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 September 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
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 November 7, 2005, 11,673,187 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.
Table Of Contents
Page(s)
PART I. FINANCIAL INFORMATION...............................................1
Item 1. Condensed Consolidated Financial Statements.........................1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........24
Item 4. Controls and Procedures............................................24
PART II. OTHER INFORMATION..................................................25
Item 1. Legal Proceedings..................................................25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........25
Item 3. Defaults Upon Senior Securities....................................26
Item 4. Submission of Matters to a Vote of Security Holders................26
Item 5. Other Information..................................................27
Item 6. Exhibits, and Reports on Form 8-K..................................27
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
--------------------------------------------------------------------------------
September 30, March 31,
ASSETS 2005 2005
CURRENT ASSETS:
Cash and cash equivalents $ 3,133,921 $ 9,471,694
Restricted funds on deposit 603,911 2,044,079
Other current assets 329,466 88,103
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Total current assets 4,067,298 11,603,876
PROPERTY AND EQUIPMENT - Net 3,628,154 3,655,604
OTHER ASSETS 16,259 16,594
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TOTAL $ 7,711,711 $ 15,276,074
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,725,632 $ 2,046,620
Accrued expenses 664,361 173,699
Deferred revenue 1,314,786
----------
Total current liabilities 4,389,993 3,535,105
Total liabilities 4,389,993 3,535,105
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,080,000 shares authorized and
unissued as of September 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, 58,400 and 60,400 shares
outstanding as of September 30, 2005 and March 31, 2005, respectively;
aggregate liquidation preference of $1,500,025 as of September 30, 2005. 1,500,025 1,551,165
Series B convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 240,000 shares authorized, 18,725 and 19,925
shares outstanding as of September 30, 2005 and
March 31, 2005, respectively; aggregate liquidation
preference of $485,091 as of September 30, 2005. 485,091 516,093
Series C convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 160,000 shares authorized, 46,536 and 60,452 shares
outstanding as of September 30, 2005 and
March 31, 2005, respectively; aggregate liquidation
preference of $1,205,821 as of September 30, 2005. 1,205,821 1,566,976
Series D convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 200,000 shares authorized,
117,200 and 160,280 shares outstanding as of September 30, 2005 and March 31, 2004;
March 31, 2005, respectively; aggregate liquidation
preference of $3,011,396 as of September 30, 2005. 3,011,396 4,117,657
Common stock, par value $0.01 per share, 100,000,000 shares authorized,
11,619,214 and 11,332,366 shares issued and outstanding
as of September 30, 2005 and March 31, 2005, respectively 116,193 113,324
Additional paid-in capital 78,323,663 76,428,132
Deficit accumulated during the developmental stage (81,320,111) (72,552,378)
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Total stockholders' equity 3,321,718 11,740,969
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TOTAL $ 7,711,711 $ 15,276,074
============ =============
See notes to condensed consolidated financial statements.
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Six Months Ended (Inception) to
September 30, September 30, September 30,
---------------------------- ---------------------------- --------------
2005 2004 2005 2004 2005
REVENUES $ 879,721 $ 1,704,634 $ 2,358,301 $ 2,562,246 $ 19,547,999
---------- ------------ ------------ ----------- ------------
EXPENSES:
Research and development 2,671,930 2,187,210 4,941,137 3,273,426 46,614,507
General and administrative 3,329,233 2,463,412 6,061,506 3,892,166 51,313,288
Equity in loss of joint venture - - - - 135,002
Total expenses 6,001,163 4,650,622 11,002,643 7,165,592 98,062,797
---------- ---------- ----------- ----------- -----------
LOSS FROM OPERATIONS (5,121,442) (2,945,988) (8,644,342) (4,603,346) (78,514,798)
---------- ----------- ------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 42,931 27,046 100,518 36,112 833,980
Interest expense - - - - (1,129,502)
Loss on sales of investment securities - net - - - - (2,942)
Cancelled offering costs - - - - (584,707)
Gain on extinguishment of debt - - - - 1,427,765
Other income - net 42,931 27,046 100,518 36,112 544,594
NET LOSS (5,078,511) (2,918,942) (8,543,824) (4,567,234) (77,970,204)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE (105,087) (147,754) (223,909) (296,596) (5,719,806)
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS - - - - 2,369,899
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(5,183,598) $(3,066,696) $(8,767,733) $(4,863,830) $(81,320,111)
=========== =========== =========== =========== ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net loss $ (0.44) $ (0.28) $ (0.74) $ (0.45)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.01) (0.01) (0.02) (0.03)
------- ------- ------- ------
BASIC AND DILUTED LOSS PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.45) $ (0.29) $ (0.76) $ (0.48)
========= ========= ========= ========
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 11,556,816 10,560,065 11,474,311 10,222,910
=========== =========== =========== ==========
See notes to condensed consolidated financial statements.
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Three Months Ended Six Months Ended (Inception) to
September 30, September 30, September 30,
------------------------------ ---------------------------------- ----------------
2005 2004 2005 2004 2005
OPERATING ACTIVITIES:
Net loss $ (5,078,511) $ (2,918,942) $ (8,543,824) $ (4,567,234) $(77,970,204)
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 7,571 1,051,428 44,852 1,345,579 27,582,834
Depreciation and amortization of
property and equipment 39,390 31,740 77,712 62,050 958,859
Deferred rental obligation (1,592) (3,184)
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 81,639 85,342 (241,363) (179,576) (329,466)
Other assets 207 - 335 - (16,259)
Accounts payable 2,495,116 659,900 1,679,012 149,119 4,053,167
Accrued expenses (495,780) (30,525) 490,662 56,192 1,327,374
Deferred revenue (836,206) (629,882) (1,314,786) (1,487,493)
---------- ---------- ------------ ----------- ------------
Net cash used in operating activities (3,786,574) (1,752,531) (7,807,400) (4,624,547) (45,549,013)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (26,291) (52,702) (50,262) (60,259) (1,560,083)
Restricted funds on deposit 1,152,254 32,932 1,440,168 1,015,901 (603,911)
Advances to joint venture (135,002)
Proceeds from maturities of investment
securities 1,800,527
Purchases of investment securities (1,803,469)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 1,125,963 (19,770) 1,389,906 955,642 (2,301,938)
------------ ------------ ------------ ------------ ------------
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 convertible preferred
stock dividends
and for fractional shares of
common stock resulting from the
conversions of convertible
preferred stock (54) (23) (591) (1,360) (4,156)
Net proceeds from the issuance
of common stock 40,871 8,393,688 80,312 8,439,668 31,133,977
Deferred offering costs
Additional capital contributed
by stockholders 245,559
------------ ------------ ------------ ------------ ------------
Net cash provided by
financing activities 40,817 8,393,665 79,721 8,438,308 50,984,872
------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (2,619,794) 6,621,364 (6,337,773) 4,769,403 3,133,921
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,753,715 4,893,322 9,471,694 6,745,283
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,133,921 $ 11,514,686 $ 3,133,921 $ 11,514,686 $ 3,133,921
============ ============= ============ ============= ============
See notes to condensed consolidated financial statements.
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by Immtech International, Inc. and its subsidiaries (the "Company") 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 and its subsidiaries are pharmaceutical
companies working to commercialize oral drugs to treat infectious diseases by
applying their 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 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 work to commercialize the aromatic cation pharmaceutical
technology platform (the Company acquired its rights to the aromatic cation
technology platform in 1997 and promptly thereafter commenced development of its
current programs). The Company uses the expertise and resources of strategic
partners and third parties in a number of areas, including: (i) laboratory
research, (ii) animal and human trials and (iii) manufacture of pharmaceutical
drugs.
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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 $77,970,000. Management expects the Company will continue to incur
significant losses during the next several years as the Company continues
development activities, clinical trials and commercialization efforts. In
addition, the Company has various research and development agreements with third
parties and is dependent upon such parties' abilities to perform under these
agreements. There can be no assurance that the Company's activities will lead to
the development of commercially viable products. The Company's operations to
date have consumed substantial amounts of cash. The negative cash flow from
operations is expected to continue in the foreseeable future. The Company
believes it will require substantial additional funds to commercialize its
product candidates. The Company's cash requirements may vary materially from
those now planned when and if the following become known: results of research
and development efforts, results of clinical testing, responses to grant
requests, formation and development of relationships with strategic partners,
changes in the focus and direction of development programs, competitive and
technological advances, requirements in the regulatory process and other
factors. Changes in circumstances in any of the above areas may require the
Company to allocate substantially more funds than are currently available or
than management intends to raise.
The Company is currently actively involved in discussions to obtain additional
funds through its traditional funding sources along with the potential recovery
of legal costs from the resolution of disputes described later in this document.
The Company believes that it will be able to obtain the necessary funding to
meet its planned expenditures from September 30, 2005 through the next
twelve-month period, although there can be no assurance we will be able to
acquire the funds for current planned expenditures or that additional funds will
not be required.
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.
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 a bank which is restricted for use in accordance with (i)
a clinical research subcontract
-5-
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
insurance limits (generally, $100,000 per depositor per insured bank) are
uninsured.
Investment - The Company accounts for its investment in NextEra Therapeutics,
Inc. ("NextEra") on the equity method. As of September 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 September 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. Cash payments from research and
development grants received in advance of delivery of services 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
-6-
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 and six month periods ended
September 30, 2005 and September 30, 2004, as none of the Company's outstanding
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 and six month periods ended September 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
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 in arrears 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 $40,025 and $41,166 of accrued preferred stock dividends at September
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 Series A Convertible Preferred
Stock. On April 15, 2004, the Company issued 2,961 shares of common stock and
paid $352 in
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lieu of fractional common shares as dividends on the Series A Convertible
Preferred Stock. During the three month periods ended September 30, 2005 and
2004, certain holders of Series A Convertible Preferred Stock converted 2,000
and 8,000 shares, including accrued dividends, into 11,409 and 45,678 shares of
common stock, respectively. During the six month periods ended September 30,
2005 and 2004 certain holders of Series A Convertible Preferred Stock converted
2,000 and 8,400 shares, including accrued dividends, into 11,409 and 47,942
shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares of Series
A Convertible Preferred Stock be converted into shares of our common stock,
provided that the shares of common stock into which the Series A Convertible
Preferred Stock are convertible are registered pursuant to an effective
registration statement, as defined. The number of shares of common stock to be
received by the holders of the Series A Convertible Preferred Stock upon a
mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price A, provided that the closing bid price
for the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price A.
The Conversion Price A is subject to certain adjustments, as defined in the
Series A Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all outstanding
shares of the Series A Convertible Preferred Stock by payment of the Liquidation
Price to the holder of such shares, provided that the holder does not convert
the Series A Convertible Preferred Stock into shares of common stock during the
30 day period. The Series A Convertible Preferred Stock has a preference in
liquidation equal to $25.00 per share, plus any accrued and unpaid dividends.
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 in
arrears 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 $16,966 and $17,968 of accrued preferred stock
dividends as of September 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 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 $4.00 conversion price (the "Conversion Price B"), subject to
certain adjustments, as defined in the Series B Certificate of
-8-
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 Series B
Convertible Preferred Stock. 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 Series B Convertible Preferred Stock. During the three and six month periods
ended September 30, 2005 certain holders of Series B Convertible Preferred Stock
converted 1,200 shares, including accrued dividends, into 7,572 shares of common
stock. There were no conversions of Series B Convertible Preferred Stock during
the three month and six month periods ended September 2004.
The Company may at any time require that any or all outstanding shares of Series
B Convertible Preferred Stock be converted into shares of our 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 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 in arrears 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
$42,421 and $55,676 of accrued preferred stock dividends as of September 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 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
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"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 Series C Convertible Preferred Stock. 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 Series C Convertible Preferred Stock. During the
three month periods ended September 30, 2005 and 2004 certain holders of Series
C Convertible Preferred Stock converted 4,800 and 2,800 shares, including
accrued dividends, into 27,354 and 16,036 shares of common stock, respectively.
During the six month periods ended September 30, 2005 and 2004 certain holders
of Series C Convertible Preferred Stock converted 13,916 and 7,852 shares,
including accrued dividends, into 78,976 and 44,611 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 our 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.
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 in arrears 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 $81,396 and $110,657 of accrued preferred stock dividends as of
September 30, 2005 and March 31, 2005, respectively. Each share of Series D
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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 $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 Series D Convertible
Preferred Stock. 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
Series D Convertible Preferred Stock. During the three and six month periods
ended September 30, 2005 certain holders of Series D Convertible Preferred Stock
converted 43,080 shares, including accrued dividends, into 121,324 shares of
common stock, respectively. During the three and six month periods ended
September 30, 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 Series D Certificate of
Designation.
The Series D Convertible Preferred Stock has a preference in liquidation equal
to $25.00 per share, plus any accrued and unpaid dividends. Each issued and
outstanding share of Series D Convertible Preferred Stock shall be entitled to
2.7778 votes (subject to adjustment) 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.
Amended and Restated Certificate of Incorporation; Increase Authorized Common
Stock - At the stockholders' meeting held January 7, 2004, the stockholders of
the Company approved an increase in the number of shares 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
common stock share increase to 100 million from 30 million shares of common
stock.
Secondary Public Offering - On July 30, 2004 the Company closed a secondary
public offering of its common stock. In the offering the Company issued 899,999
shares of common stock resulting in net proceeds to the Company of approximately
$8,334,000. The shares were sold to the public at $10.25 per share. Jeffries &
Company, Inc. acted as the sole book-running manager and underwriter of this
offering.
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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
thereunder to 2,200,000 shares from 1,100,000 shares. Options granted under the
2000 Stock Incentive Plan that expire are available to be reissued. During the
three and six month periods ended September 30, 2005, 34,084 and 76,834 options
previously granted under the 2000 Stock Incentive Plan, respectively, expired
and were available to be reissued. No options expired in the three and six month
periods ended September 30, 2004. As of September 30, 2005, there were a total
of 1,087,584 shares available for grant.
The Company has granted options to purchase common stock to individuals who have
contributed to the Company in various capacities. Those options generally vest
over periods ranging from 0 to 4 years and generally expire after five or ten
years. During the three and six month periods ended September 30, 2005, the
Company issued 8,500 and 30,000 options, respectively, to purchase shares of
common stock to certain new employees, while for the three and six month periods
ended September 30, 2004, 157,000 options were issued to employees and
directors. During the three and six month periods ended September 30, 2005,
16,028 and 26,928 non-compensatory options (options issued to officers and
directors) were exercised with an exercise price of $2.55, while for the three
and six month periods ended September 30, 2004 no non-compensatory options were
exercised.
Compensatory Options Granted - During the three and six month periods ended
September 30, 2005 the Company issued no options to non-employees and recognized
expense of approximately $8,000 and $19,000, respectively, related to certain
options issued during prior years which vest over a four year service period,
while for the three and six month periods ended September 30, 2004, the Company
issued zero and 20,000 options, respectively, to purchase shares of common stock
to non employees and recognized expense of approximately $19,000, and $303,000,
respectively, related to these options and certain options issued during prior
years which vest over a four year service period. The expense was determined
based on the estimated fair value of the options issued using the Black-Scholes
option valuation model.
The abovementioned option to purchase 20,000 shares of common stock during the
six month period ended September 30, 2004 was granted to a consultant on May 12,
2004 as compensation for services to develop relationships with Tsinghua
University. Tsinghua University has committed resources from its Department of
Biological Sciences and Biotechnology to assist the Company in its pre-clinical
and clinical trials of the Company's drug candidates targeting tuberculosis and
diabetes in China.
On May 28, 2004, an option holder exercised, on a cashless basis, an option to
purchase 18,517 shares of common stock at an exercise price of $0.4649 per
share. Based on the fair market value calculated as of the date of exercise, the
option holder received a net of 18,000 shares of common stock.
On July 1, 2005, an option holder exercised, on a cashless basis, an option to
purchase 18,744 shares of common stock at an exercise price of $0.4649 per
share. Based on the fair market value calculated as of the date of exercise, the
option holder received a net 18,000 shares of common stock.
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Warrants - There were no warrant issuances during the three and six month
periods ended September 30, 2005 and 2004. There were no warrant exercises in
the three month period ended September 30, 2005. During the six month period
ended September 30, 2005, a warrant to purchase 1,800 shares of common stock was
exercised, resulting in proceeds to the Company of $11,646, while for the three
and six month periods ended September 30, 2004, warrants to purchase 10,000 and
16,000 shares of common stock were exercised, resulting in proceeds to the
Company of $60,000 and $106,000, respectively. Additionally, on May 11, 2004, a
warrant to purchase 21,400 shares of common stock was exercised at $16.00 per
share on a cashless basis resulting, based on the fair market value calculated
as of the date of exercise, in a net issuance of 4,390 shares of common stock.
On July 20, 2004, the Company's board of directors approved a four-year exercise
extension to warrants to purchase 225,000 shares of the Company's common stock
which were originally issued to RADE Management Corporation ("RADE") on July 24,
1998. The expiration dates for these warrants, which have an exercise price of
$6.47 per share, were extended to July 24, 2008 from July 24, 2004. The Company
recorded a non-cash charge of $1,032,000, determined using the Black-Scholes
option pricing model, during the three month period ended September 30, 2004
related to the abovementioned warrant extension.
On July 30, 2004, in connection with related secondary public offering, we
granted the underwriter a five-year warrant to purchase 80,100 shares of our
common stock at an exercise price of $12.81 per share.
Effective as of July 13, 2005, in connection with services rendered to us, we
issued to an investment bank and two of its affiliates, warrants to purchase in
the aggregate 100,000 shares of our common stock. The warrants are exercisable
at $13.11 per share (the exercise price was set by calculating a 15% premium
over the Company's common stock volume weighted average price for the 10 day
period immediately preceding July 12, 2005). The warrants are exercisable 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.
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
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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.
During the three and six month periods ended September 30, 2005, the Company
issued 8,500 and 30,000 options, respectively, to certain new employees while
for the three and six month periods ended September 30, 2004, 157,000 options
were issued to employees or directors. If the Company had recognized
compensation expense for the options granted and or vesting during the three and
six months ended September 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 Six Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2005 2004 2005 2004
Net loss attributable to common shareholders -
as reported $(5,183,598) $(3,066,696) $ (8,767,733) $(4,863,830)
Add: stock-based compensation expense to
employees and directors included in reported
net loss - - - -
Deduct: total stock-based compensation expense
determined under fair value method for awards to
employees and directors (1,035,536) (870,793) (2,028,907) (1,573,743)
----------- ----------- ------------- -----------
Net loss attributable to common stockholders -
pro forma $(6,219,134) $(3,937,489) $ (10,796,640) $(6,437,573)
=========== =========== ============= ===========
Basic and diluted net loss per share attributable
to common stockholders - as reported $ (0.45) $ (0.29) $ (0.76) $ (0.48)
=========== =========== ============= ===========
Basic and diluted net loss per share attributable
to common stockholders - pro forma $ (0.54) $ (0.37) $ (0.94) $ (0.63)
============ =========== ============= ===========
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
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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, together 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 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 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
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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 and six month periods ended September 30, 2005, the Company
expensed approximately $255,000 and $466,000, respectively, of other payments to
UNC and certain other Scientific Consortium universities for patent related
costs and other contracted research. For the corresponding periods ended
September 30, 2004, the Company expensed approximately $206,000 and $304,000,
respectively. Total payments to UNC and certain other Scientific Consortium
universities expensed were approximately $255,000 and $466,000, during the three
and six months ended September 30, 2005. For the corresponding periods ended
September 30, 2004, the Company expensed approximately $221,000 and $319,000,
respectively. Included in accounts payable as of September 30, 2005 and March
31, 2005, were approximately $149,000, and $136,000, respectively, due to UNC
and certain other Scientific Consortium universities.
In July 2004, the Company was awarded an Small Business Innovation Research
grant from the National Institutes of Health entitled "Aromatic Dication
Prodrugs for CNS Trypanosomiasis" in the amount of $107,000. During the three
and six month periods ended September 30, 2005, the Company recognized
approximately $44,000 revenues and $44,000 expenses from this grant. During the
three month period ended September 30, 2004, the Company recognized no revenues
from this grant and expensed payments of approximately $63,000.
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 (the "Foundation Grant"). On March
29, 2001, UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company would receive up to $9,800,000, subject to certain
terms and conditions, over the succeeding five year period to conduct certain
clinical and research studies related to the Foundation Grant.
In April 2003, the Foundation increased the Foundation Grant by $2,713,124 for
the expansion of phase IIB/III clinical trials to treat human Trypanosomiasis
(African sleeping sickness) and improved manufacturing processes. The Company
has received, pursuant to the clinical research subcontract with UNC, inclusive
of its portion of the grant increase, a total amount of funding of approximately
$11,700,000. The Company and its research partners are working with existing and
new funding sources to develop next steps and to increase funding to advance
development of a treatment for African sleeping sickness.
During the three and six months ended September 30, 2005, approximately $846,000
and $1,698,000 was utilized for clinical and research purposes conducted and
expensed, respectively. During the three and six months ended September 30,
2004, approximately $920,000 and
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$1,566,000 was utilized for clinical and research purposes conducted and
expensed, respectively. The Company has recognized revenues of approximately
$17,000 and $869,000 during the three and six months ended September 30, 2005,
respectively. The Company has recognized revenues of approximately $819,000 and
$1,465,000 during the three and six months ended September 30, 2004,
respectively. At September 30, 2005, the Company had no deferred revenue
recorded with respect to this agreement.
On November 26, 2003, the Company entered into a testing agreement ("Testing
Agreement") with Medicines for Malaria Venture ("MMV"), a foundation established
in Switzerland, and UNC, 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 gaining regulatory approval of a drug
product for the treatment of malaria.
Pursuant to the Testing Agreement, MMV committed to advance funds to Immtech to
pay for human clinical trials and regulatory approvals by at least one
internationally accepted regulatory agency and in one malaria-endemic country to
market a resulting drug product for treatment of malaria. 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 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 a resulting malaria drug 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 $819,000 and $1,446,000 during
the three and six month periods ended September 30, 2005, respectively, for
expenses incurred related to activities within the scope of the Testing
Agreement. For the corresponding periods ended September 30, 2004, the
recognized revenues and expenses were approximately $886,000 and $1,097,000,
respectively. The Company received $1,000,000 during the six month period ended
September 30, 2005, aggregating to approximately $4,023,000 to date under the
Testing Agreement. At September 30, 2005, the Company had no deferred revenue
recorded with respect to this agreement.
5. SUBSEQUENT EVENTS
On November 2, 2005, a warrant holder, Fulcrum Holdings of Australia, Inc.,
agreed to accelerate the expiration date of its warrant to purchase 125,000
shares of our common stock in
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exchange for a reduction of the per share exercise price. The warrant expiration
date was accelerated to November 5, 2005 from December 23, 2005 and the exercise
price was reduced to $8.80 per share from $15.00 per share. The warrant was
subsequently exercised for 35,000 shares on November 4, 2005 which results in
gross proceeds to us of $308,000. A non-cash compensation charge will be taken
in the third quarter ending December 31, 2005. The warrant was originally issued
to Fulcrum on March 21, 2003, pursuant to an Investor Relations Agreement
whereby Fulcrum provided the Company with financial consulting services and
public relations management. The Investor Relations Agreement terminated by its
terms on March 20, 2004.
* * * * * *
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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 not described herein. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
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 September 30, 2005, we incurred cumulative net losses of
approximately $77,970,000. 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:
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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
our results of operations for any period may be unrelated to the results of
operations for any other period.
Three Month Period Ended September 30, 2005 Compared with the Three
Month Period Ended September 30, 2004.
Revenues under collaborative research and development agreements were
approximately $880,000 and $1,705,000 for the three month periods ended
September 30, 2005 and September 30, 2004, respectively. For the three month
period ended September 30, 2005, we recognized revenues of approximately $17,000
related to a clinical research subcontract agreement between us and The
University of North Carolina at Chapel Hill ("UNC"), $819,000 related to a grant
from Medicines for Malaria Venture ("MMV") to fund clinical studies and
licensure of DB289 for treatment of malaria, and $44,000 related to an SBIR
grant while for the three month period ended September 30, 2004, revenues
recognized of approximately $819,000 related to the abovementioned UNC clinical
research subcontract and $886,000 related to the abovementioned MMV grant for
treatment of malaria. The UNC 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. Grant and research and development
agreement revenue is recognized as earned when the research and development is
complete 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 periods ended September 30, 2005 and
September 30, 2004 was approximately $43,000 and $27,000, respectively. The
increase in interest income was due primarily to an increase in funds invested.
There was no interest expense for the three month periods ended September 30,
2005 and September 30, 2004.
Research and development expenses increased to approximately $2,672,000 from
approximately $2,187,000 for the three month periods ended September 30, 2005,
and September 30, 2004, respectively. The increase in research and development
expenses was primarily due to an increase in development and preparation costs
related to human clinical trials for treatment of PCP. Research and development
expenses related to human clinical trials and regulatory matters related to a
treatment of malaria funded by MMV increased by approximately $75,000 to
approximately $961,000 in the three month period ended September 30, 2005 from
approximately $886,000 in the three month period ended September 30, 2004.
Additionally, research and development expenses related to human clinical trials
for development of a treatment for trypanosomiasis funded by UNC under the
Foundation Grant decreased by
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approximately $74,000 to approximately $846,000 in the three month period ended
September 30, 2005 from approximately $920,000 in the three month period ended
September 30, 2004.
General and administrative expenses increased to approximately $3,329,000 from
approximately $2,463,000 for the three month periods ended September 30, 2005,
and September 30, 2004, respectively. The increase was primarily due to legal
costs associated with Neurochem litigation as described below.
During the three month period ended September 30, 2005 there were no non-cash
charges recorded as compared to approximately $1,032,000 related to non-cash
charges accrued related to the extension of certain warrants in the three month
period ended September 30, 2004.
Legal costs increased from approximately $211,000 during the three month period
ended September 30, 2004 to approximately $1,975,000 during the three month
period ended September 30, 2005. Insurance, investor relations (including
non-cash charges), and payroll expenses, decreased from approximately $639,000
to approximately $517,000 during the three month periods ended September 30,
2004 and September 30, 2005, respectively.
Our net loss increased to approximately $5,079,000 from approximately $2,919,000
during the three month periods ended September 30, 2005, and September 30, 2004,
respectively. The increase was primarily attributable to general and
administrative charges relating to legal costs and the research and development
charges relating to development and preparation costs for human clinical trials
for treatment of PCP.
Six Month Period Ended September 30, 2005 Compared with the Six Month
Period Ended September 30, 2004.
Revenues under collaborative research and development agreements were
approximately $2,358,000 and $2,562,000 for the six month period ended September
30, 2005 and September 30, 2004, respectively. For the six month period ended
September 30, 2005, revenues recognized of approximately $868,000 related to a
clinical research subcontract agreement between us and UNC and $1,446,000
related to a grant from MMV, and $44,000 related to and SBIR grant, while for
the three month period ended September 30, 2004, revenues recognized of
approximately $1,465,000 related to the abovementioned UNC clinical research
subcontract and $1,097,000 related to the abovementioned MMV grant for treatment
of malaria. 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 six month periods ended September 30, 2005 and September
30, 2004 was approximately $101,000 and $36,000, respectively. The increase in
interest income was due to an increase in funds invested. There was no interest
expense for the six month period ended September 30, 2005 and September 30,
2004.
Research and development expenses increased to approximately $4,941,000 from
approximately $3,273,000 in the six month periods ended September 30, 2005, and
September 30, 2004, respectively. The increase in research and development
expenses is primarily due to increase in
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development and preparation costs related to human clinical trials for treatment
of PCP. Research and development expenses related to human clinical trials for
development of a treatment for trypanosomiasis funded by UNC under the
Foundation Grant increased from approximately $1,563,000 in the six month period
ended September 30, 2004 to approximately $1,694,000 in the six month period
ended September 30, 2005.
Research and development expenses related to human clinical trials and
regulatory matters related to a treatment of malaria funded by MMV increased
from approximately $1,093,000 in the six month period ended September 30, 2004
to approximately $1,581,000 in the six month period ended September 30, 2005.
General and administrative expenses increased for the six month period ended
September 30, 2005 to approximately $6,062,000 from approximately $3,892,000 for
the six month period ended September 30, 2004. The increase in general and
administrative expenses was primarily due to increased legal costs associated
with Neurochem litigation. Legal costs increased from approximately $556,000
during the six month period ended September 30, 2004 to approximately $3,375,000
during the six month period ended September 30, 2005. Non-cash expenses in the
six month period ended September 30, 2005 were approximately $26,000 as compared
to non-cash expenses in the six month period ended September 30, 2004 of
$1,276,000. Insurance, investor relations, travel, payroll and recruiting
charges increased from approximately $1,228,000 during the six month period
ended September 30, 2004 to approximately $1,378,000 during the six month period
ended September 30, 2005.
Our net loss increased to approximately $8,544,000 during the six month period
ended September 30, 2004. The increase in net loss was primarily due to an
increase in general and administrative costs due to increased legal costs.
Liquidity and Capital Resources
-------------------------------
During the three and six month periods ended September 30, 2005, cash and cash
equivalents were primarily invested in a money market mutual fund. Unrestricted
cash and cash equivalents were approximately $3,134,000 as of September 30, 2005
and restricted funds on deposit were approximately $604,000.
The Company has a working capital deficit of $322,695 as of September 30, 2005
compared to working capital of $8,068,771 as of March 31, 2005. The reduction in
working capital of $8,391,466 is a result of higher than anticipated legal costs
of $3,375,000 incurred primarily in connection with the resolution of the
disputes described below along with the Company's ongoing efforts to develop
drug candidates.
To date, the Company has spent a substantial amount of cash resources on legal
costs in respect of its suit against Neurochem. Pursuant to the terms of the
Confidentiality, Testing and Option Agreement between Immtech and Neurochem
dated April 22, 2002, each party is to bear its own attorneys' fees and costs
during an arbitration. In accordance with the ICC Rules which govern the
proceeding, however, the Arbitral Tribunal may award recovery of such attorneys'
fees and costs to the prevailing party. Management believes that is has the
potential to recover some or all of the legal costs it expended in resolution of
the disputes described herein. Future legal costs are not expected to be
significant as the argument portion of the above described arbitration ended on
September 20, 2005.
There were equipment expenditures during the three and six month periods ended
September 30, 2005 of approximately $26,000 and $50,000, respectively as
compared to approximately $53,000 and $60,000, respectively during the three and
six month periods ended September 30, 2004, respectively.
We periodically receive cash from the exercise of common stock options and
warrants. During the three month period ended September 30, 2004, no options
were exercised; however, warrant holders exercised warrants to purchase 10,000
shares of common stock resulting in gross proceeds to us of approximately
$60,000. During the three month period ended September 30, 2005, options to
purchase 16,028 shares of common stock were exercised which resulted in net
proceeds to us of approximately $41,000; however, no warrants were exercised
during the period. Also, during the three month period ended September 30, 2005,
options to purchase 18,744 shares of common stock were exercised on a cashless
basis resulting in the net issuance
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of 18,000 shares. See "Unregistered Sales of Equity Securities and Use of
Proceeds - Recent Sales of Unregistered Securities" below.
Through September 30, 2005, we have 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 $50,985,000;
o payments from research and testing agreements, foundation grants and
SBIR grants and STTR grants of approximately $19,548,000; and
o the use of stock, options and warrants in lieu of cash compensation.
We have focused or efforts and used our cash resources primarily to develop drug
product candidates (including sponsored research) pursuant to the terms of (1)
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 (2) an agreement, dated
November 26, 2003, among us, UNC, and the Medicines for Malaria Venture ("MMV").
Preparations are also underway to commence Company sponsored clinical programs
that include human clinical trials for the treatment of PCP at multiple
locations in North and South America. 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 clinical trials, achievement of regulatory milestones, third party
collaborators fulfilling their obligations to us, the timing and cost of
obtaining 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
-23-
China, our ability to maintain existing and to establish new collaborative
arrangements 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.
The Company is currently actively involved in discussions to obtain additional
funds through its traditional funding sources along with the potential recovery
of legal costs from the resolution of disputes described earlier in this
document. The Company believes that it will be able to obtain the necessary
funding to meet its planned expenditures from September 30, 2005 through the
next twelve-month period, although there can be no assurance we will be able to
acquire the funds for current planned expenditures or that additional funds will
not be required.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The exposure of market risk associated with risk-sensitive instruments is not
material, as our operations are conducted primarily in U.S. dollars and we
invest primarily in short-term government obligations and other cash
equivalents. We intend to develop policies and procedures to manage market risk
in the future if and when circumstances require.
Item 4. Controls and Procedures.
Disclosures and Procedures.
---------------------------
We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Our Chief Executive 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: 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.
We have not made any material changes in our internal control over financial
reporting during the quarter ended September 30, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party to certain lawsuits and legal proceedings, which are
described in "Part I, Item 3. Legal Proceedings", of our Annual Report on Form
10-K for our fiscal year ended March 31, 2005 filed with the SEC on July 14,
2005. The following is a description of material developments during the period
covered by this Quarterly Report and through the filing of this Quarterly
Report, and should be read in conjunction with the Annual Report referenced
above.
Immtech International, Inc. et. al. v. Neurochem, Inc. et al.
-------------------------------------------------------------
The arbitration hearing between the Company and Neurochem, Inc. and Neurochem
(International) Limited started on September 7, 2005 and ended on September 20,
2005. The parties have submitted post-hearing briefs, and expect that the
Arbitral Tribunal's decision will be forthcoming.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
------------------------------------------------------------------
In May 2005, the Company filed a motion for partial summary judgment of the
above captioned action, seeking the dismissal of three of the five counts
contained in plaintiffs' Amended Complaint. In August 2005, the Court granted
summary judgment as to one of the counts, but denied the Company's motion for
summary judgment on the other two counts. A final pre-trial conference is set
for December 19, 2005. The date for trial on the four remaining counts has not
yet been set.
Except as noted above and in Part I, Item 3, Legal Proceedings, of our Form 10-K
filed on July 14, 2005, we are not aware of any pending litigation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities.
----------------------------------------
Common Stock.
None
Option Exercise.
On July 1, 2005, a holder "cashlessly" exercised an option to purchase 18,744
shares which were exercisable at $0.4649 per share. Based on the fair market
value calculated as of the date of exercise pursuant to the terms of the option
agreement, the option holder received a net issuance of 18,000 shares of common
stock. On August 29, 2005, an option holder exercised and option to purchase
6,028 shares at an exercise price of $2.55 per share. On September 26, 2005, a
holder exercised and option to purchase 10,000 shares at an exercise price of
$2.55 per share.
-25-
Conversion of Series A Preferred Stock to Common Stock.
On August 23, 2005, a holder of Series A Convertible Preferred Stock, $0.01 par
value ("Series A Stock") converted 2,000 shares of Series A Stock into 11, 409
shares of our common stock.
Conversion of Series B Preferred Stock to Common Stock.
On August 15, 2005, a holder of Series B Convertible Preferred Stock, $0.01 par
value ("Series B Stock") converted 1,200 shares of Series B Stock into 7,572
shares of our common stock.
Conversion of Series C Preferred Stock to Common Stock.
On July 11, 2005, a holder of Series C Convertible Preferred Stock, $0.01 par
value (Series C Stock") converted 4,800 shares of Series C Stock into 27,354
shares of our common stock.
Conversion of Series D Preferred Stock to Common Stock.
On July 11, 2005, holders of Series D Convertible Stock, $0.01 par value
("Series D Stock") converted 22,000 shares of Series D Stock into 61,816 shares
of our common stock. On August 15, 2005, holders of Series D Convertible
Preferred stock, $0.01 par value ("Series D Stock") converted 21,080 shares of
Series D Stock into 59,508 shares of our common stock.
Series A, Series B, Series C and Series D Preferred Stock Dividend Payment.
On October 15, 2005 we issued 18,973 shares of common stock in payment of a
dividend earned on outstanding preferred stock to the holders thereof: holders
of Series A Stock earned 4,213 shares of stock on 58,400 outstanding shares;
holders of Series B Stock earned 1,805 shares of common stock on 18,725
outstanding shares; holders of Series C Stock earned 4,483 shares of common
stock on 46,536 outstanding shares; and holders of Series D Stock earned 8,472
shares of common stock on 117,200 outstanding shares.
Warrant Exercise.
On November 4, 2005, Fulcrum Holdings of Australia, Inc. exercised a warrant to
purchase 35,000 shares of our common stock at $8.80 per share. See "Subsequent
Events" and "Other Information" in this Quarterly Report on Form 10-Q. The
warrant was potentially for 125,000 shares, the remainder of the warrant expired
by its terms without exercise.
Warrant Issuance.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-26-
Item 5. Other Information.
On November 2, 2005, a warrant holder, Fulcrum Holdings of Australia, Inc.,
agreed to accelerate the expiration date of its warrant to purchase 125,000
shares of our common stock in exchange for a reduction of the per share exercise
price. The warrant expiration date was accelerated to November 5, 2005 from
December 23, 2005 and the exercise price was reduced to $8.80 per share from
$15.00 per share. The warrant was subsequently exercised for 35,000 shares on
November 4, 2005 resulting in gross proceeds to us of $308,000. The remainder of
the warrant expired by its terms without exercise. A non-cash compensation
charge will be taken in the third quarter ending December 31, 2005.
On November 9, 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.
-27-
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.
-28-
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: November 9, 2005 By: /s/ T. Stephen Thompson
------------------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: November 9, 2005 By: /s/ Gary C. Parks
------------------------------------------------
Gary C. Parks
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)