UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2005.
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
Commission file number: 000-25669
IMMTECH INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1523370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 573-0033
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes|X| No|_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes|X| No|_|
As of August 4, 2005, 11,524,697 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.
Table Of Contents
Page(s)
PART I FINANCIAL INFORMATION............................................2
Item 1 Condensed Consolidated Financial Statements....................2
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................17
Item 3 Quantitative and Qualitative Disclosures about Market Risk....20
Item 4 Controls and Procedures.......................................21
PART II OTHER INFORMATION...............................................21
Item 1 Legal Proceedings.............................................21
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds...22
Item 3 Defaults Upon Senior Securities...............................23
Item 4 Submission of Matters to a Vote of Security Holders...........23
Item 5 Other Information.............................................24
Item 6 Exhibits, and Reports on Form 8-K.............................24
-i-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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ASSETS June 30, 2005 March 31, 2005
CURRENT ASSETS:
Cash and cash equivalents $ 5,753,715 $ 9,471,694
Restricted funds on deposit 1,756,165 2,044,079
Other current assets 411,105 88,103
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Total current assets 7,920,985 11,603,876
PROPERTY AND EQUIPMENT - Net 3,641,253 3,655,604
OTHER ASSETS 16,466 16,594
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TOTAL $11,578,704 $15,276,074
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,230,516 $ 2,046,620
Accrued expenses 1,160,141 173,699
Deferred revenue 836,206 1,314,786
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Total current liabilities 3,226,863 3,535,105
Total liabilities 3,226,863 3,535,105
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,080,000 shares
authorized and unissued as of June 30, 2005 and March 31, 2005
Series A convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 320,000 shares authorized,
60,400 shares outstanding as of June 30, 2005 and
March 31, 2005; aggregate liquidation
preference of $1,528,578 as of June 30, 2005 1,528,578 1,551,165
Series B convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 240,000 shares authorized,
19,925 shares outstanding as of June 30, 2005 and March 31, 2005;
aggregate liquidation preference of $506,158 as of June 30, 2005 506,158 516,093
Series C convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 160,000 shares authorized, 51,336 and
60,452 shares outstanding as of June 30, 2005 and March 31, 2005, respectively;
aggregate liquidation preference of $1,304,387 as of June 30, 2005 1,304,387 1,566,976
Series D convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 200,000 shares authorized, 160,280
shares outstanding as of June 30, 2005 and March 31, 2005;
aggregate liquidation preference of $4,057,717 as of June 30, 2005 4,057,717 4,117,657
Common stock, par value $0.01 per share, 100,000,000 shares
authorized, 11,417,527 and 11,332,366 shares issued and outstanding
as of June 30, 2005 and March 31, 2005, respectively 114,176 113,324
Additional paid-in capital 76,977,338 76,428,132
Deficit accumulated during the developmental stage (76,136,513) (72,552,378)
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Total stockholders' equity 8,351,841 11,740,969
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TOTAL $11,578,704 $15,276,074
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See notes to condensed consolidated financial statements.
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IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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Three Month Period Ended October 15, 1984
June 30, (Inception) to
--------------------------- June 30,
2005 2004 2005
REVENUES $ 1,478,580 $ 857,612 $ 18,668,278
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EXPENSES:
Research and development 2,269,207 1,086,216 43,942,577
General and administrative 2,732,273 1,428,754 47,984,055
Equity in loss of joint venture 135,002
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Total expenses 5,001,480 2,514,970 92,061,634
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LOSS FROM OPERATIONS (3,522,900) (1,657,358) (73,393,356)
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OTHER INCOME (EXPENSE):
Interest income 57,587 9,066 791,049
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942)
Cancelled offering costs (584,707)
Gain on extinguishment of debt 1,427,765
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Other income (expense) - net 57,587 9,066 501,663
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NET LOSS (3,465,313) (1,648,292) (72,891,693)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (118,822) (148,842) (5,614,719)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(3,584,135) $(1,797,134) $(76,136,513)
============ =========== ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net loss $(0.30) $(0.17)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.01) (0.02)
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BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ (0.31) $ (0.19)
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WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 11,390,899 9,882,051
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See notes to condensed consolidated financial statements.
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IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Month Period Ended October 15, 1984
June 30, (Inception) to
------------------------- June 30,
2005 2004 2005
OPERATING ACTIVITIES:
Net loss $(3,465,313) $(1,648,292) $(72,891,693)
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 37,281 294,151 27,575,263
Depreciation and amortization of property and equipment 38,322 30,310 919,469
Deferred rental obligation (1,592)
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942
Amortization of debt discounts and issuance costs 134,503
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Other current assets (323,002) (264,918) (411,105)
Other assets 128 (16,466)
Accounts payable (816,104) (510,781) 1,558,051
Accrued expenses 986,442 86,717 1,823,154
Deferred revenue (478,580) (857,611) 836,206
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Net cash used in operating activities (4,020,826) (2,872,016) (41,762,439)
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INVESTING ACTIVITIES:
Purchase of property and equipment (23,971) (7,557) (1,533,792)
Restricted funds on deposit 287,914 982,969 (1,756,165)
Advances to joint venture (135,002)
Proceeds from maturities of investment securities 1,800,527
Purchases of investment securities (1,803,469)
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Net cash (used in) provided by investing activities 263,943 975,412 (3,427,901)
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FINANCING ACTIVITIES:
Advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Net proceeds from issuance of redeemable preferred stock 3,330,000
Net proceeds from issuance of convertible preferred stock and warrants 13,124,364
Payments of dividends on convertible preferred stock and for fractional shares of
common stock resulting from the conversions of convertible preferred stock (537) (1,337) (4,102)
Net proceeds from issuance of common stock 39,441 45,980 31,093,106
Additional capital contributed by stockholders 245,559
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Net cash (used in) provided by financing activities 38,904 44,643 50,944,055
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,717,979) (1,851,961) 5,753,715
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,471,694 6,745,283 --
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,753,715 $ 4,893,322 $ 5,753,715
=========== =========== ============
NON-CASH FINANCING ACTIVITY - DEFERRED OFFERING
COSTS FINANCED WITH ACCOUNTS PAYABLE $ 49,821
See notes to condensed consolidated financial statements.
-4-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Immtech International, Inc. and its subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments necessary for a fair statement of results for each period
shown (unless otherwise noted herein, all adjustments are of a normal
recurring nature). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such SEC rules and regulations. The
Company believes that the disclosures made are adequate to prevent the
financial information given from being misleading. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest Annual
Report on Form 10-K.
2. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiaries (the "Company") are pharmaceutical
companies advancing the development and commercialization of oral drugs to
treat infectious diseases and extending its proprietary aromatic cation
technology platform to the treatment of cancer, diabetes and other
diseases. The Company has advanced clinical programs that include new
treatments for malaria, Pneumocystis pneumonia ("PCP") and African
sleeping sickness (trypanosomiasis), and drug development programs for
fungal infections and tuberculosis. The Company has worldwide licensing
and exclusive commercialization rights to an aromatic cationic
pharmaceutical technology platform and is developing drugs intended for
commercial use based on that technology. The Company's development
programs include treatments for malaria, fungal infections, tuberculosis,
PCP and tropical diseases, including African sleeping sickness
(trypanosomiasis).
The Company holds worldwide patents and patent applications, and licenses
and rights to license technology, primarily from a scientific consortium
that has granted to the Company exclusive rights to commercialize products
from, and license rights to, the technology. The scientific consortium
includes scientists from The University of North Carolina at Chapel Hill
("UNC"), Georgia State University ("Georgia State"), Duke University
("Duke University") and Auburn University ("Auburn University")
(collectively, the "Scientific Consortium"). The Company is a development
stage enterprise and, since its inception on October 15, 1984, has engaged
in research and development programs, expanded its network of scientists
and scientific advisors and licensing technology agreements, and advanced
the commercialization of the aromatic cation pharmaceutical technology
platform (the Company acquired its rights to the aromatic cation
technology platform in 1997 and promptly thereafter commenced development
of its current programs). The Company uses the expertise and resources of
strategic partners and third parties in a number of areas, including: (i)
laboratory research, (ii) pre-clinical and human clinical trials and (iii)
manufacture of pharmaceutical drugs.
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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, 2006, if at all.
Since inception, the Company has incurred accumulated net losses of
approximately $72,892,000. Management expects the Company will continue to
incur additional losses during the next several years as the Company
continues research and development activities and clinical trial and
commercialization efforts. In addition, the Company has various research
and development agreements with third parties and is dependent upon such
parties' abilities to perform under these agreements. There can be no
assurance that the Company's 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 believes it will require additional funds to commercialize its
product candidates. The Company's cash requirements may vary materially
from those now planned because of the results of research and development,
results of pre-clinical and clinical testing, responses to grant requests,
relationships with strategic partners, changes in the focus and direction
in research and development programs, competitive and technological
advances, the regulatory process and other factors. Changes in
circumstances in any of the above areas may require the Company to
allocate more funds than are currently available or than management
intends to raise.
Management believes the Company's existing unrestricted cash and cash
equivalents, and the grants received or awarded and awaiting disbursement
of, will be sufficient to meet the Company's planned expenditures through
at least the next twelve months, although there can be no assurance the
Company will not require additional funds. Management may seek to satisfy
future funding requirements through public or private offerings of
securities, by collaborative or other arrangements with pharmaceutical or
biotechnology companies or from other sources or by issuance of debt.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to generate sufficient revenues for profitable
operations. Management's plans for the forthcoming year, in addition to
normal operations, include continuing financing efforts, obtaining
additional research grants and entering into research and development
agreements with other entities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Immtech International, Inc. and its wholly owned
subsidiaries. All inter-company balances and transactions have been
eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of an amount on
deposit at a bank and an investment in a money market mutual fund, stated
at cost, which approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash
in two accounts on deposit at banks which are restricted for use in
accordance with (i) a clinical research subcontract agreement with UNC and
(ii) a malaria drug development agreement with The Medicines for Malaria
Venture ("MMV").
Concentration of Credit Risk - The Company maintains its cash in
commercial banks. Balances on deposit are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to specified limits. Balances in excess
of FDIC limits are uninsured.
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Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of June 30, 2005
and March 31, 2005, according to NextEra's disclosure the Company owned
approximately 28% of the issued and outstanding shares of NextEra common
stock. The Company has recognized an equity loss in NextEra to the extent
of the basis of its investment, and the investment balance is zero as of
June 30, 2005 and March 31, 2005. Recognition of any investment income on
the equity method by the Company for its investment in NextEra will occur
only after NextEra has earnings in excess of previously unrecognized
equity losses. The Company does not provide, and has not provided, any
financial guaranties to NextEra.
Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the
estimated useful lives of the respective assets, ranging from three to
fifty years.
Long-Lived Assets - The Company periodically evaluates the carrying value
of its property and equipment. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, a
loss is recognized for the asset which is measured by the difference
between the fair value and the carrying value of the asset.
Revenue Recognition - Grants to perform research are the Company's primary
source of revenue and are generally granted to support research and
development activities for specific projects or drug candidates. Revenue
related to grants to perform research and development is recognized as
earned based on the performance requirements of the specific grant.
Upfront cash payments from research and development grants are reported as
deferred revenue until such time as the research and development
activities covered by the grant are performed.
Research and Development Costs - Research and development costs are
expensed as incurred and include costs associated with research performed
pursuant to collaborative agreements. Research and development costs
consist of direct and indirect internal costs related to specific projects
as well as fees paid to other entities that conduct certain research
activities on the Company's behalf.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. In addition, a valuation allowance is recognized if it is more
likely than not that some or all of the deferred income tax assets will
not be realized. A valuation allowance is used to offset the related net
deferred income tax assets due to uncertainties of realizing the benefits
of certain net operating loss and tax credit carryforwards and other
deferred income tax assets.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share." Basic net income (loss) and diluted net income
(loss) per share are computed by dividing net income (loss) attributable
to common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share, when applicable, is computed by
dividing net income attributable to common stockholders by the weighted
average number of common shares outstanding increased by the number of
potential dilutive common shares based on the treasury stock method.
Diluted net loss per share was the same as the basic net loss per share
for the three month periods ended June 30, 2005 and June 30, 2004, as none
of the Company's outstanding
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common stock options, warrants and the conversion features of Series A, B,
C and D Convertible Preferred Stock were dilutive.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the three month periods ended June 30, 2005 and 2004,
respectively.
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 materially from these estimates.
3. STOCKHOLDERS' EQUITY
On January 7, 2004, the stockholders of the Company approved an increase
in the number of authorized common stock from 30 million to 100 million
shares. On June 14, 2004, the Company filed with the Secretary of State of
the State of Delaware an Amended and Restated Certificate of Incorporation
implementing, among other things, the approved authorized 70 million share
common stock increase from 30 million to 100 million shares of common
stock.
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series A Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $18,578 and $41,166 of accrued preferred stock dividends at June 30,
2005 and March 31, 2005, respectively. Each share of Series A Convertible
Preferred Stock may be converted 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 A"), subject
to certain adjustments, as defined in the Series A Certificate of
Designation. On April 15, 2005, the Company issued 3,469 shares of common
stock and paid $117 in lieu of fractional common shares as dividends on
the preferred shares. On April 15, 2004, the Company issued 2,961 shares
of common stock and paid $352 in lieu of fractional common shares as
dividends on the preferred shares. During the three month period ended
June 30, 2005 there were no conversions while for the three month period
ended June 30, 2004, certain preferred stockholders converted 400 shares
of Series A Convertible Preferred Stock, including accrued dividends, for
2,264 shares of common stock.
The Company may at any time require that any or all outstanding shares of
Series A Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series A Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series A Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price A, provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing
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110% of the Liquidation Price by the Conversion Price A. The Conversion
Price A is subject to certain adjustments, as defined in the Series A
Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series A Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series A Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share
of Series A Convertible Preferred Stock shall be entitled to 5.6561 votes
(subject to adjustment) with respect to any and all matters presented to
the Company's stockholders for their action or consideration. Except as
provided by law or by the provisions establishing any other series of
preferred stock, Series A Convertible Preferred stockholders and holders
of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
Series B Convertible Preferred Stock - On September 25, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 240,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 8.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series B Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $8,033 and $17,968 of accrued preferred stock dividends as of June 30,
2005 and March 31, 2005, respectively. Each share of Series B Convertible
Preferred Stock may be converted by the holder at any time into shares of
common stock at a conversion rate determined by dividing the $25.00 stated
value, plus any accrued and unpaid dividends (the "Liquidation Price"), by
a $4.00 conversion price (the "Conversion Price B"), subject to certain
adjustments, as defined in the Series B Certificate of Designation. On
April 15, 2005, the Company issued 1,526 shares of common stock and paid
$49 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2004, the Company issued 974 shares of common stock
and paid $107 in lieu of fractional common shares as dividends on the
preferred shares. During the three month periods ended June 30, 2005 and
2004, there were no conversions.
The Company may at any time require that any or all outstanding shares of
Series B Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series B Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series B Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price B, provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price B. The
Conversion Price B is subject to certain adjustments, as defined in the
Series B Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series B Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series B Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each
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issued and outstanding share of Series B Convertible Preferred Stock shall
be entitled to 6.25 votes (subject to adjustment) with respect to any and
all matters presented to the Company's stockholders for their action or
consideration. Except as provided by law or by the provisions establishing
any other series of preferred stock, Series B Convertible Preferred
stockholders and holders of any other outstanding preferred stock shall
vote together with the holders of common stock as a single class.
Series C Convertible Preferred Stock - On June 6, 2003, we filed a
Certificate of Designation with the Secretary of State of the State of
Delaware designating 160,000 shares of the Company's 5,000,000 authorized
shares of preferred stock as Series C Convertible Preferred Stock, $0.01
par value, with a stated value of $25.00 per share. Dividends accrue at a
rate of 8.0% per annum on the $25.00 stated value per share and are
payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined.
Included in the carrying value of the Series C Convertible Preferred Stock
in the accompanying condensed consolidated balance sheets are $20,987 and
$55,676 of accrued preferred stock dividends as of June 30, 2005 and March
31, 2005, respectively. Each share of Series C Convertible Preferred Stock
may be converted by the holder at any time into shares of common stock at
a conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.42
conversion price (the "Conversion Price C"), subject to certain
adjustments, as defined in the Series C Certificate of Designation. On
April 15, 2005, the Company issued 4,625 shares of common stock and paid
$212 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2004, the Company issued 3,534 shares of common stock
and paid $397 in lieu of fractional common shares as dividends on the
preferred shares. During the three month periods ended June 30, 2005 and
2004, certain preferred stockholders converted 9,116 and 5,052 shares of
Series C Convertible Preferred stock, including accrued dividends, for
51,622 and 28,575 shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares of
Series C Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series C Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series C Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price C provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price C. The
Conversion Price C is subject to certain adjustments, as defined in the
Series C Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series C Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series C Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share
of Series C Convertible Preferred Stock shall be entitled to 5.6561 votes
(subject to adjustment) with respect to any and all matters presented to
the Company's stockholders for their action or consideration. Except as
provided by law or by the provisions establishing any other series of
preferred stock, Series C Convertible Preferred stockholders and holders
of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
-10-
Series D Convertible Preferred Stock - On January 15, 2004, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 200,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series D Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series D Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $50,717 and $110,657 of accrued preferred stock dividends as of June
30, 2005 and March 31, 2005, respectively. Each share of Series D
Convertible Preferred Stock may be converted by the holder at any time
into shares of common stock at a conversion rate determined by dividing
the $25.00 stated value, plus any accrued and unpaid dividends (the
"Liquidation Price"), by a $9.00 conversion price (the "Conversion Price
D"), subject to certain adjustments, as defined in the Series D
Certificate of Designation. On April 15, 2005, the Company issued 9,219
shares of common stock and paid $135 in lieu of fractional common shares
as dividends on the preferred shares. On April 15, 2004, the Company
issued 3,340 shares of common stock and paid $447 in lieu of fractional
common shares as dividends on the preferred shares. During the three month
periods ended June 30, 2005 and 2004, there were no conversions.
The Company may at any time, require that any or all outstanding shares of
Series D Convertible Preferred Stock be converted into shares of our
common stock, provided that the shares of common stock into which the
Series D Convertible Preferred Stock are convertible are registered
pursuant to an effective registration statement, as defined. The number of
shares of common stock to be received by the holders of the Series D
Convertible Preferred Stock upon a mandatory conversion by us is
determined by (i) dividing the Liquidation Price by the Conversion Price D
provided that the closing bid price for the Company's common stock exceeds
$18.00 for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met,
the number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price D. The Conversion Price D is
subject to certain adjustments, as defined in the Certificate of
Designation.
The Series D Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends. Each
issued and outstanding share of Series D Convertible Preferred Stock shall
be entitled to 2.7778 votes (subject to adjustment) with respect to any
and all matters presented to the Company's stockholders for their action
or consideration. Except as provided by law or by the provisions
establishing any other series of preferred stock, Series D Convertible
Preferred stockholders and holders of any other outstanding preferred
stock shall vote together with the holders of common stock as a single
class.
Common Stock Options - At the stockholders' meeting held November 12,
2004, the stockholders approved the second amendment to the 2000 Stock
Incentive Plan which increased the number of shares of common stock
reserved for issuance from 1,100,000 shares to 2,200,000 shares. Options
granted under the 2000 Stock Incentive Plan that expire are available to
be reissued. During the three month period ended June 30, 2005, 42,750
options previously granted under the 2000 Stock Incentive Plan expired and
were available to be reissued. No options expired in the three month
period ended June 30, 2004. As of June 30, 2005, there were a total of
1,062,000 shares available for 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
-11-
generally expire after five or ten years. During the three month period
ended June 30, 2005, the Company issued 30,000 options to purchase shares
of common stock to certain new employees while for the three month period
ended June 30, 2004 no options were issued to any employees or directors.
During the three month period ended June 30, 2005, 10,900 non compensatory
options were exercised with an exercise price of $2.55, while for the
three month period ended June 30, 2004 no non-compensatory options were
exercised.
Compensatory Options Granted - During the three month period ended June
30, 2005 the Company issued no options to non-employees and recognized
expense of approximately $11,000, related to certain options issued during
prior years which vest over a four year service period, while for the
three month period ended June 30, 2004, the Company issued options to
purchase 20,000 shares of common stock to non-employees and recognized
expense of approximately $283,000, related to these options and certain
options issued during prior years which vest over a four year service
period. The expense was determined based on the estimated fair value of
the options issued using the Black-Scholes option valuation model.
On May 28, 2004, options to purchase 18,517 shares with an exercise price
of $0.4649 per share were exercised on a cashless basis. Based on the fair
market value calculated as of the date of exercise, the option holder
received 18,000 shares of common stock.
The 20,000 stock options issued during the three month period ended June
30, 2004 were granted to a consultant on May 12, 2004 as compensation for
services to develop relationships with Tsinghua University. Tsinghua
University committed resources from its Department of Biological Sciences
and Biotechnology to assist the Company in pre-clinical and clinical
trials of the Company's drug candidates targeting tuberculosis and
diabetes in China.
Warrants - During the three month period ended June 30, 2005, warrants to
purchase 1,800 shares of common stock were exercised, resulting in
proceeds to the Company of $11,646 while for the three month period ended
June 30, 2004, warrants to purchase 6,000 shares of common stock were
exercised, resulting in proceeds to the Company of $45,980. Additionally,
on May 11, 2004, a warrant holder exercised a warrant to purchase 21,400
shares of common stock at an exercise price of $16.00 per share on a
cashless basis. Based on the fair market value calculated as of the date
of exercise, the warrant holder received 4,390 shares of common stock.
Stock-Based Compensation - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment"
("SFAS 123R"), which requires compensation costs related to share-based
payment transactions to be recognized in the financial statements. With
limited exceptions, the amount of the compensation cost is to be measured
based on the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards are to be measured each reporting
period. Compensation cost is to be recognized over the period that an
employee provides service in exchange for the award. SFAS 123R replaces
FASB Statement No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123R is effective for all interim or
annual periods beginning after the Company's next fiscal year ending March
31, 2006. The Company has not yet adopted this pronouncement and is
evaluating the impact that the adoption of SFAS 123R will have on its
consolidated financial position, results of operations and cash flows. The
Company continues to adhere to the disclosure-only provisions of SFAS No.
123, and applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock option plans.
-12-
During the three month period ended June 30, 2005, the Company issued
options to purchase 30,000 shares of common stock to certain new employees
while for the three month period ended June 30, 2004, no options were
issued to employees or directors. If the Company had recognized
compensation expense for the options granted and or vesting during the
three month period ended June 30, 2005 and 2004, consistent with the
method prescribed by SFAS No. 123, net loss and net loss per share would
have been changed to the pro forma amounts indicated below:
Three Months Ended June 30,
---------------------------
2005 2004
Net loss attributable to common shareholders - as reported $(3,584,135) $(1,797,134)
Add: stock-based compensation expense included in reported
net loss 0 0
Deduct: total stock-based compensation expense determined
under fair value method for all awards (1,022,828) (702,950)
----------- -----------
Net loss attributable to common stockholders - pro forma $(4,606,963) $(2,500,084)
=========== ===========
Basic and diluted net loss per share attributable to common
stockholders - as reported $ (0.31) $ (0.19)
=========== ===========
Basic and diluted net loss per share attributable to common
stockholders - pro forma $ (0.40) $ (0.25)
=========== ===========
4. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenue under various collaborative research agreements.
Under the terms of these arrangements, the Company generally has agreed to
perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding, an allowance for management
overhead, and may also earn additional fees for the attainment of certain
milestones.
The Company initially acquired its rights to the aromatic cation
technology platform developed by a consortium of universities consisting
of 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, UNC and a third-party (to
which each of the other members of the Scientific Consortium agreed
shortly thereafter to become a party) (the "original licensee"). The
Consortium Agreement commits the parties to collectively research,
develop, finance the research and development of, manufacture and market
both the technology and compounds owned by the Scientific Consortium and
previously licensed or optioned to the original licensee and licensed to
the Company in accordance with the Consortium Agreement (the "Current
Compounds"), and all technology and compounds developed by the Scientific
Consortium after January 15, 1997, through use of Company-sponsored
research funding or National Cooperative Drug Development grant funding
made available to the Scientific Consortium (the "Future Compounds" and,
collectively with the Current Compounds, the "Compounds").
The Consortium Agreement contemplated that upon the completion of our
initial public offering ("IPO") of shares of its common stock with gross
proceeds of at least $10,000,000 by April 30, 1999, the Company, with
respect to the Current Compounds, and UNC, (on behalf of the Scientific
-13-
Consortium), with respect to Current Compounds and Future Compounds, would
enter into license agreements for the intellectual property rights
relating to the Compounds pursuant to which the Company would pay
royalties and other payments based on revenues received for the sale of
products based on the Compounds.
The Company completed an IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000 thereby earning a worldwide license and exclusive
rights to commercially use, manufacture, have manufactured, promote, sell,
distribute, or otherwise dispose of any products based directly or
indirectly on all of the Current Compounds and Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to the original
licensee or persons designated by the original licensee.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium
whereby the Company received the exclusive license to commercialize the
aromatic cation technology platform and compounds developed or invented by
one or more of the Consortium scientists after January 15, 1997, and which
also incorporated into such License Agreement the Company's existing
license with the Scientific Consortium with regard to the Current
Compounds. Also pursuant to the Consortium Agreement, the original
licensee transferred to the Company the worldwide license and exclusive
right to commercially use, manufacture, have manufactured, promote, sell,
distribute or otherwise dispose of any and all products based directly or
indirectly on aromatic cations developed by the Scientific Consortium on
or prior to January 15, 1997 and previously licensed (together with
related technology and patents) to the third-party.
The Consortium Agreement provides that the Company is required to pay to
UNC on behalf of the Scientific Consortium reimbursement of patent and
patent-related fees, certain milestone payments and royalty payments based
on revenue derived from the Scientific Consortium's aromatic cation
technology platform. Each month on behalf of the inventor scientist or
university, as the case may be, UNC submits an invoice to the Company for
payment of patent-related fees related to current compounds or future
compounds incurred prior to the invoice date. The Company is also required
to make milestone payments in the form of the issuance of 100,000 shares
of its common stock to the Consortium when it files its first initial New
Drug Application ("NDA") or an Abbreviated New Drug Application ("ANDA")
based on Consortium technology. We are also required to pay to UNC on
behalf of the Scientific Consortium (other than Duke University) (i)
royalty payments of up to 5% of our net worldwide sales of "current
products" and "future products" (products based directly or indirectly on
current compounds and future compounds, respectively) and (ii) a
percentage of any fees we receive under sublicensing arrangements. With
respect to products or licensing arrangements emanating from Duke
University technology, the Company is required to negotiate in good faith
with UNC (on behalf of Duke University) royalty, milestone or other fees
at the time of such event, consistent with the terms of the Consortium
Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and
defend patents so long as the Company chooses to retain the license to
such patents.
During the three month periods ended June 30, 2005 and 2004, the Company
expensed approximately $211,000 and $98,000, 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
-14-
$211,000 and $98,000 during the three month periods ended June 30, 2005
and 2004, respectively. Included in accounts payable as of June 30, 2005
and March 31, 2005, were approximately $81,000, and $136,000,
respectively, due to UNC and certain other Scientific Consortium
universities.
In July 2004, the Company was awarded an SBIR grant from the NIH of
$107,000 as a grant to research on "Aromatic Dication Prodrugs for CNS
Trypanosomiasis." During the three month period ended June 30, 2005, the
Company recognized no revenues and no expenses from this grant.
In November 2000, a philanthropic foundation (the "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 related to the Foundation Grant.
In April 2003, the Foundation awarded a $2,713,124 supplemental grant to
UNC for the expansion of phase IIB/III clinical trials to treat human
Trypanosomiasis (African sleeping sickness) and improved manufacturing
processes. The Company is to receive and has received, pursuant to the
clinical research subcontract with UNC, inclusive of its portion of the
supplemental grant, a total amount of funding of approximately
$11,700,000. The proceeds to the Company are restricted and must be
segregated from other funds and used for specific purposes. The Company
and its research partners are working with their funding sources to
develop next steps and to increase funding to advance the development of a
treatment for African sleeping sickness.
During the three month period ended June 30, 2005, approximately $852,000
and $646,000 was utilized for clinical and research purposes conducted and
expensed during the three month periods ended June 30, 2005 and 2004,
respectively. The Company has recognized revenues of approximately
$852,000 and $646,000 during the three month periods ended June 30, 2005
and 2004, respectively. The remaining amount (approximately $17,000 as of
June 30, 2005) 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 Foundation grants. The Company recognized expense
of approximately $310,000 and $0 during the three month periods ended June
30, 2005 and 2004, respectively, related to this agreement.
On November 26, 2003, the Company entered into a testing agreement
("Testing Agreement") with The Medicines for Malaria Venture ("MMV"), a
foundation established in Switzerland, and UNC, pursuant to which the
Company, with the support of MMV and UNC, is conducting a proof of concept
study of the dicationic drug candidate DB289, including Phase II and Phase
III human clinical trials, and will pursue drug development activities of
DB289 alone, or in combination with other anti-malaria drugs, with the
goal of obtaining marketing approval of a product for the treatment of
malaria.
Under the terms of the Testing Agreement, MMV has committed to advance
funds to Immtech to pay for human clinical trials and regulatory
preparation and filing costs for the approvals to market DB289 to treat
malaria by at least one internationally accepted regulatory agency and one
malaria-endemic country. The funding under the Testing Agreement is for
the performance of specific research and is not subject to maximum funding
amounts. The term of the funding is three years
-15-
and is subject to annual renewals. The Company has forecasted such costs
to be approximately $8.2 million over the three years. In return for MMV's
funding, the Company is required, when selling malaria drugs derived from
this research into "malaria-endemic countries," as defined, to sell such
drugs at affordable prices. An affordable price is defined in the Testing
Agreement to mean a price not to be less than the cost to manufacture and
deliver the drugs plus administrative overhead costs (not to exceed 10% of
the cost to manufacture) and a modest profit. There are no price
constraints on product sales into non-malaria-endemic countries. The
Company must, however, pay to MMV a royalty not to exceed 7% of net sales,
as defined, on product sales into non-malaria-endemic countries, until the
amount funded under the Testing Agreement and amounts funded under a
related discovery agreement between MMV and UNC is refunded to MMV at face
value.
The Company recognized revenues of approximately $627,000 and $211,000
during the three month periods ended June 30, 2005 and 2004, respectively,
for expenses incurred related to activities within the scope of the
Testing Agreement. The Company received $1,000,000 during the three month
period ended June 30, 2005, aggregating to approximately $4,023,000 to
date under the Testing Agreement. At June 30, 2005, the Company has
approximately $819,000 recorded as deferred revenue with respect to this
agreement.
5. SUBSEQUENT EVENT
In connection with services rendered to us, effective July 13, 2005, we
issued to an investment bank and two of its affiliates, warrants to
purchase 100,000 shares of our common stock. The warrants are exercisable
at $13.11 per share (the exercise price was set by calculating a 15%
premium over our common stock volume weighted average price for the 10 day
period immediately preceding July 12, 2005). The warrants are exercisable
beginning on July 13, 2006 through July 12, 2010. The Company may redeem
any outstanding warrants, at $0.01 per share underlying each warrant, upon
30 day prior notice if at any time prior to the expiration of the warrant
the market closing price of the Company's common stock meets or exceeds
$26.22 for 20 consecutive trading days. The warrant holder may exercise
the warrant, pursuant to its terms, during the 30 day notice period.
* * * * * *
-16-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Forward Looking Statements
--------------------------
Certain statements contained in this quarterly report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "may", "intends", "plans", "believes", "anticipates" or
"expects" or similar words and may include statements concerning our strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this quarterly
report, the following: (i) we are in an early stage of product development, (ii)
the possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our product candidates not
to be viable, (v) uncertainties as to the requirement that a drug product be
found to be safe and effective after extensive clinical trials and the
possibility that the results of such trials, if completed, will not establish
the safety or efficacy of our drug product candidates, (vi) risks relating to
requirements for approvals by governmental agencies, such as the Food and Drug
Administration, before products can be marketed and the possibility that such
approvals will not be obtained in a timely manner or at all or will be
conditioned in a manner that would impair our ability to market our product
candidates successfully, (vii) the risk that our patents could be invalidated or
narrowed in scope by judicial actions or that our technology could infringe upon
the patent or other intellectual property rights of third parties, (viii) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of commercializing a successful product or that
future financing will be completed on unfavorable terms, (ix) the possibility
that any products successfully developed by us will not achieve market
acceptance and (x) other risks and uncertainties that may not be described
herein. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Results of Operations
---------------------
With the exception of certain research funding agreements and certain grants, we
have not generated any revenue from operations. For the period from inception
(October 15, 1984) to June 30, 2005, we incurred cumulative net losses of
approximately $72,892,000. 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:
-17-
o payments from foundations and other collaborators under
arrangements that may be entered into in the future;
o grants from the United States government and other governments and
entities; and
o the issuance of securities or borrowing of funds.
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.
Three Month Period Ended June 30, 2005 Compared with the Three Month Period
Ended June 30, 2004.
Revenues under collaborative research and development agreements were
approximately $1,479,000 and $858,000 for the three month periods ended June 30,
2005 and June 30, 2004, respectively. For the three month period ended June 30,
2005, we recognized revenues of approximately $852,000 related to a clinical
research subcontract agreement between us and The University of North Carolina
at Chapel Hill ("UNC") and $627,000 related to a grant from Medicines for
Malaria Venture ("MMV") to fund clinical studies and licensure of DB289 for
treatment of malaria, while for the three month period ended June 30, 2004,
revenues recognized of approximately $646,000 related to the abovementioned UNC
clinical research subcontract and $212,000 related to the abovementioned MMV
grant for treatment of malaria.
The clinical research subcontract agreement initiated in March 2001 relates to a
grant from a philanthropic foundation (the "Foundation") to UNC to develop new
drugs to treat trypanosomiasis (African sleeping sickness) and leishmaniasis.
MMV also receives funding from the Foundation. Grant and research and
development agreement revenue is recognized as completed under the terms of the
respective agreements, according to Company estimates. Grant and research and
development funds received prior to completion under the terms of the respective
agreements are recorded as deferred revenues.
Interest income for the three month period ended June 30, 2005 was approximately
$58,000. Interest income during the three month period ended June 30, 2004 was
approximately $9,000. The increase is primarily due to an increase in funds
invested from the prior corresponding quarter. There were no interest expenses
during the three month periods ended June 30, 2005 and June 30, 2004.
Research and development expenses increased to approximately $2,269,000 from
$1,086,000 for the three month periods ended June 30, 2005 and June 30, 2004,
respectively. Expenses relating to the MMV testing agreement and the UNC
subcontract, respectively, increased from approximately $211,000 and $644,000 in
the three month period ended June 30, 2004 to approximately $624,000 and
$849,000 in the three month period ended June 30, 2005. Additionally, contract
services relating to trials for treatment of Pneumocystis pneumonia increased
from approximately $31,000 to approximately $385,000 in the same periods. Other
research and
-18-
development expenses increased approximately $211,000 from the three month
period ended June 30, 2004 to the three month period ended June 30, 2005.
General and administrative expenses increased to approximately $2,732,000 from
approximately $1,429,000 during the three month periods ended June 30, 2005, and
June 30, 2004, respectively. The increase was largely due to increased legal
fees, primarily concerning ongoing legal proceedings with Neurochem (see Part
II, Item 1), which increased from approximately $345,000 in the three month
period ended June 30, 2004, to approximately $1,400,000 in the three month
period ended June 30, 2005. The increase in legal fees for the Neurochem
proceeding related to preparation for a hearing scheduled in September 2005.
Each of patent fees and public relations related fees increased from
approximately $74,000 and $18,000 to approximately $165,000 and $108,000 over
the same periods. Due to new hires, payroll and related costs increased from
approximately $194,000 in the three month period ended June 30, 2004 to
approximately $391,000 in the three month period ended June 30, 2005. Non-cash
general and administrative expenses decreased from approximately $243,000 in the
three month period ended June 30, 2004 to approximately $26,000 in the three
month period ended June 30, 2005. Other general and administrative costs
increased by approximately $87,000 over the same periods.
Our net loss increased to approximately $3,465,000 from approximately $1,648,000
during the three month periods ended June 30, 2005 and June 30, 2004,
respectively. The increase was primarily attributable to increases in research
and development costs and general and administrative expenses, including legal
expenses, noted above.
Liquidity and Capital Resources
-------------------------------
As of June 30, 2005, cash and cash equivalents, substantially all of which were
invested in a money market mutual fund, were approximately $5,754,000.
We spent approximately $24,000 on equipment purchases during the three month
period ended June 30, 2005, compared to $8,000 for equipment expenditures during
the same period in the previous year. No significant purchases of equipment are
anticipated by us during the year ending March 31, 2006.
We periodically receive cash from the exercise of common stock options and
warrants. During the three month period ended June 30, 2005, we received
approximately $28,000 from the exercise of options. Warrant holders exercised
warrants to purchase 1,800 shares of common stock resulting in gross proceeds to
us of approximately $12,000. (See "Changes in Securities and Use of Proceeds -
Recent Sales of Unregistered Securities" below).
We believe our existing unrestricted cash and cash equivalents and the grants we
have received or have been awarded and are awaiting disbursement of, will be
sufficient to meet our planned expenditures through August 2006, although there
can be no assurance we will not require additional funds.
-19-
Through June 30, 2005, we financed our operations with:
o proceeds from various private placements of debt, net of repayments,
and equity securities, an initial public offering, and other cash
contributed from stockholders, which in the aggregate raised
approximately $50,944,000;
o payments from research and testing agreements, foundation grants and
SBIR grants and STTR grants of approximately $18,668,000; and
o the use of stock, options and warrants in lieu of cash compensation.
Our cash resources have been used to finance, develop and begin
commercialization of drug product candidates, including sponsored research,
conduct of human clinical trials, capital expenditures, expenses associated with
development of product candidates pursuant to an agreement, dated January 15,
1997, (the "Consortium Agreement"), among us and UNC (to which each of Duke
University, Auburn University and Georgia State University agreed shortly
thereafter to become a party, and all of which, collectively with UNC, are
referred to as the "Consortium") and, as contemplated by the Consortium
Agreement, under a license agreement dated January 28, 2002 ("Consortium License
Agreement") with the Consortium, and general and administrative expenses. Over
the next several years we expect to incur additional research and development
costs, including costs related to research in pre-clinical (laboratory) and
human clinical trials, administrative expenses to support our research and
development operations and marketing expenses to launch the sale of any
commercialized product that may be developed.
Our future working capital requirements will depend upon numerous factors,
including the progress of research, development and commercialization programs
(which may vary as product candidates are added or abandoned), pre-clinical
testing and human clinical trials, achievement of regulatory milestones, third
party collaborators fulfilling their obligations to us, the timing and cost of
seeking regulatory approvals, the level of resources that we devote to the
engagement or development of manufacturing capabilities including the build-out
of our subsidiary's facility in China, our ability to maintain existing and to
establish new collaborative arrangements with others to provide funding to
support these activities, and other factors. In any event, we will require
additional funds in addition to our existing resources to develop product
candidates and to otherwise meet our business objectives.
Management's plans for the remainder of the fiscal year, in addition to normal
operations, include continuing their efforts to create joint ventures, obtain
additional grants and to develop and enter into research, development and/or
commercialization agreements with others. Subject to management's strategic
development plan, we may consider raising additional capital through equity or
debt issuance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The exposure of market risk associated with risk-sensitive instruments is not
material, as our operations are conducted primarily in U.S. dollars and we
invest primarily in short-term
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government obligations and other cash equivalents. We intend to develop policies
and procedures to manage market risk in the future if and when circumstances
require.
Item 4. Controls and Procedures.
Disclosures and Procedures
We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Our Chief Executive Officer and Chief
Financial Officer are responsible for establishing and maintaining these
procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of our disclosure controls and
procedures, which took place as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer believe that these procedures are effective to ensure that we are able
to collect, process and disclose the information we are required to disclose in
the reports we file with the SEC within the required time periods.
Internal Controls
We maintain a system of internal controls designed to provide reasonable
assurance that: (1) transactions are executed in accordance with management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit preparation of financial statements in conformity with generally
accepted accounting principles and (ii) 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.
Changes in Internal Controls
We have not made any material changes in our internal control over financial
reporting during the quarter ended June 30, 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging, among other things, that Neurochem had misappropriated
the Company's trade secrets by filing a series of patent applications in June
2002, September 2002, December 2002 and March 2003 relating to compounds
synthesized and developed by the Consortium, with whom Immtech has an exclusive
licensing agreement. The misappropriated intellectual property was provided to
Neurochem pursuant to a testing agreement entered into in April 2002, under
which Neurochem agreed to test the compounds to determine if they could be
successfully used to treat
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Alzheimer's disease. Pursuant to the terms of the agreement, Neurochem agreed to
keep all information confidential, not to disclose or exploit the information
without Immtech's prior written consent, to immediately advise Immtech if any
invention was discovered and to cooperate with Immtech and its counsel in filing
any patent applications.
In its complaint, the Company also alleged, among other things, that Neurochem
fraudulently induced the Company into signing the testing agreement, and
breached numerous provisions of the testing agreement, thereby causing harm to
Immtech and blocking the development of the Consortium's compounds for the
treatment of Alzheimer's disease. By engaging in these acts, the Company
alleged, among other things, that Neurochem has prevented the public from
obtaining the potential benefit of new drugs for the treatment of Alzheimer's
disease, which would compete with Neurochem's Alzhemed drug.
Since the filing of the complaint, Neurochem had aggressively sought to have an
International Chamber of Commerce ("ICC") arbitration panel hear this dispute,
as opposed to the federal district court in which the action was originally
filed. The Company agreed to have a three member ICC arbitration panel (the
"Arbitration Panel") hear and rule on the dispute on the expectation that the
Arbitration Panel will reach a more timely and economical resolution. In this
regard, the ICC hearing is scheduled from September 7, 2005 through September
16, 2005, and the Company anticipates a resolution of this matter by the end of
the calendar year.
The Company recently filed witness statements with the Arbitration Panel, which
set forth information and statements that the Company intends to rely on at the
hearing in support of its case. In addition, the Company recently filed expert
reports, which set forth, among other things, a range of monetary damages based
on different scenarios of between $14 million and $50 million, without regard to
punitive damages. Neurochem, Inc. and Neurochem (International) Limited have
also filed with the Arbitration Panel documents claiming damages of at least
$3.5 million based on their counterclaims.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
The parties in this action completed discovery in April 2005, and the Company
filed a motion for summary judgment on three of the five counts alleged in the
plaintiff's Amended Complaint. A trial on the remaining counts is expected to be
scheduled after the Court rules on the Company's motion for summary judgment
described above.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities.
----------------------------------------
Common Stock.
-------------
Option Exercise
On April 19, 2005, options to purchase 900 shares with an exercise price of
$2.55 per share were exercised. On May 12, 2005, options to purchase 10,000
shares with an exercise price of $2.55 per share were exercised.
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Conversion of Preferred Stock to Common Stock.
Series C Stock
--------------
On April 22, 2005, holders of Series C Convertible Preferred Stock, $0.01 par
value ("Series C Stock") converted 8,000 shares of Series C Stock into 45,273
shares of our common stock. On June 28, 2005, a holder of Series C Convertible
Preferred Stock, $0.01 par value ("Series C Stock") converted 1,116 shares of
Series C Stock into 6,349 shares of our common stock.
Preferred Stock Dividend Payment.
On April 15, 2005, we issued 18,839 shares of common stock as payment of a
dividend earned on outstanding preferred stock to the holders thereof: holders
of Series A Stock earned 3,469 shares of common stock on 60,400 outstanding
shares; holders of Series B Stock earned 1,526 shares of common stock on 19,925
outstanding shares; holders of Series C Stock earned 4,625 shares of common
stock on 60,452 outstanding shares; and holders of Series D Stock earned 9,219
shares of common stock on 160,280 outstanding shares. We also paid holders of
our outstanding preferred stock $513 in cash in lieu of fractional shares.
Warrants - Exercises
--------------------
On May 12, 2005 a warrant holder exercised a warrant to purchase 1,800 shares of
our common stock at an exercise price of $6.47 per share; we received $11,646.
Warrants - Issuance
-------------------
In connection with services rendered to us, effective as of July 13, 2005, we
issued to an investment bank and two of its affiliates warrants to purchase
100,000 shares of our common stock. The warrants are exercisable at $13.11 per
share (the exercise price was set by calculating a 15% premium over our common
stock volume weighted average price for the 10 days immediately preceding July
12, 2005). The warrants' are exercisable beginning on July 13, 2006 through July
12, 2010. The Company may redeem any outstanding warrants, at $0.01 per share
underlying each warrant, upon 30 day notice if at any time prior to the
expiration of the warrant the market closing price of the Company's common stock
meets or exceeds $26.22 for 20 consecutive trading days, unless the warrant
holder exercises the warrant, pursuant to its terms, during the 30 day notice
period.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
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Item 5. Other Information.
On August 5, 2005, we disseminated a press release containing financial and
other information excerpted from the unaudited financial statements contained
herein and elsewhere in this Quarterly Report on Form 10-Q.
Item 6. Exhibits, and Reports on Form 8-K.
Exhibits
--------
See Exhibit Index.
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Exhibit Index
-------------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: August 5, 2005 By: /s/ T. Stephen Thompson
------------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: August 5, 2005 By: /s/ Gary C. Parks
------------------------------------------
Gary C. Parks
Treasurer, Secretary and Chief Financial
Officer (Principal Financial and
Accounting Officer)