
warrants in private placements to certain accredited and non-U.S. 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 Convertible Preferred Stock and 400,250
related warrants in private placements to certain accredited and non-U.S.
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 will not vest, and therefore will not be exercisable, unless our Common
Stock meets or exceeds the respective exercise price for 20 consecutive
-47-
trading days prior to January 31, 2003. The offerings raised approximately
$3,849,000 of additional net equity.
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 an initial public stock offering ("IPO"), resulting in net proceeds of
approximately $9,173,000. The underwriters received warrants to purchase 100,000
additional shares of Common Stock at $16.00 per share. Those warrants expired on
April 30, 2003. We used $110,000 of the net proceeds of the IPO to repay amounts
due to the State of Illinois and Northwestern University. Substantially all of
the remaining net proceeds of the IPO were used to fund our research and
development efforts, including clinical and pre-clinical studies. Any net
proceeds not applied to our research and development efforts were used for
working capital and general corporate purposes, including hiring additional
employees.
Our cash resources have been used to finance research and
development, including sponsored research, capital expenditures, expenses
associated with the efforts of the 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 pre-clinical and clinical trials, increased
administrative expenses to support research and development operations and
increased capital expenditures for expanded research capacity, various equipment
needs and facility improvements or relocation.
As of March 31, 2003, we had federal net operating loss
carryforwards of approximately $33,639,000, which expire from 2006 through 2023.
We also had approximately $30,967,000 of stated net operating loss carryforwards
as of March 31, 2003, which expire from 2009 through 2023, 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 $920,000 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, 2003, we had federal income
tax credit carryforwards of approximately $701,000, which expire from 2008
through 2023.
We believe our existing resources, but not including proceeds from
any grants we may receive, are sufficient to meet our planned expenditures
through June 2004, although there can be no assurance that we will not require
additional funds. In addition, we have received approximately $1 million so far
and anticipate the receipt of approximately an additional $728,000 payment
(restricted funds) under the Clinical Research Subcontract with the University
of North Carolina at Chapel Hill ("UNC") (funded by The Gates Foundation) in
calendar year 2003. Our working capital requirements will depend upon numerous
factors, including the progress of our research and development programs (which
may vary as product candidates are added or abandoned), pre-clinical testing and
clinical trials, achievement of regulatory milestones, our corporate 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, and establish new,
collaborative arrangements with other
-48-
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 product candidates and otherwise to meet
our business objectives.
Results of Operations
Year Ended March 31, 2003 Compared with Year Ended March 31, 2002
Revenues under collaborative research and development agreements
were approximately $1,609,000 and $3,522,000 in the years ended March 31, 2003
and 2002, respectively. In 2003, we recognized revenues of approximately
$1,389,000 relating to a clinical research subcontract agreement with UNC funded
by a grant that UNC received from The Gates Foundation, compared to
approximately $2,946,000 in 2002. Revenue in 2003 from the Confidentiality,
Testing and Option Agreement with Neurochem was $150,000. We also recognized
approximately $70,000 from SBIR grants in 2003, while in 2002 there were grant
revenues of approximately $576,000 through STTR and SBIR programs from the NIH.
Research and development expenses decreased from approximately
$3,958,000 in 2002 to approximately $2,570,000 in 2003. The decrease in research
and development costs of approximately $1,388,000 is primarily attributable to
the decrease in the revenues relating to the clinical research subcontract
agreement between the Company and UNC and the decrease in the grant revenues
from SBIR grants from the NIH.
General and administrative expenses were approximately $3,732,000 in
2003, compared to approximately $2,928,000 in 2002. In the year ended 2003,
there were general and administrative compensation expenses of approximately
$758,000 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 commercializing
Company products in the PRC.
We incurred a net loss of approximately $4,679,000 for the year
ended March 31, 2003, as compared to a net loss of approximately $3,323,000 for
the year ended March 31, 2002.
In 2002 and 2003, respectively, we also charged deficit accumulated
during the development stage of approximately $938,000 and $452,000 in
convertible preferred stock dividends.
Year Ended March 31, 2002 Compared with Year Ended March 31, 2001
Revenues under collaborative research and development agreements
were approximately $3,522,000 and $1,355,000 in the years ended March 31, 2002
and 2001, respectively. In 2002, we recognized revenues of approximately
$2,946,000 relating to a clinical research subcontract agreement with UNC funded
by a grant that UNC received from The Gates Foundation, compared to
approximately $791,000 in 2001. We also recognized approximately $576,000 from
SBIR grants in 2002, while in 2001 there were grant revenues of approximately
$564,000 through STTR and SBIR programs from the NIH.
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Research and development expenses decreased from approximately
$6,695,000 in 2001 to $3,958,000 in 2002. The decrease is primarily attributable
to an April 20, 2001, settlement agreement with Pharm-Eco Laboratories, Inc.
("Pharm-Eco"), whereby we received from Pharm-Eco a cash payment of $1,000,000
and certain accounts payable obligations to Pharm-Eco of approximately $159,000
were forgiven. The cash payment received and the accounts payable obligation
forgiven were recorded as a credit to (reduction of) research and development
expenses because we had previously expensed to research and development the
estimated fair value of the shares of our Common Stock received by Pharm-Eco at
the time of our initial public offering on April 26, 1999, and the accounts
payable obligations. We had significant expenses relating to pre-clinical
studies required for regulatory filings in the year ended March 31, 2001, which
were not incurred in 2002.
General and administrative expenses were approximately $2,928,000 in
2002, compared to approximately $4,719,000 in 2001. In the year ended March 31,
2001, there were general and administrative compensation expenses of
approximately $1,308,000 related to services by Stonegate Securities, Inc. and
The Kriegsman Group for warrants issued for advisory services for which there
was no comparable charge in 2002. The remaining reduction in general and
administrative expenses was a decrease in legal fees of approximately $419,000.
We incurred a net loss of approximately $3,323,000 for the year
ended March 31, 2003, as compared to a net loss of approximately $9,863,000 for
the year ended March 31, 2002.
In 2002, we also charged deficit accumulated during the development
stage of approximately $938,000 in convertible preferred stock dividends.
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.
Unaudited Selected Quarterly Information
The following table sets forth certain unaudited selected quarterly
information:
-50-
Fiscal Quarters Ended
(in thousands except for per share data)
------------------------------------------------------
2003
------------------------------------------------------
March 31, December 31, September 30, June 30,
2003 2002 2002 2002
--------- ------------ ------------- --------
Statements of Operations Data:
REVENUES ................................... $585 $234 $360 $430
--------- ------------ ------------- --------
EXPENSES:
Research and development ................ 706 402 711 751
General and administrative .............. 673 724 883(4) 1,452(3)
Total expenses ................... 1,379 1,126 1,594 2,203
LOSS FROM OPERATIONS ....................... (794) (892) (1,234) (1,773)
--------- ------------ ------------- --------
OTHER INCOME(EXPENSE):
Interest income
1 3 2 8
--------- ------------ ------------- --------
LOSS BEFORE EXTRAORDINARY ITEM ............. (793) (889) (1,232) (1,765)
--------- ------------ ------------- --------
CONVERTIBLE PREFERRED STOCK DIVIDENDS ...... (89) (96) (207) (60)
--------- ------------ ------------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(882) $(985) $(1,439) $(1,825)
--------- ------------ ------------- --------
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Fiscal Quarters Ended
(in thousands except for per share data)
-------------------------------------------------------
2002
------------------------------------------------------
March 31, December 31, September 30, June 30,
2002 2001 2001 2001
--------- ------------ ------------- --------
Statements of Operations Data:
REVENUES ................................... $607 $955 $837 $1,123
--------- ------------ ------------- --------
EXPENSES:
Research and development ................ 970 1,206 1,237 545(1)
General and administrative .............. 558 689 712 969
Total expenses ................... 1,528 1,895 1,949 1,514
LOSS FROM OPERATIONS ....................... (921) (940) (1,112) (391)
--------- ------------ ------------- --------
OTHER INCOME(EXPENSE):
Interest income
2 2 11 26
--------- ------------ ------------- --------
NET LOSS ................................... (919) (938) (1,101) (365)
CONVERTIBLE PREFERRED STOCK DIVIDENDS ...... (938)(2)
--------- ------------ ------------- --------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,857) $(938) $(1,101) $(365)
--------- ------------ ------------- --------
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Fiscal Quarters Ended
(in thousands except for per share data)
------------------------------------------------------
2003
------------------------------------------------------
March 31, December 31, September 30, June 30,
2003 2002 2002 2002
--------- ------------ ------------- --------
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss ................................... $(0.11) $(0.14) $(0.20) $(0.29)
Convertible preferred stock dividends ...... (0.01) (0.02) (0.03) (0.01)
--------- ------------ ------------- --------
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS ..... $(0.12) $(0.16) $(0.23) $(0.30)
========= ============ ============= ========
Fiscal Quarters Ended
(in thousands except for per share data)
------------------------------------------------------
2002
------------------------------------------------------
March 31, December 31, September 30, June 30,
2002 2001 2001 2001
--------- ------------ ------------- --------
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss ................................... $(0.15) $(0.16) $(0.18) $(0.06)
Convertible preferred stock dividends ...... (0.16)
--------- ------------ ------------- --------
BASIC AND DILUTED NET LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS ..... $(0.31) $(0.16) $(0.18) $(0.06)
========= ============ ============= ========
-------------
(1) Includes $1,159 credit to (reduction in) research and development costs
for the settlement of certain disputed costs previously expensed during
the year ended March 31, 2001 (see Note 8 to Notes to Financial
Statements).
(2) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(3) Includes $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.
(4) Includes $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.
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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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements appear following Item 16 of this report and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-53-
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding Directors and Executive Officers
The table below sets forth the names and ages of the directors and
executive officers of the Company as of June 20, 2003, 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.
Name Age Position(s)
------------------------ ------ -----------------------------------------------
T. Stephen Thompson 56 Director, President and
Chief Executive Officer
Cecilia Chan 40 Director and Executive Vice President
Gary C. Parks 53 Treasurer, Secretary and Chief
Financial Officer
Harvey R. Colten, MD 64 Director
Eric L. Sorkin 43 Director
Frederick W. Wackerle 64 Director
T. Stephen Thompson, President, Chief Executive Officer and
Director. Mr. Thompson has served as a Director since 1991. He joined Immtech in
April 1991 from Amersham Corporation, where he was President and Chief Executive
Officer. He was responsible for Amersham Corporation's four North American
divisions: Life Sciences, Radiopharmaceuticals, Diagnostics and Quality and
Safety Products. In addition, he had direct responsibility for the Clinical
Reagent (in vitro diagnostic) Division in the United Kingdom. He was employed by
Amersham Corporation from 1986 to 1991. Mr. Thompson has 20 years' experience in
healthcare, with previous positions as President of a small diagnostic start-up,
General Manager of the Infectious Disease and Immunology Business Unit in the
Diagnostic Division of Abbott Laboratories from 1981 to 1986, and Group
Marketing Manager for the Hyland Division of Baxter International Inc. from 1978
to 1981. Mr. Thompson is a member of the Board of Directors of Matritech, Inc.
(NASDAQ: NMPS). Mr. Thompson holds a B.S. from the University of Cincinnati and
an MBA from Harvard University.
Cecilia Chan, Executive Vice President and Director. Ms. Chan has 18
years of experience in making investments and business development. She began
working on Immtech's growth strategy in 1998 and spearheaded Immtech's initial
public offering in April 1999. Ms. Chan is responsible for strategic
development, creating joint ventures and licensing agreements, fund raising and
directing the Company's uses of capital resources as it advances through its
milestones and various growth stages. Prior to joining Immtech, Ms. Chan was a
Vice President at Dean Witter Realty, Inc. until 1993. During her eight years at
that firm, Ms. Chan completed over $500 million in investments and oversaw and
managed public partnerships having assets in excess of $800 million. Since 1993,
Ms. Chan has developed and funded investments in the United States and the
People's Republic of China. She graduated from New York University in 1985 with
a Bachelor of Science degree in International Business.
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Gary C. Parks, Treasurer, Secretary and Chief Financial Officer. Mr.
Parks joined Immtech 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.
Harvey Colten, MD, Director. Dr. Colten is currently Vice President
and Senior Associate Dean for Translational Research at Columbia University
Health Sciences Division and College of Physicians and Surgeons. Prior to this,
he served as Chief Medical Officer at iMetrikus, Inc., a healthcare Internet
company focused on improving the communication between the patient, physician
and the medical industry from 2000 until 2002, and prior to that he was the Dean
of the Medical School and Vice President for Medical Affairs at Northwestern
University from 1997 to 2000. He previously served as the Harriet B. Spoehrer
Professor and Chair of the Department of Pediatrics and Professor of Molecular
Microbiology at Washington University School of Medicine, St. Louis, Missouri,
whose faculty he joined in 1986. He earned a B.A. at Cornell University in 1959,
an MD from Western Reserve University in 1963, and an M.A. (honorary) from
Harvard in 1978. Following his clinical training, he was a researcher at the
National Institutes of Health from 1965 to 1970. In 1970, he was appointed to
the faculty at the Harvard Medical School, where he was named Professor of
Pediatrics in 1979 and Chief of the Division of Cell Biology, Pulmonary
Medicine, and Director of the Cystic Fibrosis Program at Children's Hospital
Medical Center, Boston. He is a member of the Institute of Medicine and was
Vice-Chair of its Council. He is a member of the American Society for Clinical
Investigation, the Society for Pediatric Research, the Association of American
Physicians, the American Pediatric Society, the American Association of
Immunologists (former secretary and treasurer), and the American Society for
Biochemistry and Molecular Biology. He is also a Fellow of the American
Association for the Advancement of Science, the American Academy of Allergy and
Immunology and the American Academy of Pediatrics. Dr. Colten is a Diplomat of
the American Board of Pediatrics, served on the American Board of Allergy and
Immunology, was a member of the National Heart, Lung, and Blood Institute
Advisory Council, and serves on the Board of Directors of the Oasis Institute
and the March of Dimes Scientific Advisory Council, in addition to many other
Federal and private health groups that advise on scientific and policy issues.
Dr. Colten also served as Vice Chairman of the Board of Directors of Parents as
Teachers National Center. He has been on editorial boards and advisory
committees of several leading scientific and medical journals, including the New
England Journal of Medicine, Journal of Clinical Investigation, Journal of
Pediatrics, Journal of Immunology, Annual Review of Immunology, Proceedings of
the Association of American Physicians and American Journal of Respiratory Cell
and Molecular Biology.
Eric L. Sorkin, Director. Mr. Sorkin is a private investor. Prior to
1994, Mr. Sorkin worked for eleven years at Dean Witter Realty Inc., a wholly
owned subsidiary of Morgan Stanley, which grew to hold an investment portfolio
of real estate and other assets of over $3 billion. He became a Managing
Director in 1988 and was responsible for the acquisition, structuring and debt
placement of various investments including real estate, fund management and
asset-backed securities. Mr. Sorkin managed Dean Witter Realty's retail
(shopping center) portfolio of over two million square feet, and participated in
the development
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of office, residential, industrial and retail property and in the acquisition of
over five million square feet of properties. He is a graduate of Yale University
with a Bachelor of Arts degree in Economics.
Frederick W. Wackerle, Director. Mr. Wackerle is an author, private
investor and President of Fred Wackerle, Inc. He has been an advisor to Chief
Executive Officers ("CEOs") and boards and an executive search consultant for
the past 35 years. Mr. Wackerle specializes in advising corporate boards on
management succession and the recruiting of CEO positions. In the past ten
years, he devoted a significant amount of his time to investing in and advising
biotechnology companies on succession planning, and recruited CEO candidates and
board members for companies that include Biogen, Inc., ICOS Corp., Amylin
Pharmaceuticals, Inc., Enzon, Inc., Medtronic Inc. and Ventana Medical Systems.
Mr. Wackerle frequently writes management articles for Chicago Crain's Business,
recently completed a book on management succession entitled, "The Right
CEO-Straight Talk About Making CEO Selection Decisions" (Jossey-Bass), and is a
graduate of Monmouth College, where he has been active on their Board of
Trustees. He is also a board member of The Rehabilitation Institute of Chicago.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and 10% stockholders of a registered class of equity
securities of the Company to file reports of ownership and reports of changes in
ownership of the Company's Common Stock and other equity securities with the
SEC. Directors, executive officers and 10% stockholders are required to furnish
the Company 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 fiscal
2002, our directors, executive officers and 10% stockholders complied with all
Section 16(a) filing requirements applicable to them, except for two reports
disclosing one transaction each which were inadvertently filed late in fiscal
2003 by Mr. Chan Kon Fung, a 10% stockholder of Common Stock of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding the
compensation of our Chief Executive Officer, our Executive Vice President and
our Chief Financial Officer for the fiscal years ended March 31, 2001, 2002 and
2003. Except as set forth below, no other compensation was paid to these
individuals during the years indicated.
-56-
Long-Term
Annual Compensation
Compensation Awards
--------------- ------------------
Securities
Underlying
Year Salary ($) Options/SARs (#)
------ --------------- ------------------
T. Stephen Thompson 2003 $ 150,000 75,000
President, Chief Executive Officer 2002 $ 150,000 0
and Director 2001 $ 150,000 0
Cecilia Chan 2003 $ 120,000 50,000
Executive Vice President and 2002 $ 120,000 0
Director 2001 $ 75,000 0
Gary C. Parks 2003 $ 143,250(1) 25,000
Secretary, Treasurer and Chief 2002 $ 125,000 10,000
Financial
Officer 2001 $ 125,000 0
(1) Includes a bonus of $18,250.
Stock Option Grants and Exercises During the Fiscal Year Ended March 31, 2003
The following table sets forth information concerning stock option
grants made during the fiscal year ended March 31, 2003, to the executive
officers of the Company named in the "Summary Compensation Table" above. This
information is for illustration purposes only and is not intended to predict the
future price of our Common Stock. The actual future value of the options will
depend on the market value of the Common Stock.
-57-
STOCK OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 2003
Individual Grants Potential Realizable Value At
-------------------------------------------------------------------------------- Assumed Annual Rates of Stock
Price Appreciation For Option
Term
-----------------------------
Number of Percent of
Securities Total
Underlying Options/SARs Exercise
Options/SARs Granted to Price Expiration
Name Granted Employees (%) ($/SH) Date 5% ($) 10% ($)
----------------------- ---------------- ---------------- ----------- ------------ ---------------- -------------
T. Stephen Thompson 75,000 36.95 2.55 12/23/2012 311,526 496,053
Cecilia Chan 50,000 24.63 2.55 12/23/2012 207,684 330,702
Gary C. Parks 25,000 12.32 2.55 12/23/2012 103,842 165,351
The following table sets forth certain summary information
concerning exercised and unexercised options and warrants to purchase Common
Stock held by the executive officers named in the "Summary Compensation Table"
as of March 31, 2003.
STOCK OPTION AND WARRANT EXERCISES IN FISCAL YEAR
ENDED MARCH 31, 2003, AND FISCAL YEAR-END OPTION/WARRANT VALUES
Number of Unexercised Value of Unexercised
Options/Warrants at Fiscal In-The-Money Options/Warrants
Year End (#) at Fiscal Year End ($)
-------------------------------- -------------------------------
Shares
Acquired on Realized
Exercise (#) Value ($) Exercisable Unexercisable Exercisable Unexercisable
--------------- -------------- -------------- ----------------- -------------- ----------------
T. Stephen Thompson 0 0 34,318 88,749 87,211(1) 134,061(2)
Cecilia Chan 0 0 231,479 45,833 8,126(3) 89,374(4)
Gary C. Parks 0 0 21,835 28,360 43,242(5) 44,686(6)
--------------------------------------------------------------------------------------------------------------------------
(1) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $1.53 multiplied by the number of shares underlying the
options.
(2) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $2.55 multiplied by the number of shares underlying the
options.
(3) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $2.55 multiplied by the number of shares underlying the
options.
-58-
(4) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $2.55 multiplied by the number of shares underlying the
options.
(5) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $1.84 multiplied by the number of shares underlying the
options.
(6) Based on the March 31, 2003, value of $4.50 per share, minus the average per
share exercise price of $2.55 multiplied by the number of shares underlying the
options.
Director Compensation
We compensate non-employee members of the Board of Directors for
their service as Board members through the grant to each such director of 15,000
options to purchase our Common Stock upon joining the Board. In addition, each
non-employee director will receive 55,000 options for each subsequent year of
Board service and 1,000 additional options for each year of service on each
Board committee. Such options are generally granted at fair market value on the
date of grant, vest ratably over 3 years and expire 5 years from the date of
grant. We also reimburse the directors for out-of-pocket expenses incurred with
their service as directors.
Employment Agreements
We entered into an employment agreement with T. Stephen Thompson in
1992, pursuant to which we retained Mr. Thompson as our President and Chief
Executive Officer for an annual base salary of $150,000 (subject to annual
adjustment by the Board), plus reimbursement for related business expenses. The
agreement, which includes certain confidentiality and non-disclosure provisions,
grants to Mr. Thompson the right to receive an annual bonus to be established by
the Board in an amount not to exceed 60% of Mr. Thompson's annual base salary
for the year and certain other fringe benefits. If we breach the agreement or
Mr. Thompson is terminated by us without cause, he is entitled to all payments
which he would otherwise accrue over the greater of nine months from the date of
termination or the remaining term under the agreement. Additionally, rights to
all options granted to Mr. Thompson pursuant to the agreement vest immediately
upon his termination without cause or a change of control. The term of Mr.
Thompson's agreement expired on May 11, 1999; however, the agreement is subject
to automatic renewal for successive one-year terms unless terminated by either
party upon 30 days' notice. Except for $12,500 paid to Mr. Thompson during the
fiscal year ended March 31, 1998, Mr. Thompson has waived any right to receive
salary due under his employment agreement prior to June 30, 1998. Beginning July
1, 1998, and continuing until April 30, 1999, Mr. Thompson agreed to accept
one-half of his annual salary as full satisfaction of our salary obligation
under his employment agreement. Mr. Thompson, effective May 1, 1999, has resumed
his full salary rate of $150,000 per annum under his employment agreement, but
will not be paid amounts previously waived.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee makes all compensation decisions.
The present members of the Compensation Committee are Frederick W. Wackerle,
Chairman, Harvey R. Colten and Eric L. Sorkin. No interlocking relationship
exists between our Board of Directors or
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Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our Common Stock as of June 16, 2003, 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
of Common Stock Percentage of
Beneficially Owned Outstanding Shares
Name and Address (1) of Common Stock
------------------------------------- --------------------- -------------------
T. Stephen Thompson (2) 407,610 shares 4.71%
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061
Cecilia Chan (3) 227,063 shares 3.16%
c/o Immtech International, Inc.
One North End Avenue, Ste. 1111
New York, NY 10282
Gary C. Parks (4) 50,748 shares 0.59%
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061
Harvey Colten, MD (5) 23,368 shares 0.27%
c/o Office of the Dean Columbia
University,
College of Physicians and Surgeons
630 West 168th Street
New York, NY 10032
Eric L. Sorkin (6) 296,114 shares 3.37%
c/o Immtech International, Inc.
One North End Avenue, Ste. 1111
New York, NY 10282
Frederick W. Wackerle(7) 80,941 shares 0.94%
3750 N. Lake Shore Drive
Chicago, IL 60613
All directors and executive 1,135,844 shares 12.26%
officers as a group (6 persons)
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Number of Shares
of Common Stock Percentage of
Beneficially Owned Outstanding Shares
Name and Address (1) of Common Stock
------------------------------------- --------------------- -------------------
Chan Kon Fung 1,200,000 shares 14.07%
Flat B, 16th Floor
132 Broadway
Mei Foo Sun Chuen
Kowloon, Hong Kong
James Ng (8) 452,800 shares 5.04%
c/o RADE Management Corporation
New York Mercantile Exchange
Box 415
New York, NY 10282
Donald F. Fitzgerald 517,000 shares 6.06%
7701 Fitzgerald Road
P.O. Box 75
Thurmont, MD 21788
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares beneficially owned by
them, subject to applicable community property laws.
(2) Includes (i) 287,209 shares of Common Stock; (ii) 45,249 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii) 12,500
shares of Common Stock issuable upon the conversion of Series B Preferred Stock;
(iv) 25,000 shares of Common Stock issuable upon the exercise of warrants as
follows: warrant to purchase 20,000 shares of Common Stock at $6.00 per share by
February 14, 2007 (only after the Series A Preferred Stock has been converted
and vested), and warrant to purchase 5,000 shares of Common Stock at $6.125 per
share by September 25, 2007; and (v) 37,652 shares of Common Stock issuable upon
the exercise of options as follows: vested option to purchase 8,872 shares of
Common Stock at $0.46 per share by March 21, 2006, vested option to purchase
14,195 shares of Common Stock at $1.74 per share by April 16, 2008, and the
vested portion of 14,585 shares of an option to purchase 75,000 shares of Common
Stock at $2.55 per share by December 24, 2012.
(3) Includes (i) 34,247 shares of Common Stock; (ii) 5,781 shares of Common
Stock issuable upon the conversion of Series B Preferred Stock; (iii) 227,312
shares of Common Stock issuable upon the exercise of warrants as follows: vested
warrant to purchase 51,923 shares of Common Stock at $6.47 per share by July 24,
2004, vested warrant to purchase 173,077 shares of Common Stock at $6.47 per
share by October 12, 2004, and vested warrant to purchase 2,312 shares of Common
Stock at $6.125 per share by September 25, 2007; and (iv) the vested portion of
9,723 shares of an option to purchase 50,000 shares of Common Stock at $2.55 per
share by December 24, 2012.
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(4) Includes (i) 21,762 shares of Common Stock; (ii) 2,262 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii) 1,000
shares of Common Stock issuable upon the exercise of warrants as follows:
warrant to purchase 1,000 shares of Common Stock at $6.00 per share by February
14, 2007 (only after the Series A Preferred Stock has been converted); and (iv)
25,724 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, the vested portion of 6,667 shares of an option to purchase
10,000 shares of Common Stock at $10.00 per share by July 19, 2011, and the
vested portion of 4,862 shares of an option to purchase 25,000 shares of Common
Stock at $2.55 per share by December 24, 2012.
(5) Includes (i) 1,088 shares of Common Stock; and (ii) 22,280 shares of Common
Stock issuable upon the exercise of options as follows: the vested portion of
17,224 shares of an option to purchase 20,000 shares of Common Stock at $10.50
per shares by December 28, 2005, the vested portion of 3,695 shares of an option
to purchase 7,000 shares of Common Stock at $4.75 per share by December 18,
2006, the vested portion of 1,361 shares of an option to purchase 7,000 shares
of Common Stock at $2.55 per share by December 24, 2007.
(6) Includes (i) 26,140 shares of Common Stock; (ii) 20,362 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii) 234,000
shares of Common Stock issuable upon the exercise of warrants as follows: vested
warrant to purchase 51, 923 shares of Common Stock at $6.47 per share by July
24, 2004, vested warrant to purchase 173,077 shares of Common Stock at $6.47 per
share by October 12, 2004, and vested warrant to purchase 9,000 shares of Common
Stock at $6.00 per share by February 14, 2007 (only after the Series A Preferred
Stock has been converted); and (iv) 15,612 shares of Common Stock issuable upon
the exercise of options as follows: the vested portion of 14,251 shares of an
option to purchase 27,000 shares of Common Stock at $4.75 per share by December
18, 2006, and the vested portion of 1,361 shares of an option to purchase 7,000
shares of Common Stock at $2.55 per share by December 24, 2007.
(7) Includes (i) 33,393 shares of Common Stock; (ii) 13,575 shares of Common
Stock issuable upon the conversion of Series A Preferred Stock; (iii) vested
warrant to purchase 6,000 shares of Common Stock at $6.00 per share by February
14, 2007 (only after the Series A Preferred Stock has been converted); and (iv)
27,973 shares of Common Stock issuable upon the exercise of options as follows:
the vested option to purchase 15,000 shares of Common Stock at $10.50 per share
by December 28, 2005, the vested portion of 11,612 shares of an option to
purchase 22,000 shares of Common Stock at $4.75 per share by December 18, 2006,
and the vested portion of 1,361 on an option to purchase 7,000 shares of Common
Stock at $2.55 per share by December 24, 2007.
(8) Includes (i) 2,800 shares of Common Stock; and (ii) 320,000 shares of Common
Stock issuable upon the exercise of warrants as follows: warrant to purchase
73,845 shares of Common Stock at $6.47 per share by July 24, 2004, and warrant
to purchase 246,155 shares of Common Stock at $6.47 per share by October 12,
2004. As beneficial owner of RADE Management Corporation ("RADE"), includes
130,000 shares of Common Stock issuable upon the exercise of warrants as
follows: warrant to purchase 30,000 shares of Common Stock at $6.47 per share by
July 24, 2004, and warrant to purchase 100,000 shares of Common Stock at $6.47
per share by October 12, 2004.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following related-party transactions are disclosed.
RADE Management Corporation
---------------------------
Immtech leases an office facility in New York, New York from RADE
Management Corporation ("RADE") on a month-to-month basis. During the years
ended March 31, 2001, 2002 and 2003, we paid approximately $102,000, $106,000
and $106,000, respectively, for the use of the facility. In addition, during the
years ended March 31, 2001, 2002, and 2003, we reimbursed RADE approximately
$41,000, $18,000 and $0, respectively, for expenses paid on our behalf.
ITEM 14. CONTROLS AND PROCEDURES
Disclosure and Procedures
The Company maintains controls and procedures designed to ensure
that it is able to collect the information it is required to disclose in the
reports it files with the SEC, and to process, summarize and disclose this
information within the time periods specified in the rules of the SEC. The
Company's Chief Executive and Chief Financial Officers are responsible for
establishing and maintaining these procedures and, as required by the rules of
the SEC, evaluate their effectiveness. Based on their evaluation of the
Company's disclosure controls and procedures, which took place as of a date
within 90 days of the filing date of this report, the Chief Executive and Chief
Financial Officers believe that these procedures are effective to ensure that
the Company is able to collect, process and disclose the information it is
required to disclose in the reports it files with the SEC within the required
time periods.
Internal Controls
The Company mains a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
generally accepted accounting principles and (ii) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of the Company's
internal controls by the Chief Executive and Chief Financial Officers, there
have been no significant changes in such controls or in other factors that could
have significantly affected those controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents the aggregate fees billed for
professional services rendered by Deloitte & Touche LLP in 2002 and 2003. Other
than as set forth below, no
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professional services were rendered or fees billed by Deloitte & Touche LLP
during 2002 or 2003.
2002 2003
---- ----
Audit Fees (1)................................. $127,972 $92,681
Audit-Related Fees (2) ........................ $25,900 $20,040
Tax Fees (3)................................... $4,600 $4,200
TOTAL.......................................... $158,472 $116,921
------------------------
(1) Audit fees consist of professional services rendered for the audit of the
Company's annual financial statements and the reviews of the quarterly
financial statements.
(2) Audit-related fees include fees related to assurance and related services.
This category also includes fees for issuance of comfort letters, consents
and assistance with and review of documents filed with the SEC.
(3) Tax fees consist of fees for services rendered to the Company for tax
compliance, tax planning and advice.
All work performed by Deloitte & Touche as described above under the
caption Audit Fees for the fiscal year ended March 31, 2003, has been approved
by the Audit Commitee.
PART IV.
ITEM 16. 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 Form 10-K:
1. Financial Statements
The 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.
3. Exhibits
The information called for by this paragraph is contained in the
Index to Exhibits of this Form 10-K, which is incorporated herein by reference.
(b) Reports on Form 8-K.
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During the quarter ended March 31, 2003, the Company filed Current
Reports on Form 8-K with the Securities and Exchange Commission on each of
January 15, 2003 and January 23, 2003.
The Report on Form 8-K filed on January 15, 2003 reported under Item
5 of Form 8-K our purchase of an 80% interest in Lenton Fibre Optics Development
Limited, a Hong Kong company. Pursuant to Item 7 of Form 8-K, the Company also
filed unaudited pro forma financial information reflecting the historical
financial position of the Company, with pro forma adjustments as if the purchase
had closed on September 30, 2002.
The Report on Form 8-K filed on January 23, 2003 was filed to
announce the Company's receipt of a $2.1 million advance payment of a grant to
further support the clinical development of our drug DB289 to treat African
sleeping sickness and was reported under Item 5 of Form 8-K.
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Consolidated Financial Statements of Immtech International, Inc.
Page
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2002 AND 2003,
FOR THE YEARS ENDED MARCH 31, 2001, 2002 AND 2003
AND FOR THE PERIOD FROM OCTOBER 15, 1984 (DATE OF
INCEPTION) TO MARCH 31, 2003 (UNAUDITED):
Balance Sheets F-2
Statements of Operations F-3
Statements of Stockholders' Equity (Deficiency
in Assets) F-4 - F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: June 27, 2003 By: /s/ T. Stephen Thompson
----------------------------------- ---------------------------------
T. Stephen Thompson
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ T. Stephen Thompson June 27, 2003
--------------------------------- ----------------------------
T. Stephen Thompson
Chief Executive Officer and
President
(Principal Executive Officer)
/s/ Gary C. Parks June 27, 2003
--------------------------------- ----------------------------
Gary C. Parks
Treasurer, Secretary and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Cecilia Chan June 27, 2003
--------------------------------- ----------------------------
Cecilia Chan
Director
/s/ Harvey Colten, MD June 27, 2003
--------------------------------- ----------------------------
Harvey Colten, MD
Director
/s/ Eric L. Sorkin June 27, 2003
--------------------------------- ----------------------------
Eric L. Sorkin
Director
/s/ Frederick W. Wackerle June 27, 2003
--------------------------------- ----------------------------
Frederick W. Wackerle
Director
CERTIFICATIONS
I, T. Stephen Thompson, certify that:
1. I have reviewed this annual report on Form 10-K of Immtech International,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: June 27, 2003
/s/ T. Stephen Thompson
----------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
I, Gary C. Parks, certify that:
1. I have reviewed this annual report on Form 10-K of Immtech International
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the periods covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: June 27, 2003
/s/ Gary C. Parks
---------------------------------
Gary C. Parks
Secretary, Treasurer and
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3.1 (2) Certificate of Incorporation of the Company, as amended
3.2 (8) By-laws of the Company, with amendment
4.1 (3) Form of Common Stock Certificate
4.2 (2) Warrant Agreement relating to the Underwriters' Warrants
4.3 (2) Warrant Agreement, dated July 24, 1998, by and between the
Company and RADE Management Corporation
4.4 (2) Warrant Agreement, dated October 12, 1998, by and between
the Company and RADE Management Corporation
4.5 (8) Warrant Agreement, dated March 15, 2001, by and between
the Company and The Kriegsman Group
4.6 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Griffith Shelmire Partners, Inc.
4.7 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Scott R. Griffith
4.8 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Jesse B. Shelmire
4.9 (9) Certificate of Designation for February 14, 2002 Private
Placement
4.10(9) Stock Purchase Warrant, dated February 14, 2002 for
February 14, 2002 Private Placement
4.11 (11) Certificate of Designation for June 2003 Private Placement
10.1 (1) Letter Agreement, dated January 15, 1997, by and between
the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.1 (1) Consulting Agreement, dated May 15, 1998, by and between
the Company and RADE Management Corporation
10.2 (1) 1993 Stock Option and Award Plan
10.3 (6) 2000 Stock Option and Award Plan
10.4 (1) Letter Agreement, dated May 29, 1998, between the Company
and Franklin Research Group, Inc.
10.5 (1) Indemnification Agreement, dated June 1, 1998, between the
Company and RADE Management Corporation
10.6 (1) Letter Agreement, dated June 24, 1998, between the
Company and Criticare Systems, Inc.
10.7 (1) Letter Agreement, dated June 25, 1998, between the
Company and Criticare Systems, Inc.
10.8 (2) Amendment, dated January 15, 1999, to Letter Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.9 (5) Office Lease, dated August 26, 1999, by and between the
Company and Arthur J. Rogers & Co.
10.10 (8) License Agreement, dated August 25, 1993, by and between
the University of North Carolina at Chapel Hill and
Pharm-Eco Laboratories, Inc.
10.11 (8) Assignment Agreement, dated as of March 27, 2001, by and
between the Company and Pharm-Eco Laboratories, Inc.
10.12 (8) Clinical Research Subcontract, dated as of March 29,
2001, by and between The University of North Carolina at
Chapel Hill and the Company
10.13 (1) Material Transfer and Option Agreement, dated March 23,
1998, by and between the Company and Sigma Diagnostics,
Inc.
10.14 (1) License Agreement, dated March 10, 1998, by and between
the Company and Northwestern University
10.15 (1) License Agreement, dated October 27, 1994, by and between
the Company and Northwestern University
10.16 (1) Assignment of Intellectual Properties, dated June 29,
1998, between the Company and Criticare Systems, Inc.
10.18 (1) Assignment Agreement, dated June 26, 1998, by and between
the Company and Criticare Systems, Inc.
10.19 (1) Assignment Agreement, dated June 29, 1998, by and between
the Company and Criticare Systems, Inc.
10.20 (1) International Patent, Know-How and Technology License
Agreement, dated June 29, 1998, by and between the Company
and Criticare Systems, Inc.
10.21 (1) Employment Agreement, dated 1992, by and between the
Company and T. Stephen Thompson
10.22 (2) Funding and Research Agreement, dated September 30, 1998,
by and among the Company, NextEra Therapeutics, Inc. and
Franklin Research Group, Inc.
10.23 (4) Two Year Plus 200% Lock-Up Agreement executed by James Ng
10.24 (4) Employment Agreement, dated 1998, by and between NextEra
and Lawrence Potempa
10.25 (7) Form of Regulation D Subscription Agreement for December
8, 2000 Private Placement
10.26 (7) Form of Regulation S Subscription Agreement for December
8, 2000 Private Placement
10.27 (9) Form of Regulation D Subscription Agreement for February
14, 2002 Series A Preferred Private Placement
10.28(9) Form of Regulation S Subscription Agreement for February
14, 2002 Series A Preferred Private Placement
10.29 (10) Amendment, dated January 28, 2002, to License Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.30 (11) Form of Regulation D Subscription Agreement for June 2003
Series C Preferred Private Placement
10.31 (11) Form of Regulation S Subscription Agreement for June 2003
Series C Preferred Private Placement
21.1 Subsidiaries of Registrant
23.1 Consent of Deloitte & Touche LLP
99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(1) Incorporated by Reference to our Registration Statement on Form SB-2
(Registration Statement No. 333-64393), as filed with the Securities and
Exchange Commission on September 28, 1998.
(2) Incorporated by Reference to Amendment No. 1 to our Registration Statement
on Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on February 11, 1999.
(3) Incorporated by Reference to Amendment No. 2 our Registration Statement on
Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on March 30, 1999.
(4) Incorporated by Reference to our Form 10-KSB for the fiscal year ended March
31, 1999 (File No. 001-14907), as filed with the Securities and Exchange
Commission on June 29, 1999.
(5) Incorporated by Reference to our Annual Report on Form 10-KSB for the fiscal
year ended March 31, 2000 (File No. 000-25669), as filed with the Securities
and Exchange Commission on June 26, 2000.
(6) Incorporated by Reference to Annex A to our Definitive Proxy Statement (File
No. 000-25669), as filed with the Securities and Exchange Commission on
August 25, 2000.
(7) Incorporated by Reference to our Quarterly Report on Form 10-QSB (File No.
000-25669), as filed with the Securities and Exchange Commission on February
14, 2001.
(8) Incorporated by Reference to our Annual Report on Form 10-KSB/A (File No.
000-25669), as filed with the Securities and Exchange Commission on June 29,
2001, as amended on July 6, 2001.
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(9) Incorporated by Reference to the Exhibits to our Form 8-K (File No.
000-25669), as filed with the Securities and Exchange Commission on
February 14, 2002.
(10) Incorporated by Reference to our Form 10-Q (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002, as
amended on June 10, 2002.
(11) Incorporated by Reference to the Exhibits to our Form 8-K (File No.
001-14907), as filed with the Securities and Exchange Commission on June
10, 2003.
IMMTECH INTERNATIONAL, INC.
AND SUBSIDIARY (A Development Stage
Enterprise)
Consolidated Financial Statements as of March 31, 2002
and 2003, for the Years Ended March 31, 2001, 2002 and
2003 and for the Period October 15, 1984 (Date of
Inception) to March 31, 2003 (Unaudited) and
Independent Auditors' Report
IMMTECH INTERNATIONAL, INC. and subsidiary
(A Development Stage Enterprise)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Immtech International, Inc.
(A Development Stage Enterprise):
We have audited the accompanying consolidated balance sheets of Immtech
International, Inc. (a development stage enterprise) and subsidiary (the
"Company") as of March 31, 2002 and 2003, and the related consolidated
statements of operations, stockholders' equity (deficiency in assets) and cash
flows for each of the three years in the period ended March 31, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2002
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
June 20, 2003
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND 2003
--------------------------------------------------------------------------------
ASSETS 2002 2003
CURRENT ASSETS:
Cash and cash equivalents $ 2,037,813 $ 112,040
Restricted funds on deposit 602,400 2,739,947
Other current assets 39,881 133,525
------------ ------------
Total current assets 2,680,094 2,985,512
PROPERTY AND EQUIPMENT - Net 175,950 3,604,656
OTHER ASSETS 19,848 19,848
------------ ------------
TOTAL ASSETS $ 2,875,892 $ 6,610,016
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 545,017 $ 541,881
Accrued expenses 4,257 4,821
Deferred revenue 563,435 2,554,071
------------ ------------
Total current liabilities 1,112,709 3,100,773
DEFERRED RENTAL OBLIGATION 27,145 20,779
------------ ------------
Total liabilities 1,139,854 3,121,552
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 296,193
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,680,000 and 4,440,000 shares
authorized and unissued as of March 31, 2002 and 2003, respectively
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 160,100 and 142,800 shares issued
and outstanding as of March 31, 2002 and 2003, respectively, aggregate
liquidation preference of $4,031,900 and $3,668,005 as of March 31, 2002
and 2003, respectively 4,031,900 3,668,005
Series B convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 240,000 shares authorized, 56,725 shares issued
and outstanding as of March 31, 2003
aggregated liquidation preference of $1,469,967 as of March 31, 2003 1,469,967
Common stock, par value $0.01 per share, 30,000,000 shares
authorized, 6,066,459 and 7,898,986 shares issued and
outstanding as of March 31, 2002 and 2003, respectively 60,664 78,990
Additional paid-in capital 34,679,844 40,142,617
Deficit accumulated during the developmental stage (37,036,370) (42,167,308)
------------ ------------
Total stockholders' equity 1,736,038 3,192,271
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,875,892 $ 6,610,016
============ ============
See notes to consolidated financial statements.
-2-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2001, 2002 AND 2003 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Years Ended March 31, (Inception)
------------------------------------------ to March 31,
2001 2002 2003 2003
REVENUES $ 1,354,943 $ 3,522,113 $ 1,608,849 $ 8,842,822
------------ ----------- ----------- ------------
EXPENSES:
Research and development 6,694,546 3,958,107 2,570,370 31,071,531
General and administrative 4,719,298 2,927,726 3,731,398 21,071,884
Equity in loss of joint venture 135,002
------------ ----------- ----------- ------------
Total expenses 11,413,844 6,885,833 6,301,768 52,278,417
------------ ----------- ----------- ------------
LOSS FROM OPERATIONS (10,058,901) (3,363,720) (4,692,919) (43,435,595)
------------ ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 198,559 40,610 13,850 577,578
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942) (2,942)
Cancelled offering costs (584,707)
Gain on extinguishment of debt 1,427,765
------------ ----------- ----------- ------------
Other income (expense) - net 195,617 40,610 13,850 288,192
------------ ----------- ----------- ------------
NET LOSS (9,863,284) (3,323,110) (4,679,069) (43,147,403)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (937,935) (451,869) (1,389,804)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS 2,369,899
------------ ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (9,863,284) $ (4,261,045) ($5,130,938) $(42,167,308)
============ ============ =========== ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $ (1.78) $ (0.55) $ (0.71)
Convertible preferred stock dividends (0.16) (0.07)
------------ ----------- -----------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (1.78) $ (0.71) $ (0.78)
============ =========== ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 5,545,190 6,011,416 6,565,495
See notes to consolidated financial statements.
-3-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED MARCH 31, 2001, 2002 AND 2003 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
Series A Convertible Series B 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
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
----------- -----------
Deficit Accumulated Total
Accumulated Other Stockholders'
Additional During the Comprehensive Equity
Paid-in Development Income (Deficiency in
Capital Stage (Loss) 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 (2,246,428) (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
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)
----------- ---------- -----------
See notes to consolidated financial statements. (Continued)
-4-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED MARCH 31, 2001, 2002 AND 2003 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
----------------------------- -----------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
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
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
======== ============ ======= ============
Deficit
Common Stock Accumulated
----------------------------- Additional During the
Issued and Paid-in Development
Outstanding Amount Capital Stage
Balance, March 31, 1998 743,665 $ 7,437 $ 4,233,386 $(13,262,446)
Issuance of common stock under
private placement offering 575,000 5,750 824,907
Exercise of options 40,650 406 12,944
Provision for compensation -
nonemployees 2,426,000
Issuance of common stock to Criticare 86,207 862 133,621
Conversion of Criticare debt to
common stock 180,756 1,808 856,485
Conversion of debt to common stock 424,222 4,242 657,555
Conversion of redeemable preferred
stock to common stock 1,195,017 11,950 1,852,300 3,713,334
Net loss (1,929,003)
---------- --------- ------------ -------------
Balance, March 31, 1999 3,245,517 32,455 10,997,198 (11,478,115)
Comprehensive loss:
Net loss (11,433,926)
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 9,161,110
Exercise of options and warrants 247,420 2,474 424,348
Provision for compensation -
nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 611,250 6,113 6,106,387
Issuance of common stock for
accrued interest 28,147 281 281,189
---------- --------- ------------ -------------
Balance, March 31, 2000 5,282,334 52,823 27,480,070 (22,912,041)
Comprehensive loss:
Net loss (9,863,284)
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 4,299,806
Exercise of options 88,661 886 41,922
Provision for compensation -
nonemployees 1,739,294
Contributed capital -
common stockholder 13,825
---------- --------- ------------ -------------
Balance, March 31, 2001 5,955,245 59,552 33,574,917 (32,775,325)
Net loss (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)
Issuance of common stock as offering
costs under private placement offerings 60,000 600 (600)
Accrual of preferred stock dividends (29,400)
Exercise of options 51,214 512 18,972
Provision for compensation -
nonemployees 332,005
---------- --------- ------------ -------------
Balance, March 31, 2002 6,066,459 60,664 34,679,844 (37,036,370)
Net loss (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)
Issuance of common stock for services provided
in connection with private placement offerings 290,000 2,900 942,200
Conversion of convertible preferred
stock to common stock 228,448 2,285 950,758
Accrual of preferred stock dividends (302,437)
Payment of preferred stock dividends 45,529 456 160,657
Issuance of common stock for land use rights acquisition 1,260,000 12,600 2,986,200
Issuance of common stock and warrants for services 8,333 83 89,042
Exercise of options 217 2 126
Provision for compensation -
nonemployees 243,150
---------- --------- ------------ -------------
Balance, March 31, 2003 7,898,986 $ 78,990 $ 40,142,617 $ (42,167,308)
========== ========= ============ =============
Accumulated Total
Other Stockholders'
Comprehensive Equity
Income (Deficiency in
(Loss) Assets)
Balance, March 31, 1998 $ (9,021,623)
Issuance of common stock under
private placement offering 830,657
Exercise of options 13,350
Provision for compensation -
nonemployees 2,426,000
Issuance of common stock to Criticare 134,483
Conversion of Criticare debt to
common stock 858,293
Conversion of debt to common stock 661,797
Conversion of redeemable preferred
stock to common stock 5,577,584
Net loss (1,929,003)
--------- -----------
Balance, March 31, 1999 (448,462)
--------- -----------
Comprehensive loss:
Net loss (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 9,172,610
Exercise of options and warrants 426,822
Provision for compensation -
nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 6,112,500
Issuance of common stock for
accrued interest 281,470
--------- -----------
Balance, March 31, 2000 (1,178) 4,619,674
--------- -----------
Comprehensive loss:
Net loss (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 4,305,649
Exercise of options 42,808
Provision for compensation -
nonemployees 1,739,294
Contributed capital -
common stockholder 13,825
--------- -----------
Balance, March 31, 2001 859,144
Net loss (3,323,110)
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash offering
costs of $153,985 3,848,515
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends
Exercise of options 19,484
Provision for compensation -
nonemployees 332,005
--------
Balance, March 31, 2002 1,736,038
Net loss (4,679,069)
Issuance of Series B convertible
preferred stock under private placement
offerings, less cash offering costs of
$58,792 1,859,333
Issuance of common stock for services provided
in connection with private placement offerings 945,100
Conversion of convertible preferred
stock to common stock (24)
Accrual of preferred stock dividends
Payment of preferred stock dividends (310)
Issuance of common stock for land use rights acquisition 2,998,800
Issuance of common stock and warrants for services 89,125
Exercise of options 128
Provision for compensation -
nonemployees 243,150
--------- -----------
Balance, March 31, 2003 $ 0 $ 3,192,271
========= ===========
See notes to consolidated financial statements. (Concluded)
-5-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2001, 2002 AND 2003 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2003 (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Years Ended March 31, (Inception)
----------------------------------------- to March 31,
2001 2002 2003 2003
OPERATING ACTIVITIES:
Net loss $(9,863,284) $(3,323,110) $(4,679,069) $(43,147,403)
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 1,739,294 332,005 1,277,375 14,859,975
Depreciation and amortization of property and equipment 89,616 98,893 93,420 637,180
Deferred rental obligation (6,368) (6,366) (6,366) 20,779
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942 2,942
Amortization of debt discounts and issuance costs 134,503
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit (3,812,553) 3,210,153 (2,137,547) (2,739,947)
Other current assets (17,089) (11,592) (93,644) (133,525)
Other assets (19,848)
Accounts payable 164,710 (1,150,704) (4,741) 869,416
Accrued expenses 36,958 (66,605) 564 667,834
Deferred revenue 3,509,194 (2,945,759) 1,990,636 2,554,071
----------- ----------- ----------- ------------
Net cash used in operating activities (8,156,580) (3,863,085) (3,559,372) (27,586,786)
----------- ----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of investment securities (199,996) (1,803,469)
Proceeds from sales and maturities of investment securities 1,558,043 1,800,527
Purchases of property and equipment (62,350) (64,819) (20,604) (713,790)
Cash paid for acquisition of land use rights (204,924) (204,924)
Investment in and advances to joint venture (135,002)
----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities 1,295,697 (64,819) (225,528) (1,056,658)
----------- ----------- ----------- ------------
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 3,848,515 1,859,333 5,707,848
Payments for convertible preferred stock dividends and
for fractional shares of common stock resulting from
the conversions of convertible preferred stock (334) (334)
Net proceeds from issuance of common stock 4,348,457 19,484 128 16,317,283
Additional capital contributed by stockholders 13,825 245,559
----------- ----------- ----------- ------------
Net cash provided by financing activities 4,362,282 3,867,999 1,859,127 28,755,484
----------- ----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,498,601) (59,905) (1,925,773) 112,040
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,596,319 2,097,718 2,037,813 -
----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,097,718 $ 2,037,813 $ 112,040 $ 112,040
=========== =========== =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION (Note 11)
See notes to consolidated financial statements.
-6-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2001, 2002 AND 2003
--------------------------------------------------------------------------------
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiary (the "Company") is a pharmaceutical company
focused on the development and commercialization of drugs to treat
infectious diseases. The Company has development programs that include
fungal infections, Malaria, Tuberculosis, Hepatitis C, Pneumocystis carinii
pneumonia and tropical medicine diseases including African sleeping sickness
(a parasitic disease also known as Trypanosomiasis) and Leishmaniasis (a
parasitic disease that destroys the liver). The Company holds worldwide
patents, licenses and rights to license worldwide patents, patent
applications and technologies from third parties that are integral to the
Company's business. The Company is a development stage enterprise and since
its inception on October 15, 1984, the Company has engaged in research and
development programs, expanding its network of scientists and scientific
advisors, licensing technology agreements and advancing the
commercialization of its dication technology platform. The Company uses the
expertise and resources of strategic partners and contracted parties in a
number of areas, including: (i) laboratory research, (ii) pre-clinical and
human clinical trials and (iii) the manufacture of pharmaceutical products.
The Company has licensing and exclusive commercialization rights to a
dication pharmaceutical platform and is developing drugs intended for
commercial use based on that platform.
The Company does not have any products currently available for sale, and no
products are expected to be commercially available for sale until after
March 31, 2004, if at all.
Since inception, the Company has incurred accumulated losses of
approximately $43,147,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
continues its research and development activities and clinical trial
efforts. In addition, the Company has various research and development
agreements with third parties and is dependent on their ability to perform
under these agreements. There can be no assurance that the Company's
continued research will lead to the development of commercially viable
products. The Company's operations to date have consumed substantial amounts
of cash. The negative cash flow from operations is expected to continue in
the foreseeable future. The Company will require substantial funds to
conduct research and development and laboratory and clinical testing, and to
manufacture (or have manufactured) and market (or have marketed) its product
candidates. The Company's cash requirements may vary materially from those
now planned because of results of research and development, results of
pre-clinical and clinical testing, responses to grant requests,
relationships with strategic partners, changes in the focus and direction in
the Company's research and development programs, competitive and
technological advances, the regulatory process, and other factors. In any of
these circumstances, the Company may require substantially more funds than
are currently available or than management intends to raise.
Subsequent to March 31, 2003, the Company completed private placement
offerings that raised approximately $3,133,800 of additional equity capital
(before cash offering costs of approximately $250,000) through the issuance
of 125,352 shares of Series C Convertible Preferred stock (see Note 12). The
net proceeds from the private placement offerings will not likely be
sufficient to fund the Company's
-7-
operations through the commercialization of one or more products yielding
sufficient revenues to support the Company's operations; therefore, the
Company will likely need to raise additional funds at some time in the
future.
The Company believes its existing unrestricted cash and cash equivalents
(including the net proceeds of the private placement made subsequent to year
end), and the grants the Company has received or has been awarded and is
awaiting disbursement of, will be sufficient to meet the Company's planned
expenditures through June of 2004, 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.
Principles of Consolidation - The consolidated financial statements include
the accounts of Lenton Fibre Optics Development Limited ("Lenton"), a
majority-owned subsidiary, located in Hong Kong. All significant
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of an amount on deposit
at a bank and an investment in a money market mutual fund, stated at cost,
which approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash on
deposit at a bank that is restricted for use in accordance with a clinical
research subcontract agreement with The University of North Carolina at
Chapel Hill.
Investment Securities - The Company generally classified investments in debt
securities as available-for-sale based on the intent to sell securities to
meet current cash flow needs rather than to hold such investments to
maturity. Securities available for sale were recorded at fair value, with
unrealized gains (losses) recorded as a separate component of stockholders'
equity (deficiency in assets) as accumulated other comprehensive income
(loss). Gains (losses) on the sale of investment securities were recorded on
the specific identification method.
The Company did not hold any investment securities as of March 31, 2002 and
2003. Proceeds from the sales and maturities of investment securities during
the year ended March 31, 2001 were $1,588,043. Gross gains and gross losses
of $212 and $3,154, respectively, were realized on such sales during the
year ended March 31, 2001.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method (see Note 4). The
investment balance is zero as of March 31, 2002 and 2003.
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Property and Equipment - Property and equipment are recorded at cost and
depreciation and amortization are provided using the straight-line method
over estimated useful lives ranging from three to seven years.
Land Use Rights - Land use rights represent an agreement by Lenton Fibre
Optics Development Limited ("Lenton") to use land in the People's Republic
of China for a period of 50 years and is being amortized over that period on
a straight-line basis.
Long-Lived Assets - The Company periodically evaluates the carrying value of
its property and equipment. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, a loss
is recognized for the asset and is measured by the difference between the
fair value and 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.
Minority Interest - Minority interest represents the carryover basis of the
20% of Lenton not owned by the Company at the date of acquisition, plus
equity in earnings or minus equity in losses from that date.
Revenue Recognition - Revenue under grants and research and development
agreements is recognized based on the Company's estimates of the stage of
completion under the terms of the respective agreements. Amounts received in
excess of completion under the terms of the respective agreements are
recorded as deferred revenues.
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 behalf of
the Company.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of
assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. In addition, a
valuation allowance is recognized if it is more likely than not that some or
all of the deferred income tax assets will not be realized. A valuation
allowance is used to offset the related net deferred income tax assets due
to uncertainties of realizing the benefits of certain net operating loss and
tax credit carryforwards and other deferred income tax assets.
Gain on Extinguishment of Debt - In April of 2002, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." Among other
things, SFAS No. 145 rescinded SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Under SFAS No. 4, all material gains and losses
from extinguishment of debt were required to be classified as extraordinary
items, net of related income tax effect. Under SFAS No. 145, gains and
losses from extinguishment of debt are reported as extraordinary items only
if they meet the criteria outlined in Accounting Principals Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB 30"). Any gain or loss
on extinguishment of debt that was classified as an extraordinary item in
prior periods presented that does
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not meet the criteria in APB 30 for classification as an extraordinary item
shall be reclassified. The Company adopted SFAS No. 145 during the year
ended March 31, 2003. As a result of this adoption, the Company recorded a
reclassification of $1,427,765 from an extraordinary gain to a gain on the
extinguishment of debt in the consolidated statement of operations for the
period beginning at inception through March 31, 2003.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with SFAS No. 128, "Earnings Per Share." Basic net income (loss)
per share 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. Diluted net
loss per share was the same as the basic net loss per share for the years
ended March 31, 2001, 2002 and 2003. Potentially dilutive shares for common
stock options and warrants and conversion of Series A and B Convertible
Preferred Stock were not included in net income (loss) per share as their
effect was antidilutive for each of the years then ended.
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, 2002 and 2003 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 - Comprehensive loss for the year ended March 31, 2001
includes the effects of net changes in unrealized losses on investment
securities available for sale. There was no income tax effect on the
components of comprehensive loss. There were no differences between
comprehensive loss and net loss for all other years presented.
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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
New Accounting Pronouncements - In December 2002, the FASB issued SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
which provides for alternative methods to transition to the fair value
method of accounting for stock options in accordance with provisions of SFAS
No. 123, "Accounting for Stock Based Compensation." In addition, SFAS No.
148 requires disclosure of the effects of an entity's accounting policy with
respect to stock-based compensation on reported net income and earnings per
share in annual and interim financial statements. The Company adopted the
annual disclosure provisions of SFAS No. 148 in the financial statements for
the fiscal year ended March 31, 2003 and will adopt the interim disclosure
requirements beginning as the first quarter of fiscal 2004. The transition
provisions of SFAS No. 148 are currently not applicable as the Company
continues to account for stock-based compensation in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No.
150 requires that certain instruments with
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certain characteristics be classified as liabilities as opposed to equity.
This statement is effective for financial instruments entered into or
modified after May 30, 2003, and otherwise is effective July 1, 2003. The
Company is evaluating the impact of this standard on the financial
statements.
2. LAND USE RIGHTS ACQUISITION
On January 13, 2003, the Company issued 1,200,000 shares of its common stock
pursuant to a share purchase agreement entered into with an investor
("seller") who owned 100% of the outstanding equity of Lenton, whose only
asset was use rights of undeveloped land. The subsidiary intends to
construct and operate a pharmaceutical manufacturing facility capable of
producing commercial quantities of the Company's pharmaceutical products at
competitive costs. The land is located in a "free-trade zone" called the
Futian Free Trade Zone, Shenzhen, in the People's Republic of China. The
Company intends, once the facility is built and government approvals are
obtained, to engage Lenton to manufacture for commercial distribution, the
Company's pharmaceutical products intended for sale in Asia, Africa and
other selected regions.
The Company purchased an 80% interest in Lenton from the seller for the
aggregate consideration of 1,200,000 unregistered shares of the Company's
common stock. The Company also issued 60,000 shares of the Company's common
stock for brokers fees on the transaction and incurred $206,529 in other
acquisition costs. The fair value of the Company's stock was determined
using the market value of three days prior to and after the acquisition
date. This resulted in an investment of $3,501,522, all of which was
allocated to property and equipment.
3. RECAPITALIZATION, PRIVATE PLACEMENTS AND INITIAL 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 outstanding immediately prior to the Effective Date into
1,209,962 shares of common stock and approximately $203,000 in cash (see
Note 10); and (ii) the Company's Series A Redeemable Preferred stockholders
converted 1,794,550 shares of Series A Redeemable Preferred Stock issued and
outstanding immediately prior to the Effective Date into 1,157,931 shares of
common stock (see Note 10); (iii) the Company's Series B Redeemable
Preferred stockholders converted 1,600,000 shares of Series B Redeemable
Preferred Stock issued and outstanding immediately prior to the Effective
Date into 1,232,133 shares of common stock (see Note 10).
Contemporaneously with the completion of the Recapitalization, the Company
issued and sold 575,000 shares of common stock for $1.74 per share, or
aggregate consideration to the Company of $1,000,000 to certain accredited
investors under a private placement offering. For services and expenses
involved with this Recapitalization, 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 $.10 per share. On May 17,
1999, NCHK exercised their warrants. For advisory services in this
transaction, RADE Management Corporation ("RADE") received warrants to
purchase 225,000 shares of the Company's common stock at $.10 per share. On
April 22, 1999, the warrant agreement with RADE was amended to increase the
exercise price from $.10 per share to $6.47 per share. The warrants expire
July 24, 2004 (see Note 7). The private placement offering resulted in net
proceeds of approximately $831,000. RADE leases an office facility which is
occupied by both the Company and RADE. The office space is paid for by
Immtech on RADE's behalf (see Note 9). During the years ended March 31,
2001, 2002, and 2003, the Company paid approximately $102,000, $106,000 and
$106,000 respectively, for the use of the facility. In addition, during the
years ended March 31, 2001, 2002 and 2003,
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approximately $41,000, $18,000 and $0, respectively, was paid to RADE as
reimbursement for certain administrative expenses paid on behalf of the
Company.
On April 26, 1999, the Company issued 1,150,000 shares of common stock
through an initial public stock offering resulting in net proceeds of
approximately $9,173,000. Costs incurred of approximately $513,000 as of
March 31, 1999, including approximately $329,000 of costs that were unpaid
and included in accounts payable as of such date, with respect to the
offering were deferred pending the completion of the offering and netted
with the proceeds of the offering. The underwriters received warrants to
purchase 100,000 additional shares of common stock at $16.00 per share (see
Note 7). The warrants expired on April 30, 2003.
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 warrants to
purchase 400,250 shares of the Company's common stock at an exercise price
of $6.00 per share. The warrants expire five years from the date of grant
(see Note 7).
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 warrants to
purchase 191,812 shares of the Company's common stock at an exercise price
of $6.125 per share. The warrants expire five years from the date of grant
(see Note 7).
4. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and related
diseases. The Company and Franklin have a research and funding agreement
with NextEra in which Franklin provided funding of $1,350,000 to NextEra to
fund the scale-up of manufacturing for and initiation of certain clinical
trials of NextEra's product candidates. The Company contributed its rmCRP
technology as well as use of its current laboratory facilities for shares of
common stock of NextEra. During the year ended March 31, 2000, the Company
advanced $135,000 to NextEra to fund its operations. The Company's advance
to NextEra was expensed during the year ended March 31, 2000. The Company
did not advance any funds to NextEra during the years ended March 31, 2001,
2002 and 2003.
NextEra funded the operation of the Company's primary facility, including
certain salaries related to work on rmCRP, rent and overhead associated with
the project from July 1998 through December 1999. Since January 1, 2000,
NextEra has funded only their own compensation expenses, as they stopped
funding the Company's primary facility and any associated overhead. In
addition, NextEra has funded and is required to fund the cost of maintaining
and defending the patents that are part of the intellectual property
transferred to NextEra by the Company.
NextEra has incurred accumulated losses of approximately $2,781,000 since
inception (July 8, 1998) through March 31, 2003. NextEra is expected to
continue to incur significant losses during the next
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several years. In addition, as of March 31, 2003, NextEra's current
liabilities exceeded its current assets by approximately $294,000 and
NextEra had a stockholders' equity of approximately $271,000.
As of March 31, 2002 and 2003, the Company owned approximately 28% of the
issued and outstanding shares of NextEra common stock. On April 27, 2000,
Franklin filed a complaint against the Company in the United States District
Court for the Southern District of Ohio, Eastern Division alleging fraud,
negligent misrepresentation and breach of the implied covenant of good faith
and fair dealing in connection with the research and funding agreement
entered into between Franklin, the Company and NextEra. The complaint sought
compensatory damages, unquantified punitive damages, attorneys' fees, costs
and expenses. On March 23, 2001, Franklin voluntarily dismissed its
complaint against the Company and together with NextEra filed a new
complaint in the Court of Common Pleas, Franklin County, Ohio alleging
fraud, negligent misrepresentation and breach of the implied covenant of
good faith and fair dealing in connection with the research and funding
agreement entered into between Franklin, the Company and NextEra. In
addition, NextEra alleged the Company tortuously interfered with an
employment agreement between NextEra and the chief scientific officer of
NextEra. The complaint sought compensatory damages in excess of $25,000,
unquantified punitive damages, attorneys' fees, costs and expenses. On May
25, 2001, the case was dismissed without prejudice by the Court of Common
Pleas, Franklin County, Ohio. The Company is currently in negotiations with
Franklin and its designees to resolve certain issues, including the possible
restructuring of the joint venture and relationship with NextEra to better
position NextEra in its fund-raising efforts, and increasing the Company's
ownership interest in NextEra as consideration for services provided to
NextEra, expenses the Company previously incurred on behalf of NextEra and
funds previously advanced to NextEra.
NextEra's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become
due and, ultimately, to obtain profitable operations. NextEra's financial
plans for the forthcoming year include continuing efforts to obtain
additional equity financing.
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, 2002 and 2003, the Company's net investment in Next
Era is zero.
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The following is summarized financial information for NextEra as of March
31, 2001, 2002, and 2003 and for the years then ended:
2001 2002 2003
Current assets $ 309,000 $ 281,000
Noncurrent assets $ 22,000 642,000 566,000
Current liabilities:
Advances from Franklin 872,000 71,000
Advances from the Company 135,000 135,000 135,000
Advances from other shareholders 343,000 40,000 88,000
Other 262,000 525,000 353,000
Stockholders' (deficiency) equity (1,590,000) 117,000 271,000
Revenues 77,000 46,000
Net (loss) income (660,000) (796,000) 91,000
Net loss (inception to date) (2,076,000) (2,872,000) (2,781,000)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2002 and
2003:
2002 2003
Land use rights $3,501,522
Research and laboratory equipment $ 457,033 474,455
Furniture and office equipment 154,642 157,824
Leasehold improvements 28,525 28,525
---------- ----------
Property and equipment - at cost 640,200 4,162,326
Less accumulated depreciation and amortization 464,250 557,670
---------- ----------
Property and equipment - net $ 175,950 $3,604,656
========== ==========
6. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets will
not be realized. A valuation allowance is used to offset the related net
deferred income tax assets due to uncertainties of realizing the benefits of
certain net operating loss and tax credit carryforwards and other deferred
income tax assets.
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The Company has no significant deferred income tax liabilities. Significant
components of the Company's deferred income tax assets are as follows:
March 31,
--------------------------------
2002 2003
Deferred income tax assets:
Federal net operating loss carryforwards $ 10,979,000 $ 11,437,000
State net operating loss carryforwards 1,422,000 1,486,000
Federal income tax credit carryforwards 624,000 701,000
Deferred revenue 219,000 991,000
------------ ------------
Total deferred income tax assets 13,244,000 14,615,000
------------ ------------
Valuation allowance (13,244,000) (14,615,000)
------------ ------------
Net deferred income taxes recognized
in the accompanying balance sheets $ 0 $ 0
============ ============
As of March 31, 2003, the Company had federal net operating loss
carryforwards of approximately $33,639,000 which expire from 2006 through
2023. The Company also has approximately $30,967,000 of state net operating
loss carryforwards as of March 31, 2003, which expire from 2009 through
2023, 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 $920,000 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, 2003, the Company had federal income tax credit
carryforwards of approximately $701,000 which expire from 2008 through 2023.
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,
-----------------------------------
2001 2002 2003
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes (4.8) (4.8) (4.8)
Non-deductible compensation and expenses 6.8 4.9 9.0
Benefit of federal and state net operating loss
and tax credit carryforwards and other deferred
income tax assets not recognized 32.0 33.9 29.8
----- ----- -----
Effective income tax rate 0 % 0 % 0 %
===== ===== =====
7. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 320,000 shares of the Company's 5,000,000 authorized
shares of preferred stock as Series A Convertible Preferred Stock, $0.01 par
value, with a stated value of $25.00 per share. Dividends accrue at a rate
of 6.0% per annum on the $25.00 stated value per share and are payable
semi-annually on April 15 and October 15 of each year while the shares are
outstanding. The Company has the option to pay the dividend either in cash
or in equivalent shares of common stock, as defined. As of March 31, 2002
and 2003, the Company
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recorded $29,000 and $98,005, respectively, of accrued preferred stock
dividends which are included in the carrying value of the Series A
Convertible Preferred Stock in the accompanying balance sheet. Each share of
Series A Convertible Preferred Stock shall be convertible by the holder at
any time into shares of the Company's common stock at a conversion rate
determined by dividing the $25.00 stated value, plus any accrued and unpaid
dividends (the "Liquidation Price"), by a $4.42 conversion price (the
"Conversion Price"), subject to certain antidilution adjustments, as defined
in the Certificate of Designation. During the year ended March 31, 2002, the
Company issued 166,100 shares of Series A Convertible Preferred Stock for
net proceeds of $3,848,515 (net of approximately $154,000 of cash offering
costs). On April and October 15, 2002, the Company issued 42,871 shares of
common stock as dividends on the Series A Preferred Shares.
The Company may at any time after February 14, 2003, require that any or all
outstanding shares of Series A Convertible Preferred Stock be converted into
shares of the Company's common stock, provided that the shares of common
stock into which the Series A Convertible Preferred Stock are convertible
are registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series A Convertible Preferred Stock upon conversion at the request of the
Company shall be determined by (i) dividing the Liquidation Price by the
Conversion Price provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of 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. The
Conversion Price is subject to certain antidilution adjustments, as defined
in the Certificate of Designation.
The Company may at any time, upon 30 day's notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment of
the Liquidation Price to the holder of such shares, provided that the holder
does not convert the Series A Convertible Preferred Stock into shares of
Common Stock during the 30 day period. The Series A Convertible Preferred
Stock has a preference in liquidation equal to $25.00 per share, plus any
accrued and unpaid dividends. Each issued and outstanding share of Series A
Convertible Preferred Stock shall be entitled to 5.6561 votes with respect
to any and all matters presented to the stockholders of the Company for
their action or consideration. Except as provided by law or by the
provisions establishing any other series of preferred stock, Series A
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class. A total of 17,300 shares of the Series A Convertible Preferred
Stock and related accrued dividends were converted to 99,105 shares of the
Company's common stock during the year ended March 31, 2003.
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. As of March 31, 2003,
the Company recorded $51,842 of accrued preferred stock dividends which are
included in the carrying value of the Series B Convertible Preferred Stock
in the accompanying balance sheets. Each share of Series B Convertible
Preferred Stock shall be convertible by the holder at any time into shares
of the Company's common stock at a conversion rate determined by dividing
the $25.00 stated value, plus any accrued and unpaid dividends (the
"Liquidation Price"), by a $4.00 conversion price (the "Conversion Price
B"), subject to certain antidilution adjustments, as defined in the
Certificate of Designation. During the year ended March 31, 2003 the Company
issued 76,725 shares of Series B Convertible Preferred Stock for net
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proceeds of $1,859,333 (net of offering costs of approximately $58,900 of
cash offering costs). On October 15, 2002, the Company issued 2,658 shares
of common stock as dividends on Series B preferred shares.
The Company may at any time after September 24, 2003, require that any or
all outstanding shares of Series B Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series B Convertible Preferred Stock are
convertible are registered pursuant to an effective registration statement,
as defined. The number of shares of common stock to be received by the
holders of the Series B Convertible Preferred Stock upon conversion at the
request of the Company shall be determined (i) dividing the Liquidation
Price by the Conversion Price B provided that the closing bid price for the
Company's common stock exceeds $9.00 for 20 consecutive trading days within
180 days prior to notice of conversions, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price
B. The Conversion Price B is subject to certain antidilution adjustments, as
defined in the Certificate of Designation.
The Company may at any time, upon 30 day notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment of
the Liquidation Price to the holder of such shares, provided that the holder
does not convert the Series B Convertible Preferred Stock into shares of
Common Stock during the 30 day period. The Series B Convertible Preferred
Stock has a preference in liquidation equal to $25.00 per share, plus any
accrued and unpaid dividends. Each issued and outstanding share of Series B
Convertible Preferred Stock shall be entitled to 6.25 votes (subject to
adjustment for dilution) with respect to any and all matters presented to
the stockholders of the Company for their action or consideration. Except as
provided by law or by the provisions establishing any other series of
preferred stock, Series B Convertible Preferred stockholders and holders of
any other outstanding preferred stock shall vote together with the holders
of common stock as a single class. A total of 20,000 shares of the Series B
Convertible Preferred Stock and related accrued dividends were converted to
129,343 shares of the Company's common stock during the year ended March 31,
2003.
Common Stock - On June 28, 2002, the Company entered into a Finder's
Agreement with an individual to develop and qualify potential strategic
partners for the purpose of testing and/or the commercialization of Company
products in China. As consideration for entering into the agreement, the
individual received 150,000 shares of the Company's common stock and the
Company recognized approximately $757,500 as a general and administrative
expense based on the estimated fair value of the shares issued.
On July 31, 2002, the Company entered into a one year agreement with The
Gabriele Group. L.L.C. ("Gabriele") for assistance to be provided by
Gabriele to the Company with respect to management consulting, strategic
planning, public relations and promotions. As compensation for these
services, the company granted Gabriele 40,000 shares of the Company's common
stock and the Company recognized approximately $187,600 as a general and
administrative expense during the three month period ended September 30,
2002, based on the estimated fair value of the shares issued. The Company
also granted Gabriele warrants to purchase 30,000 shares of the Company's
common stock at $6.00 per share. These warrants vest when the price of the
Company's common stock reaches certain milestones, beginning at $10.00 per
share for a period of 20 consecutive days. This agreement may be renewed for
additional one year terms at the sole discretion of the Company.
On March 21, 2003, the Company entered into media production agreements with
"winmaxmedia," an operating division of Winmax Trading Group, Inc.
("Winmax"), to produce materials to be used in connection with equity
fundraising efforts. As consideration for services to be performed under the
-17-
agreement, the Company issued 100,000 shares of common stock and paid
various amounts in cash. Amounts for services under the contracts are
recorded as deferred offering costs within other current assets on the
consolidated balance sheet.
On March 21, 2003, the Company entered into an Investor Relations Agreement
with Fulcrum Holdings of Australia, Inc. ("Fulcrum") for financial
consulting services and public relations management to be provided over a
12-month period. As consideration for services to be performed under the
agreement, the Company will issue to Fulcrum 100,000 shares of common stock
and warrants to purchase 350,000 shares of common stock at prices ranging
from $6.00 to $15.00 per share. The common shares and warrants will be
issued, and the related expense will be recognized, on a pro rata basis over
the contract period. During the year ended March 31, 2003, 8,333 common
shares were issued and a general and administrative expense of $37,290 was
recorded based on the market value of the common shares on the date of
issuance. Also during the year ended March 31, 2003, warrants to purchase
29,167 shares of common stock were issued and a general and administrative
expense of $51,835 was recorded based on the value of the warrants using the
Black-Scholes option valuation model.
Common Stock Options - On October 12, 2000, the Company's stockholders
approved the issuance of options to purchase shares of common stock to
certain employees and other nonemployees who have been engaged to assist the
Company in various research and administrative capacities as part of the
2000 Stock Incentive Plan. The 2000 Stock Incentive Plan provides for the
issuance of up to 350,000 shares of common stock in the form of incentive
stock options and non-qualified stock options. At the stockholders meeting
held November 15, 2002, the stockholders approved an amendment to the 2000
Stock Incentive Plan to increase the number of shares of common stock
reserved for issuance from 350,000 shares to 1,100,000 shares. Expiring
stock options which were issued under the 2000 Stock Incentive Plan are
available for reissuance. During the year ended March 31, 2003, there were
30,000 options previously granted under the 2000 Stock Incentive Plan that
expired and are available to be reissued. The incentive stock options must
be granted at a price at least equal to fair market value at the date of
grant.
The Company has granted 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
options generally vest over periods ranging from 0 to 4 years and expire
after five or ten years. As of March 31, 2003, there were a total of 630,750
shares available for grant, which includes 12,000 shares which are reserved
for issuance under certain consulting agreements with nonemployees.
During the year ended March 31, 2001, the Company issued options to purchase
105,000 shares of common stock to nonemployees and recognized expense of
approximately $452,000 related to such options and certain other options
issued in the prior year which vest over a four year service period. During
the year ended March 31, 2002, the Company issued options to purchase 12,000
shares of common stock to nonemployees and recognized expense of
approximately $332,000 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, 2003, the Company issued options to purchase 22,000
shares of common stock to nonemployees (of which options to purchase 5,000
shares did not vest) and recognized expense of approximately $243,000
related to such options and certain other options issued in prior years
which vest over a four year service period. The expense was determined based
on the estimated fair value of the options using the Black-Scholes 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.
-18-
The activity during the years ended March 31, 2001, 2002 and 2003 for the
Company's stock options is summarized as follows:
Weighted
Number of Stock Options Average
Shares Price Range Exercise Price
Outstanding as of March 31, 2000 416,048 $0.31- 1.74 0.63
Granted 168,500 8.50-11.50 11.05
Exercised (88,661) 0.31- 0.59 0.48
Expired (29,751) 0.31- 0.59 0.57
-------- -------------- ------
Outstanding as of March 31, 2001 466,136 0.34-11.50 4.43
Granted 107,750 4.75-10.00 7.16
Exercised (51,214) 0.34- 0.59 0.38
Expired (14,194) 0.34-11.50 1.91
-------- -------------- ------
Outstanding as of March 31, 2002 508,478 $0.34-11.50 5.48
-------- -------------- ------
Granted 225,000 2.25-4.75 2.75
Exercised (217) 0.59 0.59
Expired (34,787) 0.59-10.50 7.72
-------- -------------- ------
Outstanding as of March 31, 2003 698,474 $0.34-11.50 $ 4.49
======== ============== ======
Exercisable as of March 31, 2001 330,885 $0.34-11.50 2.33
Exercisable as of March 31, 2002 340,186 0.34-11.50 3.86
Exercisable as of March 31, 2003 415,709 0.34-11.50 4.52
The following table summarizes information about stock options outstanding
as of March 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Sharesable Exercise
Exercise Prices Outstanding Life-Years Price Exercisable Price
$ 0.34 24,390 0.01 $ 0.34 24,390 0.34
0.46 149,344 3.96 0.46 149,344 0.46
1.74-2.55 258,490 8.33 2.38 72,408 1.93
4.42-4.75 73,000 4.42 4.73 30,835 4.70
8.50-11.50 193,250 6.06 10.87 138,732 10.93
-------- ---- -------- ------- --------
698,474 6.07 $ 4.49 415,709 $ 4.52
======== ==== ======== ======= ========
Warrants - For advisory services in connection with the Recapitalization
(see Note 3), RADE received warrants to purchase 225,000 shares of the
Company's common stock at $.10 per share. On April 22, 1999, the warrant
agreement with RADE was amended to increase the exercise price from $.10 per
share to $6.47 per share. The warrants expire July 24, 2004. On October 12,
1998, RADE received warrants to purchase 750,000 shares of the Company's
common stock at $.10 per share. On April 22, 1999, the warrant agreement was
amended to increase the exercise price from $.10 per share to $6.47 per
share. The warrants were issued as compensation for management consulting,
market analysis and strategic advisory services performed from July 1998
through December 1998. The warrants expire October 12, 2004.
-19-
In connection with an initial public offering, the underwriters received
warrants to purchase 100,000 additional shares of common stock at $16.00 per
share. The warrants expired on April 30, 2003.
On July 31, 2000, the Company entered into an agreement with the principals
of Stonegate Securities, Inc. ("Stonegate") for assistance by Stonegate in
connection with raising additional equity capital for the consideration of
warrants to purchase 200,000 shares of the Company's common stock. Pursuant
to a notice of termination of the agreement dated December 8, 2000, 100,000
of the warrants shall not vest. The remaining 100,000 warrants expire on
July 31, 2005 and have an exercise price of $12.06 per share. The Company
recorded a general and administrative expense of $866,000 during the year
ended March 31, 2001, as the warrants were for compensation unrelated to the
December 8, 2000 private placement offering. The expense was determined
based on the estimated fair value of the 100,000 issued and vested warrants.
On March 15, 2001, the Company entered into a one year agreement with The
Kriegsman Group ("Kriegsman") for assistance by Kriegsman with respect to
financial consulting, planning, structuring, business strategy, public
relations and promotions. This agreement was terminated by the Company,
effective September 14, 2001. As compensation for these services, the
Company paid a retainer fee to Kriegsman of $20,000 per month for the term
of the agreement. The Company also granted Kriegsman warrants to purchase
250,000 shares of the Company's common stock at $10.75 per share. Warrants
to purchase 100,000 shares vested immediately and the remaining 150,000
warrants did not vest and were cancelled. The warrants are exercisable over
a five year period and contain a cashless exercise provision. The Company
recorded a general and administrative expense of approximately $422,000
during the year ended March 31, 2001 for the estimated fair value of the
100,000 issued and vested warrants.
There were warrants outstanding as of March 31, 2001 to purchase 850,000
shares of the Company's common stock with an exercise price of $20.52 per
share that were cancelled as of April 20, 2001.
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 February 2002
private placement offerings 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 offerings, 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. Warrants 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
offerings. The remaining warrants did not vest and were cancelled. The
warrants expire on February 14, 2007 and contain certain antidilution
provisions. The Company may, upon 30 days notice, redeem any vested warrants
for $0.10 per share if the Company's Common Stock trades at 200% of the
exercise price for 20 consecutive trading days. Yorkshire may exercise any
vested warrants during such notice period. In addition, Yorkshire received
60,000 shares of the Company's common stock as additional consideration for
identifying investors and raising funds in connection with the closing of
the private placement offerings. As compensation for the consulting
services, the Company was required to pay a retainer fee to Yorkshire of
$10,000 per month for the term of the agreement.
In February 2002, the Company, in connection with the Series A Convertible
Preferred Stock private placement offerings, 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. The warrants expire at various dates in February
2007. The warrant exercise period commences upon the conversion or the
redemption of the Series A Convertible Preferred Stock that was concurrently
issued to such warrant holder. At any time after the
-20-
first anniversary of the date of grant and if the Company's common stock
closes at $12.00 per share or above for 20 consecutive trading days, the
Company may, upon 20 days notice, redeem any unexercised portion of any
warrants for a redemption fee of $.10 per share of common stock underlying
the warrants. During the 20 day notice period, if the warrants are then
exercisable as a result of the conversion or redemption of the Series A
Convertible Preferred Stock, such warrant holder may then exercise all or a
portion of the warrant by tendering the appropriate exercise price. The
warrants contain certain antidilution provisions.
The warrants issued in February 2002 to the holders of the Series A
Preferred Convertible Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $908,535 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series A Convertible Preferred Stock resulting in a $908,535
preferred stock dividend calculated in accordance with the Emerging Issues
Task Force ("EITF") Issue No. 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments." The dividend on the Series A Convertible
Preferred Stock was charged to deficit accumulated during the development
stage immediately upon issuance, as the preferred stock is immediately
convertible. The preferred stock dividend of $908,535 and the accrued
preferred stock dividends of $29,400 were reported as dividends in
determining the net loss attributable to common stockholders in the
accompanying statement of operations for the year ended March 31, 2002.
Preferred stock dividends of $226,210 were recorded during the year ended
March 31, 2003.
In addition, 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 offerings (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
Company may, after February 22, 2003, upon 30 days' notice, provided that
the Company's common stock has traded at or above 200% of the exercise price
for 20 consecutive trading days, redeem any unexercised warrants for $0.10
per share, as defined. The Introductory Brokers may exercise their warrants
during the 30 day notice period. The warrants expire on February 22, 2007
and contain certain antidilution provisions.
In September 2002, in connection with of the Series B Convertible Preferred
Stock private placement offering, the Company issued warrants to purchase
191,812 shares of the Company's common stock at an exercise price 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. At any time after the first anniversary of the date of grant and if
the Company's common stock closes above 200% of the exercise price for 20
consecutive trading days, the Company may, upon 20 days notice, redeem any
unexercised portion of any warrants for a redemption fee of $.10 per share
of common stock underlying the warrants. During the 20 day notice period, if
the warrants are then exercisable as a result of the conversion or
redemption of the Series B Convertible Preferred Stock, such warrant holder
may then exercise all or a portion of the warrants by tendering the
appropriate exercise price.
The warrants issued in September 2002 to the holders of the Series B
preferred Convertible Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $149,432 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series B Convertible Preferred Stock resulting in a $149,432
discount on the preferred stock in accordance with the EITF Issue No. 00-27.
The dividend on the Series B Convertible Preferred Stock was charged to
deficit accumulated during the development stage immediately upon issuance,
as the preferred stock is
-21-
immediately convertible. The preferred stock dividend of $149,432 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, 2003. Preferred stock dividends of $76,227 were recorded during
the year ended March 31, 2003.
The activity during the years ended March 31, 2001, 2002 and 2003 for the
Company's warrants to purchase shares of common stock is summarized as
follows:
Weighted
Number of Warrants Average
Shares Price Range Exercise Price
Outstanding as of March 31, 2000 1,925,000 $6.47-20.52 $13.17
Granted 350,000 10.75-12.06 11.12
---------- ------------- ------
Outstanding as of March 31, 2001 2,275,000 6.47-20.52 12.85
Granted 1,160,250 6.00-12.00 7.01
Cancelled (1,000,000) 10.75-20.52 19.05
---------- ------------- ------
Outstanding as of March 31, 2002 2,435,250 6.00-16.00 7.52
---------- ------------- ------
Granted 250,977 6.00-15.00 6.64
Cancelled (260,000) 9.00-12.00 10.50
---------- ------------- ------
Outstanding as of March 31, 2003 2,426,227 $ 6.00-16.00 $ 7.11
========== ============= ======
Exercisable as of March 31, 2001 1,275,000 $6.47-16.00 $ 7.49
Exercisable as of March 31, 2002 1,775,000 6.00-16.00 7.43
Exercisable as of March 31, 2003 2,039,227 6.00-16.00 7.32
-22-
The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2003:
Exercise Price Warrants
Per Share Outstanding Expiration Date
$ 6.00 8,333 March 21, 2005
6.00 486,750 February 14, 2007
6.00 413,500 February 22, 2007
6.00 30,000 July 31, 2007
6.13 189,312 September 25, 2007
6.13 2,500 October 28, 2007
6.47 225,000 July 24, 2004
6.47 750,000 October 12, 2004
10.00 10,416 March 21, 2005
10.75 100,000 March 15, 2006
12.06 100,000 July 31, 2005
15.00 10,416 March 21, 2005
16.00 100,000 April 30, 2003
---------
Total warrants outstanding 2,426,227
=========
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans.
During the years ended March 31, 2001, 2002 and 2003, the Company issued
63,500, 95,750 and 203,000 options, respectively, to certain employees and
directors. If the Company had recognized compensation expense for the
options granted during the years ended March 31, 2001, 2002, and 2003,
consistent with the method prescribed by SFAS No. 123, net loss and net loss
per share would have been changed to the pro forma amounts indicated below:
Years Ended March 31,
------------------------------------------
2001 2002 2003
Net loss attributable to common shareholders - as reported $(9,863,284) $(4,261,045) $(5,130,938)
Add: stock-based compensation expense included in reported
net loss 0 0 0
Deduct: total stock-based compensation expense determined
under fair value method for all awards (76,000) (270,329) (295,177)
----------- ----------- -----------
Net loss attributable to common stockholders - pro forma $(9,939,284) $(4,531,374) $(5,426,115)
=========== =========== ===========
Basic and diluted net loss per share attributable to common
stockholders - as reported $ (1.78) $ (0.71) $ (0.78)
=========== =========== ===========
Basic and diluted net loss per share attributable to common
stockholders - pro forma $ (1.79) $ (0.75) $ (0.83)
=========== =========== ===========
The following weighted average assumptions were used for grants during the
year ended March 31, 2001: 1) expected dividend yield of 0%, 2) risk-free
interest rate of 5.6%, 3) expected volatility of
-23-
74.1%, and 4) expected option life of 8.2 years. The following weighted
average assumptions were used for grants during the year ended March 31,
2002: 1) expected dividend yield of 0%, 2) risk-free interest rate of 4.98%,
3) expected volatility of 87%, and 4) expected option life of 7.1 years. The
following weighted average assumptions were used for grants during the year
ended March 31, 2003: 1) expected dividend yield of 0%, 2) risk-free
interest rate of 3.8%, 3) expected volatility of 87%, and 4) expected option
life of 9.5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
value of its options and may not be representative of the future effects on
reported net income (loss) or the future stock price of the Company. The
weighted average estimated fair value of employee stock options granted
during the years ended March 31, 2001, 2002 and 2003 was $7.98, $5.46 and
$2.15, respectively. For purposes of pro forma disclosure, the estimated
fair value of the options is amortized to expense over the options' vesting
period.
8. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional fees
for the attainment of certain milestones. The Company may receive royalties
on the sales of such products. The other parties generally receive exclusive
marketing and distribution rights for certain products for set time periods
in specific geographic areas.
The Company initially acquired its rights to the platform technology and
dications developed by a consortium of universities consisting of The
University of North Carolina at Chapel Hill ("UNC"), Georgia State
University, Duke University and Auburn University (the "Scientific
Consortium") pursuant to an agreement, dated January 15, 1997 (as amended,
the "Consortium Agreement") among the Company, Pharm-Eco Laboratories, Inc.
("Pharm-Eco"), and UNC (to which each of the other members of the Scientific
Consortium agreed shortly thereafter to become a party). The Consortium
Agreement commits the parties to, collectively, research, develop, finance
the research and development of, manufacture and market both the technology
and compounds owned by the Scientific Consortium and previously licensed or
optioned to Pharm-Eco (the "Current Compounds") and to be licensed to the
Company in accordance with the Consortium Agreement, and all technology and
compounds developed by the Scientific Consortium after January 15, 1997,
through use of Company-sponsored research funding or National Cooperative
Drug Development grant funding made available to the Scientific Consortium
(the "Future Compounds" and, collectively with the Current Compounds, the
"Compounds").
The Consortium Agreement contemplated that upon the completion of the
Company's initial public offering ("IPO") of shares of its common stock with
gross proceeds of at least $10,000,000 by April 30, 1999, the Company and
Pharm-Eco, with respect to the Current Compounds, and the Company and UNC,
(on behalf of the Scientific Consortium), with respect to Future Compounds,
would enter into license agreements for, or assignments of, the intellectual
property rights relating to the Compounds held by Pharm-Eco and the
Scientific Consortium; pursuant to which the Company would pay royalties and
other payments based on revenues received for the sale of products based on
the Compounds.
-24-
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000. Pursuant to the Consortium Agreement, both Pharm-Eco
and the Scientific Consortium then became obligated to grant or assign to
the Company an exclusive worldwide license to use, manufacture, have
manufactured, promote, sell, distribute, or otherwise dispose of any
products based directly or indirectly on all of the Current Compounds and
Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to Pharm-Eco or persons
designated by Pharm-Eco.
Pursuant to the Consortium Agreement, the Company may, subject to the
satisfaction of certain conditions, be required to issue 100,000 shares of
common stock to the Scientific Consortium upon the filing by the Company of
the first new drug application or an abbreviated new drug application with
the Food and Drug Administration with respect to a product incorporating
certain Compounds. In addition, the Company will pay the Scientific
Consortium an aggregate royalty of up to 5.0% of net sales derived from the
Compounds, except that the royalty rate payable on any Compound developed at
Duke University will be determined by negotiation at the time such Compound
is developed. In the event that the Company sublicenses its rights with
respect to the Compounds to a third party, the Company will pay the
Scientific Consortium a royalty based on a percentage of any royalties the
Company receives, and a percentage of all signing, milestone and other
payments made to the Company pursuant to the sublicense agreement.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium
whereby the Company received the exclusive license to commercialize dication
technology and compounds developed or invented by one or more of the
Scientific 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.
In June 1999, the Company entered into a research and manufacturing
agreement with Pharm-Eco for Pharm-Eco to produce good manufacturing
practices quality, as defined, dicationic drugs and products for clinical
testing and for early commercialization. Pharm-Eco was unable to manufacture
certain required compounds and the Company subsequently engaged alternate
suppliers who successfully manufactured the compounds.
In August 2000, Pharm-Eco and two of its senior executives filed suit in
Delaware against the Company in connection with a dispute under the
Consortium Agreement. The Company responded by denying the allegations and
filing a counter-claim against Pharm-Eco for breach of contract.
The Company filed a Motion for Summary Judgment, which was granted on
February 21, 2001. In his Memorandum Opinion, the Vice Chancellor hearing
the proceeding dismissed all of the plaintiffs' claims against the Company
and held that Pharm-Eco had breached the Consortium Agreement by failing to
grant or assign to the Company a license for the Current Compounds. On March
12, 2001, the Vice Chancellor signed a Final Order and Judgment directing
Pharm-Eco to execute and deliver to the Company an agreement granting or
assigning to the Company the license. On March 27, 2001, Pharm-Eco and the
Company entered into an agreement assigning the license. No further claims
against the Company remain in this proceeding, and on May 1, 2001, a
Stipulation of Dismissal was filed with the Court.
On April 20, 2001, the Company entered into a settlement agreement with
Pharm-Eco and certain other parties resolving all remaining matters between
them. Pursuant to this agreement, the Company received a cash payment of
$1,000,000; an assignment from Pharm-Eco of various contract rights; and a
-25-
termination of all of the Company's obligations to Pharm-Eco, including,
without limitation, (a) the obligation to issue an aggregate of 850,000
warrants for shares of the Company's stock (see Note 7), (b) the obligation
to issue shares of common stock upon the occurrence of a certain future
event, (c) the obligation to pay a percentage of all non-royalty payments
that the Company might receive under any sublicense that the Company might
enter into with respect to certain compounds, and (d) certain accounts
payable which Pharm-Eco claimed to be owed of approximately $159,000; and a
release of any and all claims that Pharm-Eco may have had against the
Company. The cash payment received and the accounts payable obligations
which were forgiven, aggregating approximately $1,159,000, were recorded as
a credit to (reduction of) research and development expense during the year
ended March 31, 2002; as the Company had previously expensed the estimated
fair value of the shares of common stock issued to Pharm-Eco at the time of
the IPO and the accounts payable obligations, as research and development
expense.
The Company was required to make quarterly research grants in the amount of
$100,000 to UNC through April 30, 2002. During the years ended March 31,
2001, 2002 and 2003, the Company expensed grant payments to UNC of $400,000,
$400,000 and $100,000, respectively. Such payments were expensed as research
and development costs.
In August 1999 and 2000, the Company was awarded three Small Business
Innovation Research ("SBIR") grants aggregating approximately $1,429,000
from the National Institutes of Health ("NIH") to research various
infections. During the years ended March 31, 2001, 2002 and 2003, the
Company recognized revenues of approximately $564,000, $502,000 and $0,
respectively, from these grants and expensed payments to UNC and certain
other Scientific Consortium universities of approximately $215,000, $163,000
and $0, respectively, for contracted research related to these grants. There
is no additional funding available to the Company under these grants.
In August 2001, the Company was awarded an additional SBIR grant from the
NIH of approximately $144,000 as the third year grant to continue research
on "Novel Procedures for Treatment of Opportunistic Infections." During the
years ended March 31, 2002 and 2003, the Company recognized revenues of
approximately $74,000 and $70,000 from this grant and expensed payments of
approximately $65,000 and $70,000 to UNC and certain other Scientific
Consortium universities for contracted research related to this grant.
During the years ended March 31, 2001, 2002 and 2003, the Company expensed
approximately $477,000, $438,000 and $333,000, respectively, of other
payments to UNC and certain other Scientific Consortium universities for
patent related costs and other contracted research. Total payments expensed
to UNC and certain other Scientific Consortium universities were
approximately $1,093,000, $1,066,000 and $503,000 during the years ended
March 31, 2001, 2002 and 2003, respectively. Included in accounts payable as
of March 31, 2002 and 2003, were approximately $267,000 and $15,000,
respectively, due to UNC and certain other Scientific Consortium
universities.
In November 2000, The Bill & Melinda Gates Foundation ("Gates Foundation")
awarded a $15,114,000 grant to UNC to develop new drugs to treat Human
Trypanosomiasis (African sleeping sickness) and Leishmaniasis. On March 29,
2001, UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company is to receive up to $9,800,000, subject to
certain terms and conditions, over a five year period to conduct certain
clinical and research studies. The proceeds from this agreement are
restricted and must be segregated from the Company's other funds and used
for specific purposes. During the years ended March 31, 2001, 2002 and 2003,
the Company received installment payments under this grant of $4,300,000,
$0, and $3,380,000, respectively, of which approximately $791,000,
$2,946,000 and $1,389,000 was utilized for clinical and research purposes
-26-
conducted and expensed during the years ended March 31, 2001, 2002 and 2003,
respectively. The Company recognized revenues of approximately $791,000,
$2,946,000 and $1,389,000 during the years ended March 31, 2001, 2002 and
2003, respectively, for services performed under the agreement. The
remaining amount (approximately $563,000 and $2,554,000 as of March 31, 2002
and 2003, respectively) has been deferred and will be recognized as revenue
over the term of the agreement as the services are performed.
On May 4, 2001, the Company entered into a four-year subcontract agreement
with a research company located in Switzerland for clinical research to be
performed for the Company in connection with its subcontract agreement with
UNC related to the Gates Foundation grant. The agreement provides for
payments of up to approximately $1,195,000 over the term of the agreement,
provided the Company receives additional funding from UNC or the Gates
Foundation, otherwise the Company's commitment is limited to approximately
$317,000 during the initial year of the agreement. The Company recognized
expense of approximately $317,000 and $498,000 during the years ended March
31, 2002 and 2003 related to such agreement.
On April 22, 2002, the Company entered into a Confidentiality, Testing and
Option Agreement with Neurochem, Inc. ("Neurochem"), a Canadian corporation,
to supply Neurochem with selected dicationic compounds for the testing,
evaluation and potential future licensing of such compounds for (i) the
treatment and diagnosis of amyloidosis and the related underlying conditions
of Alzheimer's Disease, cerebral amyloid angiopathy, primary amyloidosis,
diabetes, rheumatic diseases and (ii) the treatments of conditions related
to secondary amyloidosis. Neurochem has the right to license tested
compounds upon the conclusion of the Confidentiality, Testing and Option
Agreement, as defined in the agreement. The Company has recognized revenues
for the year ended March 31, 2003 of $150,000. On April 4, 2003, the Company
notified Neurochem that the Confidentiality, Testing and Option Agreement
had previously expired by its terms.
9. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In December 1999, the Company began leasing its main
office and research facility under an operating lease that requires lease
payments starting in March 2000 of approximately $12,100 per month through
March 2003 and $12,800 from April 2003 through March 2005. 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 related
party, that is occupied by both the Company and RADE, on a month-to-month
basis, for approximately $8,800 per month.
In addition, the Company leases certain office equipment under an operating
lease agreement.
Total rent expense was approximately $282,000, $270,000 and $285,000 for all
leases during the years ended March 31, 2001, 2002, and 2003, respectively.
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As of March 31, 2003, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
Years
Ending Lease
March 31, Payments
2004 $ 153,000
2005 140,000
---------
Total $ 293,000
=========
Other Contingencies - In connection with obtaining the consent of Criticare
Systems, Inc. ("Criticare"), a significant stockholder of the Company, to
the private placement of stock by NCHK in 1998, the Company transferred to
Criticare, on July 2, 1998, certain of its intangible assets and 86,207
shares of the Company's common stock for $150,000. These intangible assets
included (1) a license for rmCRP as a therapy for treating sepsis (a
bacterial infection which quickly overwhelms the immune system and can lead
to sudden death), and (2) rights to certain diagnostic products.
The license granted to Criticare for rmCRP included patents and know-how
developed by the Company. NextEra has licensed the rights for producing
rmCRP back to the Company for use with sepsis applications. Criticare
assigned the technology to another party and the assignee had until July 2,
1999, to raise a minimum of $500,000 to fund both the development of the
sepsis technology and the initiation of clinical trials. The Company has not
received notification from the assignee as to whether or not the funds have
been raised. The Company is required to pay the cost of maintaining and
defending the patents until the initial financing is completed by the
assignee.
The rights transferred to Criticare for the diagnostic products included
rights to the Company's diagnostic products for measuring hemoglobin A1c in
diabetic patients and Carbohydrate Deficient Transferring ("CDT") as a
marker in the blood for long-term alcohol abuse, as well as patents that
have been issued for both technologies and exclusive worldwide rights from
Northwestern University to develop and sell the products, which now inure to
the benefit of Criticare. Criticare is responsible for the maintenance and
prosecution of the patents for both technologies.
In June 2000, Technikrom, Inc. ("Technikrom") filed a claim against the
Company with the American Arbitration Association in Chicago, Illinois. In
that proceeding, Technikrom sought to recover $124,000 in fees, interest and
costs for certain method development services provided to the Company
relating to the purification of a protein known as rmCRP. The Company filed
a counterclaim against Technikrom for fraudulent inducement of contract
which sought compensatory damages of at least $224,000, plus interest and
costs. The Company also sought a declaratory judgment that Technikrom, inter
alia, failed to use its best efforts to develop a purification method within
the time parameters set by the parties. The parties engaged an arbitrator
and in November 2001 Technikrom was awarded a $95,000 settlement, which the
Company subsequently paid.
The Company is involved in various claims and litigation incidental to its
operations. In the opinion of management, ultimate resolution of these
actions will not have a material effect on the Company's financial
statements.
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10. OTHER RETIRED OBLIGATIONS
Recapitalization - In connection with the Recapitalization (see Note 3) the
following transactions occurred on July 24, 1998:
o Criticare, a significant stockholder of the Company, who, prior to the
Recapitalization, owned 1,000,000 shares of Series A Redeemable
Preferred Stock, 1,200,000 shares of Series B Redeemable Preferred
Stock and 198,708 shares of common stock, had advanced $597,722 to the
Company. The advances were payable on demand. Criticare exchanged
$597,722 of advances and $68,368 of related accrued interest for
145,353 shares of common stock. The Company also had certain notes
payable to Criticare aggregating $148,777 and related accrued interest
of $43,426 that were exchanged for 35,403 shares of common stock. The
carrying value of the outstanding Criticare indebtedness in excess of
the estimated fair value of the shares of common stock and cash
exchanged was accounted for as additional paid-in capital.
o Certain other stockholders exchanged $387,450 of advances for 196,824
shares of common stock. The Company recognized a gain on the
extinguishment of debt of $80,404 for the outstanding indebtedness
under the advances in excess of the estimated fair value of the
196,824 shares of common stock ($307,046).
o Certain other notes payable aggregating $1,306,673, related accrued
interest aggregating $337,290 and accounts payable aggregating
$261,597 were exchanged for 227,398 shares of common stock and
$203,450 cash. The Company recognized a gain on the extinguishment of
debt of $1,347,361 for the outstanding aggregate indebtedness under
such notes ($1,306,673), related accrued interest ($337,290) and
accounts payable ($261,597) in excess of the estimated fair value of
the shares of common stock ($354,749) and cash ($203,450) exchanged.
o Series A and B Redeemable Preferred stockholders exchanged their
preferred shares for an aggregate 1,195,017 shares of common stock.
The holders of the Series A and Series B Redeemable Preferred Stock
had cumulative dividend preferences at the rate of 8% per annum,
compounded daily, of the liquidation value thereof, plus accumulated
and unpaid dividends thereon, in preference to any dividend on common
stock, payable when and if declared by the Company's Board of
Directors. Dividends accrued whether or not they had been declared and
whether or not there were profits, surplus or other funds of the
Company legally available for the payment of dividends. The difference
between the initial estimated fair value of the Series A Redeemable
Preferred Stock and the aggregate redemption value of $440,119 was a
premium which was amortized by a credit to retained earnings (deficit
accumulated during the developmental stage) and a debit to the
carrying value of the redeemable preferred stock during the period
from issuance to the required redemption date, using the interest
method. In addition, while the redeemable preferred shares were
outstanding, dividends aggregating $1,783,354 were charged to retained
earnings (deficit accumulated during the development stage). The
Series A and Series B Redeemable Preferred Stock had redemption
(carrying) values of $2,780,324 and $2,797,260, respectively, as of
the date of the Recapitalization. In connection with the
Recapitalization, the Series A and Series B Redeemable Preferred
stockholders agreed to accept 578,954 and 616,063 shares of common
stock, respectively, for their shares of the preferred stock. The
difference between the carrying value of the Series A and Series B
Redeemable Preferred Stock and the estimated fair value of the common
shares exchanged of $1,877,138 and $1,836,196, respectively, was
credited to deficit accumulated during the development stage.
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Advances from Stockholder and Affiliate - As of March 31, 1999, the
Company's president and NextEra had each advanced $25,000 to the Company.
The advances were non-interest bearing and were repaid in May 1999.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years ended
March 31, 2001, 2002 and 2003.
Non-Cash Investing and Financing Activities:
During the years ended March 31, 2001, 2002 and 2003, the Company issued
common stock, common stock options and warrants as compensation for services
and engaged in certain other non-cash investing and financing activities.
The amounts of these transactions are summarized as follows:
Years Ended March 31,
-------------------------------------------
2001 2002 2003
Expense related to issuance of common stock
as compensation for services $ 982,390
Expense related to issuance of common stock options
as compensation for services $ 451,565 $332,005 243,150
Expense related to issuance of warrants to purchase
common stock as compensation for services 1,287,729 51,835
Convertible preferred stock dividends accrued 29,400 302,437
Issuance of common stock as payment of convertible
preferred stock dividends 161,113
Issuance of common stock for conversions of convertible preferred stock 953,042
Issuance of common stock for acquisition of land use rights
Fair value of land use rights acquired $ 3,501,522
Less: Minority interest (296,193)
Cash paid for acquisition costs (204,924)
Increase in accounts payable for acquisition costs (1,605)
-----------
Issuance of common stock for acquisition $ 2,998,800
===========
12. SUBSEQUENT EVENTS
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 total amount of Series C
Convertible Preferred Stock outstanding as of June 18, 2003 was 125,352 and
gross proceeds of $3,133,800 have been received to date and would increase
equity by a similar amount.
On March 21, 2003, the Company entered into a Finder's Agreement with
Wyndham Associates Limited ("Wyndham") to identify potential strategic
partners and assist in the raising of equity financing. In conjunction with
the identification of equity investors for the Series C Convertible
Preferred Stock offering as noted above, on June 20, 2003, the Company
issued 220,000 shares of common stock. Wyndham further received a cash fee
equal to 4% of funds raised prior to June 30, 2003 through the sale of
Series C Convertible Preferred Stock. The agreement further provides that
Wyndham will receive a cash fee for any additional equity investments by
investors introduced by Wyndham subsequent to June 30, 2003.
* * * * * *
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