UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the fiscal year ended March 31, 2002.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the transition period from
[___] to [___].
Commission file number 000-25669
IMMTECH INTERNATIONAL, INC.
---------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1523370
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(State or other jurisdiction (I.R.S. Employer
of 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
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.01 per share
Indicate by check mark whether the issuer: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
The aggregate market value of the Common Stock held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such Common
Stock as of July 10, 2002, was $30,018,537. As of such date, the total number of
shares of the registrant's Common Stock outstanding was 6,270,603 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
IMMTECH INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I.
ITEM 1. BUSINESS.......................................................1
ITEM 2. PROPERTIES.....................................................33
ITEM 3. LEGAL PROCEEDINGS..............................................33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................34
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................................34
ITEM 6. SELECTED FINANCIAL DATA........................................37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................46
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT.....................................................46
ITEM 11. EXECUTIVE COMPENSATION.........................................48
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..........................................51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................56
PART IV.
ITEM 14. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL
STATEMENTS.....................................................58
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in the
documents incorporated by reference herein, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical fact may be deemed
to be forward-looking statements. Forward-looking statements frequently, but not
always, use the words "intends," "plans," "believes," "anticipates" or "expects"
or similar words and may include statements concerning the Company's 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 our annual report,
the following (i) we are in an early stage of product development, (ii) our
technology is in the research and development stage and therefore its potential
benefits for human therapy are unproven, (iii) the possibility that favorable
relationships with collaborators cannot be established or, if established, will
be abandoned by the collaborators before completion of product development, (iv)
the possibility that we or our collaborators will not successfully develop any
marketable products, (v) the possibility that advances by competitors will cause
our product candidates not to be viable, (vi) uncertainties as to the
requirement that a drug product be found to be safe and effective after
extensive clinical trials and the possibility that the results of such trials,
if commenced and completed, will not establish the safety or efficacy of our
drug product candidates, (vii) risks relating to requirements for approvals by
governmental agencies, such as the FDA, before products can be marketed and the
possibility that such approvals will not be obtained in a timely manner or at
all or will be conditioned in a manner that would impair our ability to market
its product candidates successfully, (viii) the risk that our patents could be
invalidated or narrowed in scope by judicial actions or that our technology
could infringe upon the patent or other intellectual property rights of third
parties, (ix) the possibility that we will not be able to raise adequate capital
to fund our operations through the process of developing and testing a
successful product or that future financing will be completed on unfavorable
terms, (x) the possibility that any products successfully developed by us will
not achieve market acceptance and (xi) other risks and uncertainties which may
not be described herein.
PART I.
ITEM 1. BUSINESS
OVERVIEW
Immtech International, Inc. (the "Company" or "Immtech") is a
pharmaceutical company focused on the development and commercialization of drugs
to treat infectious diseases that include fungal infections, Malaria,
tuberculosis, Hepatitis C, pneumonia, diarrhea and African sleeping sickness,
and cancer. The Company holds worldwide patents, licenses and rights to license
worldwide patents, patent applications and technologies from third parties that
are integral to the Company's business.
Since its formation in October 1984, the Company has engaged in
research and development programs, expanding its network of scientists and
scientific advisors, negotiating and consummating technology licensing
agreements, and advancing the technology platform toward commercialization. The
Company uses the expertise and resources of strategic partners and contracted
parties in a number of areas, including: (i) laboratory research, (ii)
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pre-clinical and human clinical trials and (iii) the manufacture of
pharmaceutical products. The Company has licensing and exclusive
commercialization rights to a dicationic anti-infective pharmaceutical platform
and is developing drugs intended for commercial use based on that platform.
These dication pharmaceuticals work by blocking life-sustaining enzymes from
binding to the key sites in the "minor groove" of an organism's deoxyribonucleic
acid ("DNA"), thereby killing the infectious organisms that cause fungal,
parasitic, bacterial and viral diseases. The minor groove or key site on an
organism's DNA is an area where enzymes interact with the DNA as part of their
normal life cycle. The Company does not have any commercially available products
nor does it expect to have any commercially available products for sale until
after March 31, 2003, if at all.
The infectious disease market represents a major opportunity for
Immtech. According to Astra Zeneca's 2001 Annual Report, the estimated worldwide
sales of drugs to combat infectious diseases was approximately $46 billion.
Seven individual anti-infective drugs each had sales of more than $1 billion in
that year. Most prominent anti-infective drugs are targeted against specific
bacterial and fungal infections. There is, however, an acute need to develop new
drugs to treat not only primary infections but also opportunistic infections
(i.e., infections that affect patients with compromised immune systems). The
emergence around the world of drug-resistant strains of infectious
micro-organisms has contributed to this need, as has the growing
immunosuppressed population created by disease (e.g., HIV) and the use of
immunosuppressive drugs (e.g., chemotherapeutic agents), such as for organ
transplant patients so that their immune system does not fight the transplanted
organ.
For the fiscal year ended March 31, 2002, we had revenues of
$3,522,113 and a net loss of $3,323,110. A predecessor of the Company was
incorporated under the laws of the State of Wisconsin on October 15, 1984, and
subsequently merged into the current Delaware corporation on April 1, 1993. Our
executive offices are located at 150 Fairway Drive, Suite 150, Vernon Hills,
Illinois 60061, telephone number (847) 573-0033. The management of the Company
believes it has sufficient capital for operations through October 2002. There is
no guarantee that it will not need additional funds before then or that funds
will be available after October 2002 sufficient to fund further operations.
However, the Company anticipates the receipt of a $3.4 million payment
(restricted funds) under the Clinical Research Subcontract with the University
of North Carolina at Chapel Hill ("UNC") (funded by The Gates Foundation) in
calendar year 2002.
Generally, when we use the words "we," "our," "us," "Company" or
"Immtech" we are referring to Immtech International, Inc.
GRANTS AND FUNDING
Gates Foundation Grant
In November 2000, The Bill & Melinda Gates Foundation ("The Gates
Foundation") awarded a $15.1 million grant to a consortium led by The University
of North Carolina at Chapel Hill ("UNC"), of which the Company is a member, to
develop under a research agreement, new drugs to treat African sleeping
sickness, also known as Trypanosomiasis, and Leishmaniasis (a parasitic disease)
- two diseases that are infecting and killing millions of people in developing
nations. Trypanosomiasis is a parasitic disease that is spread by tsetse flies
in an area in sub-Sahara Africa where 55 million people live. There are an
estimated 500,000 new cases of sleeping sickness in this region each year.
Existing treatments for Trypanosomiasis can be highly toxic and cannot be
administered orally. If untreated, Trypanosomiasis is fatal.
Leishmaniasis is a parasitic disease that affects more than twelve
million people in arid and tropical regions of the world. The Leishmaniasis
parasite is often spread by sand flies. UNC has used, and will continue to use,
The Gates Foundation grant to fund research and development of potential
treatments for these two diseases, through a consortium consisting of Immtech,
UNC and five other universities and research centers around the world which
collectively employ scientists considered to be the foremost experts in one or
both of these diseases.
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Pursuant to a clinical research subcontract ("Clinical Research
Subcontract") between the Company and UNC, UNC is to pay to the Company $9.8
million of The Gates Foundation $15.1 million grant in installments over a
period not to exceed five years based on the Company achieving certain
milestones. For its part, the Company will oversee Phase II, Phase IIa, Phase
IIb and Phase III human clinical trials (See Government Regulation, this Item)
on a dication compound known as DB289 for potential use against Trypanosomiasis
and pre-clinical animal studies on another dication compound to be selected for
potential use against Leishmaniasis. In ongoing Phase IIa Trypanosomiasis
clinical trials, patients are being monitored to determine DB289's
effectiveness, safety and required dosage. Phase IIa monitoring includes EKG
monitoring, blood sampling to check clinical chemistry and hematology
parameters, and various other clinical measurement and tests (including the
clearance of parasites from blood and the central nervous system). The Phase IIa
and Phase IIb Trypanosomiasis trials are being conducted on approximately 30 and
200 patients, respectively, who are being monitored to gauge the effectiveness
of DB289. At the conclusion of these trials we intend to commence a Phase III
trial to include patients from additional sites in Africa.
Clinical Research Subcontract with UNC
On March 29, 2001, the Company and UNC entered into the
aforementioned Clinical Research Subcontract. Under the terms of the agreement,
the Company is responsible for the oversight of Phase II and Phase III human
clinical trials on the dication compound DB289 for potential use against
Trypanosomiasis, and pre-clinical animal studies on another dication compound to
be selected for potential use against Leishmaniasis. In consideration for
Immtech's research, UNC is to pay to the Company $9.8 million of The Gates
Foundation $15.1 million grant in installments over a period not to exceed five
years based on the Company achieving certain milestones. The terms of the
clinical research subcontract require the Company to segregate The Gates
Foundation grant funds from other Company funds and to use grant proceeds only
for developing drugs for treatment of Trypanosomiasis and Leishmaniasis. The
Company has received or will receive The Gates Foundation grant funds from UNC
under the Clinical Research Subcontract as follows: (a) $4.3 million has been
received to fund Phase II clinical trials to test DB289's effectiveness against
Trypanosomiasis in 30 to 40 volunteers, (b) $3.4 million is to be paid to the
Company in calendar year 2002 upon the successful completion of the Phase IIa
clinical trial and to fund Phase IIb and Phase III clinical trials to test
compound DB289's effectiveness against Trypanosomiasis on a larger, more diverse
group of volunteers and (c) $2.1 million of the grant is to be paid to the
Company to oversee the manufacture, testing and pre-clinical studies upon
selection of a compound to treat Leishmaniasis.
The Company will select a compound to be tested for potential use
against Leishmaniasis based on input from the scientists who conducted the
aforementioned pre-clinical animal studies (See Gates Foundation Grant, this
Item) and on other factors including the Company's economic appraisals of the
leading compound candidates. The Company expects to select a compound for drug
development to treat Leishmaniasis within the next two years and the terms of
the research agreement require the Company to select this compound by 2005 or
forfeit payment therefor. The Clinical Research Subcontract will continue to
remain in effect until November 17, 2005, unless otherwise terminated by a
material breach by either side.
-3-
Research Agreement with University Consortium
On January 15, 1997, the Company entered into an agreement (as
amended, the "Consortium Agreement") with UNC and Pharm-Eco Laboratories, Inc.
("Pharm-Eco") (to which each of Duke University ("Duke"), Auburn University
("Auburn"), and Georgia State University ("Georgia State") agreed shortly
thereafter to become a party; the four universities are collectively referred to
as the "Consortium"). The Consortium Agreement provided for dications developed
by Consortium-member personnel to be licensed to the Company for
commercialization. As contemplated by the Consortium Agreement, on January 28,
2002, the Company entered into a License Agreement with the Consortium whereby
the Company received the exclusive license to commercialize dication technology
and compounds developed or invented by one or more of the Consortium scientists
after January 15, 1997, and which also incorporated into such License Agreement
the Company's existing license with the Consortium with regard to the Current
Compounds. The Consortium Agreement provides that the Company is required to pay
to UNC on behalf of the Consortium reimbursement of patent and patent-related
fees, certain milestone payments and a royalty based on revenue derived from any
commercialized products.
The Consortium members have thus far designed, synthesized, and
tested approximately 1,600 dications and are continuing to develop more
dications using proprietary technology. One or more of the universities
comprising the Consortium have patents covering the molecular structure of the
dications, as well as in some cases, particular uses of a compound for potential
treatment of a disease or infection. Pursuant to the Consortium Agreement,
Pharm-Eco agreed to transfer to the Company the worldwide exclusive license to
use, manufacture, have manufactured, promote, sell, distribute or otherwise
dispose of any and all products based directly or indirectly on dications
developed by the Consortium prior to January 15, 1997 and previously licensed
(together with related technology and patents) to Pharm-Eco. In March 2001,
Pharm-Eco assigned the license to the Company. The January 28, 2002 License
Agreement grants to the Company a similar worldwide exclusive license covering
products based on dicationic compounds developed by the Consortium after January
15, 1997 and incorporates the exclusive license assigned to the Company by
Pharm-Eco in March 2001. The Consortium Agreement has provided the Company with
rights to the Consortium's library of approximately 1,600 existing dications and
to all future dications to be designed by the Consortium. The university
Consortium scientists are considered to be among the world's leading experts in
infectious diseases, computer forecasting of pharmaceutical drugs and
computer-generated drug designs.
Members of the Consortium have laboratory testing systems for
screening dications for activity against specific micro-organisms (using both
laboratory and animal models). The Company may profit by commercializing the
products created. UNC and Georgia State have over 25 years of experience in
making dication compounds and have developed proprietary computer models which
simulate the binding of dications to DNA. Georgia State's proprietary computer
modeling technology enhances the understanding of how dications bind to DNA
which improves our ability to design compounds with anti-infective activity.
Generally, patents for the dications and uses are issued to the scientist who
"invents" the dication or use. Then, pursuant to the scientist's employment
arrangements, the patents are assigned to the employing university, and, through
the License Agreement, the Company has the exclusive license to
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such dication or use for commercialization. Under the License Agreement, the
Company bears the cost of obtaining the patent and assumes liability for future
costs to maintain and defend the patent so long as the Company chooses to retain
the license.
Confidentiality, Testing and Option Agreement with Neurochem, Inc.
On April 22, 2002, the Company entered into a Confidentiality,
Testing and Option Agreement with Neurochem, Inc., ("Neurochem"), a Canadian
corporation, to supply Neurochem with selected dicationic compounds for the
testing, evaluation and potential future licensing of such compounds for (i) the
treatment and diagnosis of amyloidosis and the related underlying conditions of
Alzheimer's Disease, cerebral amyloid angiopathy, primary amyloidosis, diabetes,
rheumatic diseases and (ii) the treatments of conditions related to secondary
amyloidosis. Prior to entering this Confidentiality, Testing and Option
Agreement, Neurochem identified certain of the Consortium's dicationic compounds
with positive activity regarding the above diseases and diagnostic programs. At
the conclusion of the agreement, Neurochem has the right to license tested
compounds that have shown positive activity in exchange for certain milestone
and royalty payments to Immtech.
Product Testing Sites
On March 28, 2002 the Food and Drug Administration ("FDA") approved
the export of the compound DB289 to the Democratic Republic of the Congo ("DRC")
for continued Phase IIa testing of the effectiveness of the dicationic compound
against African sleeping sickness. This is the Company's second testing site in
Africa. This DRC testing site increases enrollment rates for patients entering
the Phase IIa clinical trial. In April 2002 the Company received approval from
the government of Peru to begin a Phase II clinical trial of DB289 for the
treatment of Pneumocystis carinii pneumonia ("PCP"). PCP is a fungus that
overgrows the air sacs in the lungs of immunosuppressed patients, causing
pneumonia that can be life-threatening if not treated. This Phase II testing
site is in addition to the African testing sites that are also approved human
Phase II studies.
Market Listing
On March 6, 2002, Immtech International, Inc. was notified by a
NASDAQ Listing Qualifications Panel (the "Panel") that the Panel had determined
to transfer Immtech's common stock from the NASDAQ National Market to the NASDAQ
SmallCap Market effective with the open of business on March 8, 2002. In its
notice, the Panel stated that Immtech failed to maintain minimum net tangible
assets or shareholders' equity requirement for continued listing on the NASDAQ
National Market as required by NASDAQ Marketplace Rule 4450(a)(3). Immtech's
common stock began trading on the NASDAQ SmallCap Market on March 8, 2002 under
a special exception which expired on July 1, 2002. Thereafter, the Panel was to
determine if the Company meets the NASDAQ SmallCap Market continued listing
requirements or if further action should be taken. On July 1, 2002, we requested
that the aforementioned exception be extended to July 15, 2002 and on July 10,
2002 the Panel granted our extension request.
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PRODUCTS
Pharmaceutical Products - Dications
The Company's dication compound pharmaceutical program focuses on
the development and commercialization of drugs to treat fungal, parasitic,
bacterial and viral diseases. This technology is the result of extensive
research at several universities focused on understanding how dications bind to
the "key sites" in the "minor groove" of the DNA of infectious micro-organisms.
Dications have two positively charged ends that are held together by a chemical
linker. The structure of the dications, with positive charges on both ends
(shaped like molecular barbells), allows dications to bind to the negatively
charged key sites in the minor groove (the sites where enzymes interact with
DNA) of an organism's DNA (covering the site like a band-aid). When dications
bind to the DNA, enzymes that interact with the DNA and are necessary to sustain
the life of the infectious organism are prevented from attaching to the DNA.
Researchers have shown that once a key site is occupied by a dication, the
infectious micro-organism dies.
This platform technology licensed to the Company through the
Consortium Agreement for developing dications is the result of the Consortium's
research programs focused on understanding how dications bind to the DNA of
infectious organisms. Pentamidine (a drug marketed by several pharmaceutical
companies) was the prototype drug used by researchers at UNC to understand the
mechanism by which dications interact with the DNA. Pentamidine, which can only
be administered intravenously or via inhalation, is difficult to administer and
distribute and has a narrow dosage margin of safety tolerance. Pentamidine has
been shown to be toxic if incorrectly administered or after prolonged use.
Researchers at UNC discovered that most of Pentamidine's toxicity
was due to by-products formed as the drug breaks down within the body. This
discovery led the researchers to design a new class of compounds with a more
stable molecular structure. Laboratory and animal testing has shown that the
compound that the Company has chosen is less toxic than Pentamidine. These newly
designed dications also proved in laboratory and animal tests to be more
effective in some cases than Pentamidine. The methodology used by UNC and other
Consortium researchers to develop these new dications evolved into the
Consortium's platform technology for designing dications. The Consortium is
using this platform technology to design new treatments for a wide range of
infectious diseases, including protozoan, fungal, bacterial and viral
infections.
The Company has completed the multi-dose Phase I human clinical
trial of its lead dication, DB289. In this trial, DB289 was shown to be safe to
humans at dosage levels expected to be effective in treatment of the target
diseases. In the Phase I study for DB289, of the 72 volunteers who completed the
study, 26 were given a single dose; 24, multiple oral doses; and 22, a placebo.
The study was designed to evaluate the safety and pharmacokinetics (the study of
a drug's effect on the body from absorption until excretion) of three dose
levels of DB289 administered twice a day for six days. In addition to the safety
studies, 12 of the approximately 40 volunteers participated in a secondary study
to determine whether food affected absorption by digestive membranes. The
studies showed that DB289 easily passed through the digestive membranes, and the
drug was active (as designed) for several hours in the bloodstream. In addition,
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volunteers at the highest doses tested in the multi-dose segment of the trial
did not have any specific side effects, and the post-test EKG's, clinical
chemistry, and hematology parameters of the volunteers were within normal
ranges. The drug levels in the blood were similar to levels that showed
effectiveness in animal models on both PCP and Trypanosomiasis.
The Company has begun Phase II clinical trials of DB289 for treating
PCP and Trypanosomiasis at sites in South Africa, Angola, Peru and the
Democratic Republic of the Congo (see "Human Trials DB289").
"Pro-Drug" Technology
One of the most significant research developments was the discovery
of drug delivery technology that can be used to make dications orally
deliverable. This proprietary drug delivery technology temporarily masks the
positive charges of the dication allowing the dication to move across the
digestive membranes into blood circulation. Once the drug is in blood
circulation, the masking charges are removed by naturally occurring enzymes
(found in the blood) releasing the active drug. Dications as a group are not
readily absorbed by digestive membranes without this proprietary Pro-Drug
technology. Until now, the inability to deliver the drug across the digestive
membrane into the bloodstream had reduced the effectiveness of dications as oral
drugs for treatment of diseases via the body's bloodstream. Scientists from
Consortium-member universities have patented several methods which temporarily
mask or reduce the dication's positive charges while in the digestive system,
permitting the drug to pass through the digestive membranes and into the
bloodstream. This oral delivery system or "Pro-Drug" technology has made the
dications significantly more attractive for commercial development.
Human Trials - DB289
DB289 utilizes the Pro-Drug oral delivery technology that permits
oral delivery to release the active drug in the blood circulation. With Pro-Drug
technology it is anticipated that DB289 will be self-administered, making it
practical in developing countries and substantially less expensive to administer
than drugs like Pentamidine, which are given either through inhalation or
intravenously. In May 2001, we completed a Phase I safety trial of DB289 in
human volunteers. The single and multi-dose trials demonstrated that DB289 was
well tolerated by the volunteers. The drug reached blood levels in the Phase I
volunteers that were equivalent to those shown to be effective in animal trials
of disease treatment. We are conducting the following DB289 Phase IIa human
trials:
------------------------ -------------------------------------------- --------------------------------------- ----------------------
CLINICAL TRIAL TRIAL DESIGN / PHASE EXPECTED RESULT SITES
------------------------ -------------------------------------------- --------------------------------------- ----------------------
DB289
PCP o Phase IIa o Safety o South Africa
o 30 patients who failed treatment o Clearance of PCP from lungs
o Oral dosing up to 21 days o Peru
o Multiple dose levels (50mg bid, 100mg
bid)
DB289
Trypanosomiasis o Phase IIa o Safety o Democratic
o 30-40 patients - stage 1 disease o Clearance of parasite from blood Republic of the
o Oral dosing for 5-7 days o Pro-Drug activation in central Congo
o Multiple dose levels nervous system
o Angola
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We anticipate commencing a follow-up Phase IIb of DB289 for
treatment of Trypanosomiasis (African sleeping sickness) at the conclusion of
the Phase IIa trial. This Phase IIb trial is designed to test a larger number of
sites and patients with reduced levels of medical monitoring. The Phase IIb
volunteer group for DB289 testing of Trypanosomiasis will include approximately
200 to 250 volunteers in normal health.
The Company is planning a PhaseIIb pilot study of DB289 as a
treatment for the malaria parasite (Plasmodium falciparum). In studies of the
Pro-Drug DB289, the drug has shown very good activity against common and drug
resistant strains of malaria, including positive activity against
chloroquine-resistant strains of malaria. Chloroquine is the most frequently
used drug used to treat malaria in developing countries.
In animal models (tests using mice) of malaria, DB289 showed
activity against several forms of malaria that are used as surrogates for the
human disease. In the Phase I safety studies of DB289 in humans and the in vitro
studies performed at the Swiss Tropical Institute, it was shown that DB289
reached drug levels that would be therapeutically active to treat malaria in
humans.
Malaria is a significant problem for over 2.4 billion people in the
world that are exposed to the mosquito borne disease. The disease which affects
300 to 500 million people each year is especially devastating to children under
the age of 5. In Africa and other areas of the world with high incidences of
malaria, the fatality rate in children is very high. It is estimated by the WHO
that over 1.1 million children die every year from malaria in countries where
the disease is endemic. The Global Fund to Fight AIDS, TB, and Malaria, of which
The Gates Foundation is a member, believes there is a need for a new oral drug
that is safe and effective for treatment of patients with drug-resistant forms
of the disease.
The Company will seek a governmental or foundation sponsor to
support Phase IIa and III human trials of DB289 for treatment of malaria.
Subject to obtaining funding support, DB289 is scheduled to begin clinical
trials in 2003 according to the parameters listed below.
Clinical Trial Trial Design/Phase Expected Results Sites
--------------------------------------------------------------------------------
DB289 Phase IIb Safety Thailand
Malaria 24-30 patients Clearance of malaria
Oral dosing 5 days parasite from blood
(bid)
DB075
Cryptosporidiosis parvum is one of the most common infections of the
intestinal tract. Cryptosporidium is the parasite which causes severe diarrhea
and wasting, and can be fatal in immunosuppressed patients. Currently, no drug
is available on the market to treat Cryptosporidiosis. DB075 is designed to
block life-sustaining enzymes from binding to the Cryptosporidium's DNA, thereby
killing the organism. DB075, which is not a Pro-Drug, is designed to work
directly in the digestive tract where the Cryptosporidiosis parasite is
resident, with limited absorption across the digestive membranes into the
bloodstream. Containing DB075 in the digestive tract substantially reduces the
possibility of side effects. The Company has specifically targeted finding a
treatment for Cryptosporidiosis because the FDA permits "fast-track" approvals
for drugs that treat diseases like Cryptosporidiosis for which there currently
exists no acceptable treatment.
The Company will seek a governmental or foundation sponsor to
support a Phase I human trial of DB075 for treatment of Cryptosporidiosis.
Subject to obtaining funding support, DB075 is scheduled to begin clinical
trials in 2003 according to the parameters listed below.
-------------------------------- ----------------------------------------- ------------------------------------------
CLINICAL TRIAL TRIAL DESIGN / PHASE EXPECTED RESULT
-------------------------------- ----------------------------------------- ------------------------------------------
DB075
Diarrhea/ o Phase I/IIa o Safety
Cryptosporidiosis o 30-40 people in normal health o Pharmacokinetics (absorption and
(outside funding required) o Oral dosing - dose levels distribution in the body)
o Single and Multiple dose levels
STRATEGY
The Company's strategy is to develop drugs effective against
infectious diseases and cancer by utilizing the dicationic platform technology
developed by the Consortium's scientists. Infectious diseases in the global
population have increased significantly during the past twenty years and are the
most common cause of death worldwide, according to the WHO. Relatively few new
drugs for treatment of infectious diseases have been brought to market during
this period.
The Company intends to proceed with the development of dications
pursuant to its agreements with the Consortium as follows:
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o Conclude Phase IIa trials of DB289 targeting PCP and
Trypanosomiasis;
o Develop a drug for treatment of Malaria;
o Generate revenues through the commercialization of drug
products;
o Identify additional dications to take into human clinical
trials to further TB, antifungal and Hepatitis C programs;
o Create joint ventures with pharmaceutical and biotechnology
companies interested in developing treatments with the
dicationic to treat other diseases; and
o Co-develop the Company's pharmaceutical cancer program.
Immtech's strategy is to commercialize dications and generate
revenues in niche markets by taking advantage of fast track FDA or corollary
foreign approvals where permitted and to work with academic institutions and
foundations to support drug development. The Company will simultaneously develop
treatments for infectious diseases with substantial markets that afflict large
populations of people through strategic joint ventures. The Company believes
that its first products will demonstrate the power and versatility of the
dication platform technology.
The Company will continue to cooperate with and oversee the results
of research by the Consortium and to use business-sponsored research programs,
government grants, joint ventures and other forms of collaborative programs for
product commercialization. The Company considers its current collaborative
relationships significant to the successful development of its business and
believes that it will enter into additional arrangements in the future to
develop, manufacture and market not only the product candidates on which it is
currently focusing, but also those dications which the Consortium members are
developing for future commercialization.
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TARGET MARKET
Malaria Program
The market for antimalaria drugs consists of the 2.4 billion people living in
malaria endemic regions of the world. In addition, the market includes about
20-30 million Europeans and North Americans who travel to or live in regions
where malaria infections are prevalent. Almost two billion people in China,
India, Africa and Indonesia are at risk. Asia alone has over 3.5 million new
cases of malaria each year. An estimated 300-500 million new clinical cases of
malaria occur each year and an estimated 2 million deaths occur annually, the
majority in children under the age of five. The Company estimates that annual
sales of new malaria drugs that are safe and have activity against drug
resistant forms of the disease would be around $500 million.
Antimalaria drugs are sold and distributed through several different networks
and are often purchased by governments, foundations and private individuals. At
present, the world market is dominated by the drug chloroquine (and derivatives
of chloroquine). Chloroquines have been used to treat malaria since the 1930's
and many strains of malaria are now resistant to the drug. In sub-Sahara Africa,
chloroquine resistance is now as high as 50% of the total cases of malaria
treated. It has been reported that over 15% of the children treated with
chloroquine suffer relapses and die from the disease.
A safe, effective, replacement drug for chloroquine is urgently needed.
Scientific experts in malaria are searching for a new drug that works with a
different mechanism of action from chloroquine (to solve resistant problems). We
are focused on bringing a new Malaria drug to market.
DB289
The Company's malaria pilot Phase IIa trial will build on the safety data and
dosing information gained from the Phase I trial of that compound completed in
2001. DB 289 has shown positive activity against the human form of malaria (P.
falciparum) both in the lab and animal studies. The drug is active at minute
levels against both the common and drug resistant forms of malaria. Our clinical
program objective for malaria is to test DB289 in a pilot study to demonstrate
it is safe and effective against common and resistant strains of malaria.
Antifungal Program
Over the last five years, Consortium scientists have screened
dications to attempt to identify a candidate for a new antifungal drug with
broad-spectrum activity (i.e., a compound with activity against at least two of
the three most common types of fungi: Candida, Aspergillus, and Cryptococcus).
In vitro laboratory studies conducted at Duke University identified over 30
Consortium dications that display positive antifungal activity across all three
types of fungi, including activity against a large group of fungi which had
previously been thought to be drug resistant. Duke has developed animal models
for testing these lead dication candidates for antifungal activity in laboratory
and computer model studies.
Duke researchers developed an animal model of Aspergillus this year,
and are beginning to test dication compounds in this model. In addition, Duke
has continued to evaluate new compounds in an animal model of Candida. The
Company targets to identify an active compound during the next twelve months
that will be a candidate for drug development.
The market for antifungal drugs used to treat systemic fungal
disease (fungal diseases which enter the bloodstream and attack internal organs)
was over $3.5 billion in 2001. The market is growing rapidly due to the
increasing number of patients who are susceptible to fungal diseases, such as
those patients suffering from cancer chemotherapy or HIV or who have undergone
organ transplants. In addition, the frequency of nosocomial infection (infection
acquired while being treated in a hospital) caused by fungi has increased
drastically and is now the third most common cause of sepsis, replacing
Escherichia coli ("E. coli"). Sepsis is an infection which quickly overwhelms
the immune system and can lead to sudden death. Strains of fungi have developed
that are resistant to the drugs currently used to treat the disease. There is a
significant opportunity for a new drug that has effectiveness across a broad
spectrum of fungal strains and is orally deliverable.
Tuberculosis Program
In an April 2000 report sponsored by The Rockefeller Foundation,
"Global Expenditures and Drug Sales in TB: A Market Failure?", it was reported
that the market for private and government sales of TB drugs was greater than
$700 million per year. This amount does not include government purchases which
would add an additional $300 million. Further, there is a bulk chemical market
of $300 million sold to governments or corporations that manufacture TB
medicines. The Company believes that a new drug based on the dication platform
that shortens treatment time (used in combination with existing drugs) could
increase the overall size of the TB drug market to well over a billion dollars
per year.
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The World Health Organization ("WHO") has declared TB a global
public health emergency. TB is the world's number one killer among infectious
diseases and is the cause of over two million deaths per year worldwide,
according to the WHO and the U.S. Centers for Disease Control (the "CDC"). The
CDC reports that about two billion people, including fifteen million Americans,
are infected with TB. The disease is spreading rapidly in developing countries
in Asia, Africa, and South America, and is becoming increasingly problematic in
developed countries. Japan declared TB as the country's most threatening
disease. Even the United States is seeing an alarming increase in TB cases. The
combination of the rapid spread of the disease and the appearance of multi-drug
resistant strains of the TB organism make TB a major health threat throughout
the world. TB is an elusive infection to treat. The organisms that cause the
disease can "hide" inside white blood cells and tissues where the organisms
avoid exposure to drugs. To be effective a drug must locate and eliminate the TB
organisms inside those white blood cells and tissues.
The WHO and the NIH have significantly increased research efforts to
discover drugs to treat TB. Their research is focused on developing oral
dications that are effective against drug resistant strains of TB and the
creation of therapies to shorten the treatment period required to eradicate the
disease. Their overall target is to reduce the current nine to eighteen month
treatment period down to a two to six month period.
The market for drugs to treat TB is estimated by the Rockefeller
Foundation to be more than $700 million per year and is expected to increase as
new drugs (similar to the ones UIC is testing) with positive activity against
resistant strains are developed. The Rockefeller Foundation estimates that a new
drug that shows excellent activity against drug-resistant strains of TB will add
approximately $300 to $400 million in annual sales. While a number of companies
currently sell drugs to treat TB, no new drug with a new means of attacking TB
has been developed in twenty years. Current drugs include: Rifamate (rifampin
and isoniazid) from Aventis, Mycobutin (rifabutin) from Pharmacia & Upjohn, a
subsidiary of Monsanto, Capastat (capreomycin) from Elan Pharmaceutical,
Streptomycin from Pfizer, and Trecator (ethionamide) and Pyrazinamide, both from
subsidiaries of American Home Products Corp. These drugs are particularly
ineffective against multi-drug resistant strains of TB. A normal case of
non-drug resistant TB costs approximately $2,500 to treat and takes
approximately twelve to eighteen months to cure. If a person contracts
drug-resistant TB, the treatment cost and the time required to treat the disease
can increase to $250,000 and eighteen to 24 months.
National Institutes of Health ("NIH") researchers have screened over
500 of the Consortium's dication compounds as potential candidates for the
treatment of Mycobacterium tuberculosis ("TB"). Their screening test identified
approximately ten to fifteen dications with activity comparable, or superior, in
performance to drugs currently available for the treatment of TB. Several of the
compounds have shown activity equivalent to the current drugs used to treat TB.
Immtech contracted with Dr. Scott G. Franzblau's laboratory, the
Institute for Tuberculosis Research at the University of Illinois-Chicago
("UIC"), a recognized expert in TB research, to further test dications for
effectiveness against TB. The Company is working with Dr. Franzblau to obtain
new grants and the Company has granted $75,000 to the University of
Illinois-Chicago to fund ongoing studies.
Prior to joining the University of Illinois-Chicago, Dr. Franzblau
led the NIH-funded anti-TB screening program at National Hansen's Disease Center
at Louisiana State University for six years. Georgia State and UNC are making
the compounds for testing at UIC based on the substantial amount of information
on the in vitro and in vivo performance of the various compounds already tested.
The Company targets to identify a lead dication potent against TB and safe to
the patient as an orally administered drug candidate within the next 6-12
months.
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Hepatitis Program
Estimated worldwide sales of drugs for treating the Hepatitis C
virus (the "HCV") were $490 million in 1998 and are expected to reach $1.7
billion in 2002. RebetronTM combination therapy (capsules and injections) from
Schering-Plough, the leading treatment for HCV, had sales of approximately $1.0
billion in 2001. RebetronTM, at a cost of $1,000 per month, has potentially
severe side effects and demonstrated positive results in only 30 to 50 percent
of the patients who used the drug.
A study by the CDC found that 4.5 million people in the United
States are infected with the HCV, the most common chronic blood-borne infection
in the United States and a leading cause of liver disease. The WHO has estimated
that 170 million people worldwide have chronic HCV infections and that five
million people in Western Europe are chronically infected with the HCV. The
prevalence of the disease is expected to remain high for several decades due to
the lack of drugs to treat or a vaccine to prevent transmission of the disease,
according to the Medscope Resource Center.
Currently, no test exists which will accurately predict the
effectiveness of a drug for treatment of HCV. Scientists at Auburn have screened
some of the Consortium's dicationic compounds using a bovine viral diarrhea
virus ("BVDV") as a surrogate virus for HCV to gauge the potential effectiveness
of dications. Auburn scientists have screened over 150 of those compounds using
the surrogate assay to identify dications with potential activity against HCV.
The Auburn scientists have advanced three lead candidates into a
special animal (mouse) model that develops a chronic viral infection of BVDV.
The results from this animal model will be used to determine which dications
will be further studied in a new HCV test.
The Company signed a testing agreement with QuadPharma, Inc.
("QuadPharma") to screen its lead compounds for the Hepatitis C human virus.
This test can determine if the compounds tested have activity in early stages of
the disease. Initial in-house tests have shown the compounds to have positive
activity in the early stages of the disease. Access to the QuadPharma test is
important because it has the ability to detect activity in early stages when the
disease is most treatable.
Immtech is working with QuadPharma to evaluate the effectiveness of
the Consortium's dications against human Hepatitis C virus. We project that with
good results in QuadPharma's mouse and primate trials, Immtech will enter human
clinical trials overseas in 2003. Currently, there are no drugs that are broadly
effective or economical for the treatment of HCV.
Trypanosomiasis Program
The WHO estimates that there are 300,000 to 500,000 active cases of
human Trypanosomiasis in central Africa and another 55 million people that are
at risk of contracting the disease. A WHO survey suggests that an "epidemic
situation" for Trypanosomiasis exists in the sub-Sahara region of Africa.
Epidemic levels are also being approached in Angola, Sudan, Uganda and the
Republic of Congo. If left untreated, Trypanosomiasis is fatal.
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Assisted by the proceeds of The Gates Foundation grant, the
Consortium and others are conducting new research on developing a second
generation drug for Trypanosomiasis. UNC is working with GSU (chemistry) and the
Swiss Tropical Institute (animal models and in vitro screening) to screen new
compounds for activity against Trypanosomiasis. The Consortium has screened over
200 dicationic compounds under the grant. The group has identified over fifteen
compounds with in vitro activity that is comparable to or better than existing
drugs used to treat sleeping sickness. These fifteen compounds have been tested
in animal models and several are considered to be promising leads. The
Consortium plans to select a second generation compound from the fifteen
candidates for drug development in the next eighteen months.
Leishmaniasis Program
As part of the Clinical Research Subcontract under The Gates
Foundation grant, the Company is working with The London School of Hygiene and
Tropical Medicine in England ("The London School"), Ohio State University
("OSU"), UNC and Georgia State to develop a drug to treat Leishmaniasis. The
initial work on Leishmania was sponsored by a grant from the Walter Reed
Hospital, U.S. Army. The United States military is interested in developing a
new treatment for Leishmaniasis because U.S. soldiers are sent to places where
the Leishmania parasite is prevalent and soldiers sometimes return home infected
with the parasite. The London School and OSU have subcontracted with the
Consortium to screen the drug candidates supplied by Georgia State. The London
School and OSU researchers have performed laboratory screening of 150 Consortium
compounds for activity and have tested over twenty dicationic compounds for
activity in animal tests.
Immtech is responsible (under the Clinical Research Subcontract in
connection with The Gates Foundation grant) for the pre-clinical development of
any new drug for treating Leshmaniasis resulting from the Consortium research.
The Company's duties include monitoring clinical trials, obtaining regulatory
approvals and commercialization of the final product candidate. For its part,
the Company will receive a $2.1 million payment under the Clinical Research
Subcontract with UNC for its assistance in conducting the pre-clinical
development of any compound selected to move into clinical trials.
Cancer Program
The National Cancer Institute (the "NCI") has tested over 550
Consortium dications for anti-cancer activity. The NCI reported that a
significant number of the dications tested either retarded or killed cancer
cells. The NCI has identified 47 Consortium dications as displaying specificity
(effectiveness against specific cancer types) and potency as anti-cancer agents.
Eighteen Consortium compounds have been chosen by the NCI to advance to animal
(mouse) model testing. Early test results show that specific dications may be
effective against different cancer types and that most of the dications tested
had some effectiveness even at low doses. Immtech is in discussions with several
academic partners who are potentially interested in joining the Consortium to
test dications as cancer agents.
The market for the Company's product candidates consists of patients
seeking to treat infectious diseases (such as fungal diseases, malaria,
tuberculosis, Hepatitis, pneumonia and diarrhea) and cancer. According to the
CDC, cancer and
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infectious diseases rank second and third, respectively, as causes of death in
the United States. The American Cancer Society estimates that 552,000 people in
the United States will die of cancer in 2001 (one of every four deaths). Over
1.2 million people are diagnosed with cancer every year, and one of every four
U.S. citizens now living will eventually develop cancer. The NIH estimates the
overall annual cost to treat cancer in the United States at $107 billion, with
$37 billion due to direct medical costs (including drugs). Of the approximately
800,000 to 900,000 patients living with HIV (the virus that causes AIDS) in the
United States, one-fourth will develop opportunistic infections which become
life-threatening. Before 1987, opportunistic infections generally occurred as
single infections; today a significant percent of AIDS patients develop multiple
opportunistic infections. The use of protease inhibitors (a class of drugs that
prevent the production of protease enzymes, which are essential to the survival
of the HIV virus) as antiviral therapy in patients with the HIV virus has
reduced the number of opportunistic infections reported in HIV-positive patients
in the United States. Protease drugs are often used in combination therapy made
up of several different drugs in a cocktail. This cocktail therapy is very
expensive, requires a rigid protocol for taking the drug and is only available
to patients who can afford the high cost of the regimen. Further, in recent
meetings at the NIH, it has been reported that protease resistant strains of the
HIV virus are developing in a significant number of patients. This trend
suggests that over the next five years there will be an increase in
opportunistic infections in the HIV patient population.
MANUFACTURING
Pharmaceutical Products
The Company has entered into an agreement with Regis Technologies,
Inc. ("Regis") to produce large-scale, good manufacturing practices ("GMP")
quantities of DB289 for clinical testing and early commercialization needs.
Regis has completed a one kilogram GMP batch of DB289 which will be used in
Phase II trials for Trypanosomiasis, PCP and other diseases. Regis is a
full-service drug synthesis and chemical services company that has synthesized
numerous compounds and advanced them into clinical testing and
commercialization. Regis is known internationally for providing quality contract
manufacturing services to large pharmaceutical firms. Regis has experience in
manufacturing pharmaceuticals under FDA guidelines.
COMPETITION
Competition in the pharmaceutical, biopharmaceutical, biotherapeutic
and biotechnology industries is intense. Factors such as scientific and
technological developments, the procurement of patents, timely governmental
approval for testing, manufacturing and marketing, availability of funds and the
ability to commercialize product candidates in an expedient fashion play a
significant role in determining our ability to effectively compete. Furthermore,
these industries are subject to rapidly evolving technology that could result in
the obsolescence of any product candidates developed by the Company. The Company
competes with many specialized biopharmaceutical firms and a growing number of
large pharmaceutical companies that are applying biotechnology to their
operations and that are better capitalized. Many of our competitors have
concentrated their efforts in the development of human therapeutics and
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developed or acquired internal biotechnology capabilities. These companies, as
well as academic institutions, governmental agencies and other public and
private organizations conducting research also compete with us in recruiting and
retaining the highly qualified scientific personnel and consultants that are
essential to our business and who may establish collaborative arrangements with
our competitors.
The Company's competition will be determined in part by the
potential indications for which the Company's product candidates are developed
and ultimately approved by regulatory authorities. The Company is relying on its
collaborations with the Consortium members and other joint venture partners to
enhance its competitive edge by providing manufacturing, testing and
commercialization support.
PATENTS AND LICENSES
The Company's policy is to file patent applications or defend the
patents licensed to us covering the technology we consider important to our
business in all countries where such protection is available and feasible. We
intend to continue to file and defend patent applications we license or develop.
We also rely on trade secrets and improvements, unpatented know-how and
continuing technological innovation to develop and maintain our competitive
position.
Although we pursue and encourage patent protection and defend our
patents and those licensed to us, obtaining patents for pharmaceutical products
involves complex legal and factual questions and consequently involves a high
degree of uncertainty. In addition, others may independently develop similar
products, duplicate our potential products, or design around the claims of any
of our potential products. Because of the time delay in patent approval and the
secrecy afforded the U.S. patent applications, we do not know if other
applications, which might have priority over our applications, have been filed.
Pharmaceutical dications, including DB289 and DB075, are protected
by patents secured by members of the Consortium. The Company has, pursuant to
the Consortium Agreement, assumed the defense of all patents covering the
dications we license. To date, the Company has obtained, exclusive licensing
rights to 142 dication patents. As of June 2002, the Company had been issued 76
patents in the U.S. and in various global markets.
PHARMACEUTICAL PATENTS
Patents and patent applications for the chemical substance and use
of pharmaceutical compounds for the treatment of infections caused by PCP,
Mycobacterium tuberculoses, Cryptosporidium parvum, Giardia lamblia, Leishmania
mexicana amazonesis, Trypanosoma brucei rhodesienes, various fungi, Plasmodium
falciparum, HCV and HIV have been filed by the scientists of the Consortium
members. The Company has exclusively licensed or has the right to exclusively
license any of such patents for commercialization. The Company is obligated to
reimburse or pay for patent protection of any such drugs which it licenses for
commercialization. Pharmaceutical patents and patent applications also protect
certain processes for making Pro-Drugs and the uses of compounds to detect and
treat specific diseases as well as a patent for a new method for making chemical
compounds that form dimmers when they are bound to DNA. Dimmers are two
identical chemical molecules that attach to a DNA's key site in series to cover
a larger section (double) of a DNA's key site. (See "Research and Development",
this section.)
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a) Patent Licenses
Pursuant to the Consortium Agreements, as amended, licenses and
options to license patents for the dications developed by the Consortium prior
to January 15, 1997, which were previously licensed or optioned to Pharm-Eco,
were then transferred to Immtech by Pharm-Eco as of March 2001. In accordance
with the terms of the Consortium Agreement, we have obtained license rights to
the patents covering the technology platform for making dicationic
pharmaceutical products and to treat certain microbial infections with such
products. To date the Company has exclusively licensed 142 patents, which
includes 46 U.S. patents. All of the patents on our pharmaceutical product
candidates have been filed by UNC jointly with the other academic institutions
of the Consortium.
b) Patent Rights
Since January 1997, and pursuant to the amended Consortium
Agreements, the Consortium, together with the Company, has filed approximately
67 patent applications, of which approximately 21 have been granted. The
Consortium Agreement grants the Company the right to license for
commercialization product candidates underlying the patents and patent
applications for dications produced by the Consortium.
The Company filed 54 patent applications (30 of which have been
issued and 24 are still pending) primarily covering rmCRP for (1) treating
cancer, viral infections, bacterial infections, thrombocytopenia, and immune
complex disease, (2) diagnostic imaging of tissue-based disease, (3) monoclonal
antibodies which specifically bind rmCRP, (4) the production and isolation of
rmCRP, and (5) immune stimulation. Twenty-one of the 54 patent applications were
filed in the U.S.
Four of the 21 U.S. patent applications relating to rmCRP product
candidates were filed jointly with Northwestern University or Rush Medical
School, and the Company retained exclusive worldwide rights to use the
technology covered by these patents pursuant to license agreements.
Fifteen of the 21 U.S. rmCRP patent applications were filed by
Immtech and 6 by NextEra Therapeutics, Inc. ("NextEra"). The Company assigned 11
of its rmCRP patents to NextEra pursuant to a Funding and Research Agreement,
dated September 1998 between the Company and a joint-venture partner, Franklin
Research Group.
GOVERNMENT REGULATION
The development, manufacture and commercialization of drug products
is subject to extensive regulation by both United States federal and, to a
lesser extent, state governments and foreign governmental authorities in the
areas in which the Company's drug product candidates are tested and
manufactured, and in which potential products may be manufactured or sold. The
Federal Food, Drug and Cosmetic Act, ("FDCA"), and other federal statutes and
regulations govern or influence, among other things, the development, testing,
manufacture, safety, labeling, storage, recordkeeping, approval, advertising,
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promotion, sale and distribution of pharmaceutical products. Pharmaceutical
manufacturers are also subject to certain recordkeeping and reporting
requirements, establishment registration and product listing, and FDA
inspections.
With respect to any non-biological "new drug" product with active
ingredients not previously approved by the FDA, a prospective manufacturer must
submit a full New Drug Application ("NDA"), including complete reports of
preclinical, clinical and other studies to prove the product's safety and
efficacy. A full NDA may also need to be submitted for a drug product with a
previously approved active ingredient if, among other things, the drug will be
used to treat an indication for which the drug was not previously approved, or
if the abbreviated procedure is otherwise not available. A manufacturer
intending to conduct clinical trials in humans for a new drug may be required
first to submit a Notice of Claimed Investigational Exception for a New Drug, or
IND, to the FDA containing information relating to preclinical and clinical
studies. INDs and full NDAs may be required to be filed to obtain approval of
certain of our products, including those that do not qualify for abbreviated
application procedures. The full NDA process, including clinical development and
testing, is expensive and time consuming.
Products being developed by the Company for sale in the United
States may be regulated by the FDA as drugs or biologics. New drugs are subject
to regulation under the FDCA, and biological products, in addition to being
subject to certain provisions of that Act, are regulated under the Public Health
Service Act. The Company believes that drug products developed by it or its
collaborators will be regulated either as biological products or as new drugs.
Both statutes and the regulations promulgated thereunder govern, among other
things, the testing, manufacturing, safety, effectiveness, labeling, storage,
record keeping, advertising and other promotional practices involving biologics
or new drugs. FDA approval or other clearances must be obtained before clinical
testing, and before manufacturing and marketing of biologics and drugs.
Obtaining FDA approval has historically been a costly and time
consuming process. Generally, in order to gain FDA pre-market approval, a
developer first must conduct pre-clinical studies in the laboratory and in
animals to gain preliminary information on a drug candidate's effectiveness and
to identify any safety problems. The results of these studies are submitted as a
part of an Investigational New Drug ("IND") application, which the FDA must
review before human clinical trials of a drug candidate can start. The IND
application includes a detailed description of the pre-clinical data and
investigations to be undertaken.
In order to commercialize any potential product, the Company or its
collaborator must sponsor and file an IND, and be responsible for initiating and
overseeing clinical studies which demonstrate the safety and effectiveness
necessary to obtain FDA approval. For Company or collaborator-sponsored INDs,
the sponsor will be required to select qualified investigators (usually
physicians within medical institutions) to supervise the administration of the
products, and ensure that the investigations are conducted and monitored in
accordance with FDA regulations, including the general investigational plan and
protocols contained in the IND. Clinical trials are normally done in three
phases, although the phases may overlap. Phase I trials are concerned primarily
with the safety and preliminary effectiveness of the drug, involve fewer than
100 subjects, and may take from six months to over one year. Phase II trials
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normally involve a few hundred patients and are designed primarily to
demonstrate effectiveness in treating or diagnosing the disease or condition for
which the drug is intended, although short-term side-effects and risks in people
whose health is impaired may also be examined. Phase III trials are expanded
clinical trials with larger numbers of patients which are intended to evaluate
the overall benefit-risk relationship of the drug and to gather additional
information for proper dosage and labeling of the drug. In total, clinical
trials generally take two to five years to complete, but may take longer. The
FDA receives reports on the progress of each phase of clinical testing, and it
may require the modification, suspension, or termination of clinical trials if
it concludes that an unwarranted risk is presented to patients.
If clinical trials of a new product are completed successfully, then
the product sponsor may seek FDA marketing approval. If the product is regulated
as a biologic, the FDA will require the submission and approval of both a
Product License Application ("PLA") and an Establishment License Application
before commercial marketing can commence. If the product is classified as a new
drug, then the Company must file an NDA with the FDA and receive approval before
commencing commercial marketing. The NDA or PLA must include detailed
information about the drug or biologic and its manufacture and the results of
product development, pre-clinical studies and clinical trials. The testing and
approval processes require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. NDAs
and PLAs submitted to the FDA can take, on average, two to five years to receive
approval. If questions arise during the FDA review process, then approval can
take more than five years. Notwithstanding the submission of relevant data, the
FDA may ultimately decide that the NDA or PLA does not satisfy its regulatory
criteria for approval and deny approval or require additional clinical studies.
In addition, the FDA may condition marketing approval on the conduct of specific
post-marketing studies to further evaluate safety and effectiveness. Even if FDA
regulatory clearances are obtained, a marketed product is always subject to
continual review, and later discovery of previously unknown problems or failure
to comply with the applicable regulatory requirements may result in restrictions
on the marketing of a product or withdrawal of the product from the market as
well as possible civil or criminal sanctions.
The Drug Price Competition and Patent Restoration Act of 1984, known
as the Waxman-Hatch Act, established ANDA (abbreviated NDA) procedures for
obtaining FDA approval for generic versions of many non-biological drugs for
which patent or marketing exclusivity rights have expired and which are
bioequivalent to previously approved drugs. "Bioequivalence" for this purpose,
with certain exceptions, generally means that the proposed generic formulation
is absorbed by the body at the same rate and extent as a previously approved
"reference drug." Approval to manufacture these drugs is obtained by filing
abbreviated applications, such as ANDAs. As a substitute for clinical studies,
the FDA requires data indicating the ANDA drug formulation is bio-equivalent to
previously approved antibiotics. The advantage of the ANDA approval mechanism,
compared to an NDA, is that an ANDA applicant is not required to conduct
preclinical and clinical studies to demonstrate that the product is safe and
effective for its intended use and may rely, instead, on studies demonstrating
bio-equivalence to a previously approved reference drug.
In addition to establishing ANDA approval mechanisms, the
Waxman-Hatch Act fosters pharmaceutical innovation through such incentives as
non-patent exclusivity and patent restoration. The Act provides two distinct
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exclusivity provisions that either preclude the submission or delay the approval
of an ANDA. A five-year exclusivity period is provided for new chemical
compounds, and a three-year marketing exclusivity period is provided for changes
to previously approved drugs which are based on new clinical investigations
essential to the approval. The three-year marketing exclusivity period may be
applicable to the approval of a novel drug delivery system. The marketing
exclusivity provisions apply equally to patented and non-patented drug products.
These provisions do not delay or otherwise affect the approvability of full NDAs
even when effective ANDA approvals are not available. For drugs covered by
patents, patent extension may be provided for up to five years as compensation
for reduction of the effective life of the patent resulting from time spent in
conducting clinical trials and in FDA review of a drug application.
In addition to obtaining pre-market approval for certain of our
products, we will be required to maintain all facilities that produce our
product candidates for commercial consumption in compliance with the FDA's
current Good Manufacturing Practice, ("cGMP"), requirements. In addition to
compliance with cGMP each pharmaceutical manufacturer's facilities must be
registered with the FDA. Manufacturers must also be registered with the Drug
Enforcement Agency, or DEA, and similar state and local regulatory authorities
if they handle controlled substances, and with the EPA and similar state and
local regulatory authorities if they generate toxic or dangerous wastes.
Noncompliance with applicable requirements can result in fines, recall or
seizure of products, total or partial suspension of production and distribution,
refusal of the government to enter into supply contracts or to approve NDA's,
ANDA's or other applications and criminal prosecution. The FDA also has the
authority to revoke for cause drug approvals previously granted.
The Prescription Drug Marketing Act, or PDMA, which amended various
sections of the FDCA, requires, among other things, state licensing of wholesale
distributors of prescription drugs under federal guidelines that include minimum
standards for storage, handling and record keeping. It also imposes detailed
requirements on the distribution of prescription drug samples as those
distributed by the Ther-Rx sales force. The PDMA sets forth substantial civil
and criminal penalties for violations of these and other provisions.
For international markets, a pharmaceutical company is subject to
regulatory requirements, inspections and product approvals substantially the
same as those in the United States. In connection with any future marketing,
distribution and license agreements that we may enter, our licensees may accept
or assume responsibility for such foreign regulatory approvals. The time and
cost required to obtain these international market approvals may be greater or
lesser than those required for FDA approval.
Product development and approval within this regulatory framework
takes a number of years, involves the expenditure of substantial resources and
is uncertain. Many drug products ultimately do not reach the market because they
are not found to be safe or effective or cannot meet the FDA's other regulatory
requirements. In addition, the current regulatory framework may change and
additional regulation may arise at any stage of our product development that may
affect approval, delay the submission or review of an application or require
additional expenditures by us. We may not be able to obtain necessary regulatory
clearances or approvals on a timely basis, if at all, for any of our products
under development, and delays in receipt or failure to receive such clearances
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or approvals, the loss of previously received clearances or approvals, or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on our business.
RESEARCH AND DEVELOPMENT
Immtech's future success will depend in large part on its ability to
bring to market products developed from ongoing research and development based
upon the platform technology for developing dications currently licensed through
the Consortium Agreement and future dications for which the Company has the
exclusive worldwide rights to license from the Consortium.
In November 2000, The Bill & Melinda Gates Foundation awarded
$15,114,000 in a grant to UNC to develop new drugs to treat African sleeping
sickness and Leishmaniasis. On March 29, 2001, UNC entered into an agreement
with the Company whereby $9,800,000 will be paid to the Company over a five year
period to conduct certain studies ("Clinical Research Subcontract"). On March
29, 2001, the Company received the first installment of $4,300,000, of which
approximately $791,000 and $2,946,000 was utilized for clinical and research
purposes and expensed during the years ended March 31, 2001 and 2002,
respectively. In August 2001 the Company was awarded an additional Small
Business Innovation Research Grants ("SBIR") grant from the NIH of approximately
$144,000 as the third year grant to continue research on "Novel Procedures for
Treatment of Opportunistic Infections." During the year ending March 31, 2002,
approximately $65,000 was utilized for clinical and research purposes and
expensed.
The Company incurred approximately $6,695,000 and $3,958,000 of
expenses during the fiscal years ended March 31, 2001 and 2002, respectively, on
research and development activities. All research and development activity for
fiscal years ended March 31, 2001 and 2002 have been in support of the Company's
pharmaceutical effort.
Pharmaceutical Products
The Company conducts its own independent research and development
and also benefits from the research and development by the Consortium organized
by Dr. Richard Tidwell of UNC. Many of the world's leading experts in
opportunistic infections are affiliated with members of the Consortium,
including:
o Drs. Dave Boykin and Dave Wilson of Georgia State University
(for the chemical design, synthesis, and molecular
characterization of novel anti-infective drugs);
o Dr. John Perfect of Duke University (for fungal diseases);
o Dr. James E. Hall of UNC (for parasitology - Trypanosomiasis
and Leishmaniasis diseases);
o Dr. Byron Blagburn of Auburn University (for parasitic
diseases and animal husbandry);
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o Dr. Christine Dykstra of Auburn University (for the molecular
and biochemical effects of dications on DNA and for viral
disease);
o Dr. Scott G. Franzblau of University of Illinois at Chicago
(for Tuberculosis disease);
o Dr. Reto Brun, Swiss Tropical Institute (Trypanosomiasis,
Leishmania, and Malaria diseases);
o Dr. Simon Croft, London School of Hygiene & Tropical Medicine
(Leishmania diseases);
o Dr. Christian Buri, Swiss Tropical Institute (Clinical Trials
in Africa); and
o Dr. Carl Worboretz, Ohio State University (Screening compounds
for Leishmania).
The NIH has awarded two National Cooperative Drug Development Grants
to the Consortium. The Consortium has collectively through its members and
affiliates developed a library of approximately 1,600 dications tested in the
laboratory and in animals against infectious disease agents. In August 2000, the
Company received two research grants from the NIH aggregating approximately
$831,000 and in August 2001 an additional SBIR research grant of approximately
$144,000. During the year ended March 31, 2002, the Company recognized revenue
of approximately $576,000 from these grants. During the fiscal year ended March
31, 2002, the Company expensed payments of approximately $228,000 to UNC (on
behalf of the Consortium) for contracted research related to the SBIR grants.
UNC received a research project grant in 2001 from the NIH of
approximately $1.2 million to continue work on screening dications for treatment
of fungal activity (an "RO1 grant"). Included in the RO1 grant is support for
work performed at Duke and Georgia State. In addition, Immtech, UNC, and Georgia
State received a Phase II NIH SBIR grant of $800,000 to support pre-clinical
work and manufacture of DB289 sufficient for enhanced trials of treating PCP.
The Company, UNC, and Georgia State received approval for the funds to support
the second year of a Phase II NIH SBIR grant ($270,000) to support pre-clinical
studies of DB075 for treatment of Cryptosporidium. UNC also received a grant to
continue their work on the AIDS virus from the Center For AIDS Research
("CFAR"), which in part supports the purchase of new equipment for the
Consortium member laboratories. Georgia State received a 3 year NIH RO1 grant
($550,000) for work on a new class of patented dications that form dimmers when
bound to DNA. Dimmers are two identical chemical molecules that attach to a
DNA's key site in series to cover a larger section (double) of the DNA
("Dimmers"). Dimmers present great opportunities for advancement of drugs in
gene therapy and pharmaceuticals.
As noted above, UNC received a $15.1 million grant from The Gates
Foundation to support research and clinical development of two programs in the
tropical medicine area. One program is funded to support pre-clinical and
clinical trials of DB289 to treat Trypanosomiasis. A second program is focused
on the development of a new drug for treating Leishmaniasis. In accordance with
the Consortium Agreement, Immtech received an initial payment of $4.3 million to
support a Phase II human trial of DB289 for treating Trypanosomiasis, a second
payment of $3.2 million is expected to be made for Phases IIb and III studies of
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DB289 in Trypanosomiasis, and a third payment of $2.3 million for the
pre-clinical development of a new Leishmaniasis compound is anticipated (Immtech
is expected to receive a total of approximately $9.8 million under the grant
based on attainment of specific milestones).
The Company is seeking to further develop dications and to hasten
their commercialization. Positive results from the Phase I and Phase II trials
of DB289 will pave the way for the Company to further develop its Malaria, TB,
antifungal, hepatitis and cancer programs. DB289 and DB075 are produced under
GMP conditions, designed to ensure that necessary materials are prepared for FDA
approval requirements.
The Company is conducting multiple clinical trials using dication
drugs. Specifically:
o The Company completed Phase I safety trial on DB289 as an
orally active Pro-Drug formulation to treat PCP. DB289 crosses
the intestinal membrane to get into the bloodstream, where the
neutralizing charges are removed from the drug by natural
occurring enzymes found in the bloodstream. Once activated,
the drug kills infectious organisms which cause PCP. The
Company has received approval and has begun testing the drug
on 30-40 patients with PCP in South Africa. This test of DB289
is being conducted on PCP-infected AIDS patients who have
failed treatment with Bactrim(TM) (Roche). Phase IIa tests of
DB289 targeting Trypanosomiasis in 30 to 40 patients has begun
in Africa, concurrently with a Phase IIb test on 200 to 250
patients in Angola and the Democratic Republic of Congo.
o Subject to obtaining foundation or government support, the
Company plans Phase I trial of DB075 safety l for oral
treatment of patients afflicted with severe diarrhea caused by
the intestinal parasite Cryptosporidium parvum. Final plans
are in place for synthesis, final toxicology testing prior to
human use, absorption, distribution, metabolism and excretion
analyses, formulation for administration, and regulatory
approvals of DB075. This study is intended to establish that
DB075 reduces the duration of Cryptosporidium caused diarrhea,
the associated weight loss, and the number of Cryptosporidium
parvum organisms excreted in the patient's stool.
EMPLOYEES
The Company currently has 11 employees, five of whom hold advanced
degrees. Through its agreement with the Consortium, approximately 35 researchers
associated with UNC, Auburn, Duke and Georgia State are engaged in the research
and development of the dications. The Company expects to hire several new
employees in its regulatory and clinical development departments as the
Company's programs advance.
RISK FACTORS
THERE IS NO ASSURANCE THAT WE WILL SUCCESSFULLY DEVELOP A COMMERCIALLY VIABLE
PRODUCT.
We are at an early stage of clinical development activities required
for drug approval and commercialization. Since our formation in October 1984, we
have engaged in developing research programs, recruiting scientific advisors and
scientists, negotiating and consummating technology licensing agreements, and
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sponsoring research and development activities. We have generated no revenue
from product sales and do not have any products currently available for sale,
and none are expected to be commercially available for sale until after March
31, 2003, if at all. There can be no assurance that the research we fund and
manage will lead to the development of commercially viable products.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT; OUR FUTURE PROFITABILITY
IS UNCERTAIN.
We have experienced significant operating losses since our inception
and we expect to incur additional operating losses as we continue research and
development and clinical trial efforts. As of March 31, 2002 we had an
accumulated deficit of approximately $37,036,000.
WE NEED SUBSTANTIAL ADDITIONAL FUNDS.
Our operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to continue in the foreseeable
future. Our cash requirements may vary materially from those now planned because
of results of research and development, results of pre-clinical and clinical
testing, responses to our grant requests, relationships with strategic partners,
changes in the focus and direction of our research and development programs,
competitive and technological advances, the FDA regulatory process and other
factors. In any of these circumstances we may require substantially more funds
than we currently have available or currently intend to raise to continue our
business. We may seek to satisfy future funding requirements through public or
private offerings of securities, by collaborative or other arrangements with
pharmaceutical companies, or from other sources. Additional financing may not be
available when needed or may not be available on acceptable terms. If adequate
financing is not available we may not be able to continue as a going concern or
may be required to delay, scale back or eliminate certain research and
development programs, relinquish rights to certain technologies or product
candidates, forego desired opportunities, or license third parties to
commercialize our products or technologies that we would otherwise seek to
develop internally. To the extent we raise additional capital by issuing equity
securities, ownership dilution to existing stockholders will result.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A "GOING CONCERN."
We have a shortage of unrestricted working capital and have had
recurring losses from operations and negative cash flows from operations since
our inception. These factors, among others discussed herein, raise substantial
doubt about our ability to continue as a going concern. (See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Item 8. "Financial Statements," "Notes to Financial Statements" and
"Independent Auditors' Report" (which contains an explanatory paragraph relating
to substantial doubt about our ability to continue as a going concern) and
elsewhere in our Form 10-K, for further information on our financial position
and results of operations). Our ability to continue to operate will ultimately
depend upon raising additional funds, attaining profitability and operating at a
profit on a consistent basis, which will not occur for some time or may never
occur.
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OUR DEPENDENCE ON KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our business depends to a significant degree on the continuing
contributions of our key management, scientific and technical personnel, as well
as on the continued discoveries of scientists, researchers, and technicians at
The University of North Carolina at Chapel Hill ("UNC"), Duke University
("Duke"), Auburn University ("Auburn") and Georgia State University ("Georgia
State") (collectively, the "Consortium") who have entered into an agreement
dated January 15, 1997, as amended, and a License Agreement dated as of January
28, 2002 (collectively, the "Consortium Agreements") by which the members of the
Consortium have given us exclusive rights to commercialize certain
pharmaceutical product candidates developed in the Consortium-member
laboratories related to the dication technology. There can be no assurance that
the loss of certain members of management or the scientists, researchers and
technicians from the Consortium-member universities would not materially
adversely affect our business. We do not have "key-man" life insurance policies
on any of our executives.
ADDITIONAL RESEARCH GRANTS MAY NOT BE AVAILABLE.
We will continue to apply for new grants to support continuing
research and development of the dication platform technology and our biological
product candidates. The process of obtaining grants is extremely competitive and
there can be no assurance that any of our grant applications will be acted upon
favorably.
OUR PRODUCT CANDIDATES ARE IN EARLY STAGE CLINICAL TRIALS.
All of our product candidates, including DB289 and DB075, require
additional clinical testing, regulatory approval and development of marketing
and distribution channels, all of which are expected to require substantial
additional investment prior to commercialization. There can be no assurance that
any of our product candidates will be successfully developed, prove to be safe
and effective in human clinical trials, meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs, be
eligible for third party reimbursement from governmental or private insurers, be
successfully marketed, or achieve market acceptance.
THERE ARE SUBSTANTIAL UNCERTAINTIES RELATED TO CLINICAL TRIALS.
To obtain required regulatory approvals for the commercial sale of
our product candidates, we must demonstrate through clinical trials that such
product candidates are safe and effective for their intended uses.
We may find, at any stage of our research and development, that
product candidates which appeared promising in earlier clinical trials do not
demonstrate safety or effectiveness in later clinical trials and therefore do
not receive regulatory approvals. The results from pre-clinical testing and
early clinical trials may not be predictive of results obtained in later
clinical trials and large-scale testing. Companies in the pharmaceutical and
biotechnology industries have suffered significant setbacks in various stages of
clinical trials, even after promising results had been obtained in earlier stage
trials. Completion of the clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, difficulty in securing
-24-
sufficient supplies of clinical trial materials or adverse events occurring
during clinical trials. Completion of testing, studies and trials may take
several years, and the length of time varies substantially with the type,
complexity, novelty, and intended use of the product. Delays or rejections may
be based upon many factors, including changes in regulatory policy during the
period of product development. No assurance can be given that any of our
development programs will be successfully completed, that any Investigational
New Drug application ("IND") filed with the FDA (or any foreign equivalent filed
with the appropriate foreign authorities) will become effective, that additional
clinical trials will be allowed by the FDA or other regulatory authorities, or
that clinical trials will commence as planned. There have been delays in our
testing and development schedules to date and there can be no assurance that our
future testing and development schedules will be met.
WE HAVE NO MANUFACTURING CAPABILITY WHICH COULD IMPAIR OUR ABILITY TO DEVELOP
COMMERCIALLY VIABLE PRODUCTS AT REASONABLE COSTS.
Our ability to conduct clinical trials and to commercialize product
candidates will depend in part upon our ability to manufacture the product
candidates, either directly or through third parties, at a competitive cost and
in accordance with FDA and other regulatory requirements. We currently lack
facilities and personnel to manufacture our product candidates. There can be no
assurance that we will be able to acquire such resources, either directly or
through third parties, at reasonable costs if we develop commercially viable
products.
WE ARE DEPENDENT ON THIRD-PARTY RELATIONSHIPS FOR CRITICAL ASPECTS OF OUR
BUSINESS.
We follow a business strategy of utilizing the expertise and
resources of third parties in a number of areas, including the research and
development of potential products, the manufacture of potential products for
clinical trial purposes, the conduct of pre-clinical and clinical trials and the
future development and manufacture of commercialized drugs. This strategy
creates risks by placing critical aspects of our business in the hands of third
parties whom we may not be able to control. If these third parties do not
perform in a timely and satisfactory manner, we may incur costs and delays as we
seek alternate sources of such products and services, if available. Such costs
and delays may have a material adverse effect on our business.
We may seek additional third-party relationships in certain areas,
particularly in clinical testing, marketing, manufacturing and other areas where
pharmaceutical company collaborators will enable us to develop particular
products or geographic markets which are otherwise beyond our resources and/or
capabilities. There is no assurance that we will be able to obtain any such
collaboration or any other research and development, manufacturing, or clinical
trial agreement. Our inability to obtain and maintain satisfactory relationships
with third parties may have a material adverse effect on our business.
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WE ARE UNCERTAIN ABOUT THE ABILITY TO PROTECT OR OBTAIN NECESSARY PATENTS AND
PROTECT OUR PROPRIETARY INFORMATION.
There can be no assurance that any particular patent will be granted
or that issued patents will provide us, directly or through licenses, with the
intellectual property protection contemplated. Patents and licenses of patents
can be challenged, invalidated or circumvented. It is also possible that
competitors will develop similar products simultaneously. Our breach of any
license agreement or the failure to obtain a license to any technology or
process which may be required to develop or commercialize one or more of our
product candidates may have a material adverse effect on our business.
The pharmaceutical and biotechnology fields are characterized by a
large number of patent filings, and a substantial number of patents have already
been issued to other pharmaceutical and biotechnology companies. Third parties
may have filed applications for or have been issued patents and may obtain
additional patents and proprietary rights related to products or processes
competitive with or similar to those that we are attempting to develop and
commercialize. We may not be aware of all of the patents potentially adverse to
our interests that may have been issued to others. No assurance can be given
that patents do not exist, have not been filed, or could not be filed or issued,
which contain claims relating to or competitive with our technology, products or
processes. If patents have been or are issued to others containing preclusive or
conflicting claims, then we may be required to obtain licenses to one or more of
such patents or to develop or obtain alternate technology. There can be no
assurance that the licenses that might be required for such technology,
processes or products would be available on commercially acceptable terms, or at
all.
Because of the substantial length of time and expense associated
with bringing new products to the marketplace through the development and
regulatory approval process, the biotechnology industry places considerable
importance on patent and trade secret protection for new technologies, products
and processes. Since patent applications in the United States are confidential
until patents are issued and since publication of discoveries in the scientific
or patent literature often lag behind actual discoveries, we cannot be certain
that we (or our licensors,) were the first to make the inventions covered by
pending patent applications or that we (or our licensors,) were the first to
file patent applications for such inventions. The patent positions of
pharmaceutical and biotechnology companies can be highly uncertain and involve
complex legal and factual questions, and therefore, the breadth of claims
allowed in pharmaceutical and biotechnology patents, or their enforceability,
cannot be predicted. There can be no assurance that any patents under pending
patent applications or any further patent applications will be issued.
Furthermore, there can be no assurance that the scope of any patent protection
will exclude competitors or provide us competitive advantages, that any of our
(or our licensors,) patents that have been issued or may be issued will be held
valid if subsequently challenged, or that others, including competitors or
current or former employers of our employees, advisors and consultants, will not
claim rights in, or ownership to, our (or our licensors,) patents and other
proprietary rights. There can be no assurance that others will not independently
develop substantially equivalent proprietary information or otherwise obtain
access to our proprietary information, or that others may not be issued patents
that may require us to obtain a license for, and pay significant fees or
royalties for, such proprietary information.
-26-
The biotechnology industry has experienced extensive litigation
regarding patent and other intellectual property rights. We could incur
substantial costs in defending suits that may be brought against us (or our
licensors,) claiming infringement of the rights of others or in asserting our
(or our licensors,) patent rights in a suit against another party. We may also
be required to participate in interference proceedings declared by the United
States Patent and Trademark Office for the purpose of determining the priority
of inventions in connection with our (or our licensors,) patent applications.
Adverse determinations in litigation or interference proceedings
could require us to seek licenses (which may not be available on commercially
reasonable terms) or subject us to significant liabilities to third parties, and
could therefore have a material adverse effect on our business. Even if we
prevail in an interference proceeding or a lawsuit, substantial resources,
including the time and attention of our officers, will be required.
We also rely on trade secrets, know-how and technological
advancement to maintain our competitive position. Although we use
confidentiality agreements and employee proprietary information and invention
assignment agreements to protect our trade secrets and other unpatented
know-how, these agreements may be breached by the other party thereto or may
otherwise be of limited effectiveness or enforceability.
OUR BUSINESS HAS SIGNIFICANT COMPETITION; OUR PRODUCT CANDIDATES MAY BECOME
OBSOLETE PRIOR TO COMMERCIALIZATION DUE TO ALTERNATIVE TECHNOLOGIES.
The pharmaceutical field is characterized by extensive research
efforts and rapid technological progress. Competition from biotechnology
companies, pharmaceutical companies and research and academic institutions is
intense, and other companies are engaged in research and product development for
treatment of the same diseases as we are. New developments in molecular cell
biology, molecular pharmacology, recombinant DNA technology and other
pharmaceutical processes are expected to continue at a rapid pace in both
industry and academia. There can be no assurance that research and discoveries
by others will not render some or all of our programs or products
non-competitive or obsolete.
We are aware of other companies and institutions dedicated to the
development of therapeutics similar to those we are developing, including Eli
Lilly and Company, Hoffman-LaRoche Ltd., Chiron Corporation, Cubist
Pharmaceuticals, Inc., Schering-Plough Corporation, and Abbott Laboratories.
Many of our existing or potential competitors have substantially greater
financial and technical resources and therefore may be in a better position to
develop, manufacture, and market biopharmaceutical products. Many of these
competitors are also more experienced with regard to pre-clinical testing, human
clinical trials and obtaining regulatory approvals. The current or future
existence of competitive products may also adversely affect the marketability of
our product candidates.
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THERE IS NO ASSURANCE THAT WE WILL RECEIVE FDA APPROVAL FOR ANY OF OUR PRODUCT
CANDIDATES; GOVERNMENT REGULATION MAY IMPEDE, DELAY OR PREVENT THE
COMMERCIALIZATION OF OUR PRODUCT CANDIDATES.
All new drugs and biologics (a biologic is a naturally
occurring protein, or a synthetic form thereof), including our product
candidates, are subject to extensive and rigorous regulation by the federal
government, principally the FDA under the FDCA and other laws including, in the
case of biologics, the Public Health Services Act, and by state, local and
foreign governments. Such regulations govern, among other things, the
development, testing, manufacture, labeling, storage, pre-market clearance or
approval, advertising, promotion, sale and distribution of drugs and biologics.
If drug products are marketed abroad they are subject to extensive regulation by
foreign governments. Failure to comply with applicable regulatory requirements
may subject us to administrative or judicially imposed sanctions such as civil
penalties, criminal prosecution, injunctions, product seizure or detention,
product recalls, total or partial suspension of production, and FDA refusal to
approve pending applications.
WE HAVE NOT RECEIVED REGULATORY APPROVAL IN THE UNITED STATES OR ANY FOREIGN
JURISDICTION FOR THE COMMERCIAL SALE OF ANY OF OUR PRODUCT CANDIDATES.
The process of obtaining FDA and other required regulatory
approvals, including foreign approvals, often takes many years and varies
substantially based upon the type, complexity and novelty of the products
involved and the indications being studied. Furthermore, the approval process is
extremely expensive and uncertain. There can be no assurance that our product
candidates will be cleared for commercial sale in the United States by the FDA
or regulatory agencies in foreign countries. The regulatory review process can
take many years and we will need to raise additional funds prior to completing
the regulatory review process for our current and future product candidates.
Failure to receive FDA approval for our product candidates would preclude us
from marketing and selling such products in the United States. Therefore, the
failure to receive FDA approval would have a material adverse effect on our
business. Even if regulatory approval of a product is granted, there can be no
assurance that we will be able to obtain the labeling claims (a labeling claim
is a product's description and its FDA permitted uses) necessary or desirable
for the promotion of such product. FDA regulations prohibit the marketing or
promotion of a drug for unapproved indications. Furthermore, regulatory
marketing approval may entail ongoing requirements for post marketing studies if
regulatory approval is obtained; we will then be subject to ongoing FDA
obligations and continued regulatory review. In particular, we, or our third
party manufacturers, will be required to adhere to regulations setting forth GMP
which require us (or our third party manufacturers) to manufacture products and
maintain records in a prescribed manner with respect to manufacturing, testing
and quality control activities. Further, we (or our third party manufacturer)
must pass a manufacturing facilities pre-approval inspection by the FDA before
obtaining marketing approval. Failure to comply with applicable regulatory
requirements may result in penalties such as restrictions on a product's
-28-
marketing or withdrawal of the product from the market. In addition,
identification of certain side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional pre-clinical testing or clinical
trials and changes in labeling of the product.
Prior to the submission of an application for FDA approval, our
product candidates must undergo rigorous pre-clinical and clinical testing which
may take several years and the expenditure of substantial financial and other
resources. Before commencing clinical trials in humans we must submit to the FDA
and receive clearance of an IND. There can be no assurance that submission of an
IND for future clinical testing of any of our product candidates under
development or other future product candidates would result in FDA permission to
commence clinical trials or that we will be able to obtain the necessary
approvals for future clinical testing in any foreign jurisdiction. Further,
there can be no assurance that if such testing of product candidates under
development is completed, any such drug compounds will be accepted for formal
review by the FDA or any foreign regulatory body or approved by the FDA for
marketing in the United States or by any such foreign regulatory bodies for
marketing in foreign jurisdictions. Future federal, state, local or foreign
legislation or administrative acts could also prevent or delay regulatory
approval of our product candidates.
Prior to the submission of an application for FDA approval our
biologics must undergo rigorous pre-clinical and clinical testing which may take
several years and the expenditure of substantial resources. Before commencing
clinical trials in humans in the United States, we must submit to the FDA and
receive clearance of an IND. If clinical trials of a new product are completed
successfully, then we may seek FDA marketing approval. If the product is
regulated as a biologic, the FDA will require the submission and approval of
both a PLA and an Establishment License Application before commercial marketing
can commence. The PLA must include detailed information about the biologic and
its manufacture and the results of product development, pre-clinical studies and
clinical trials. The FDA's time to review PLAs averages two to five years. The
FDA may ultimately decide that the PLA does not satisfy its regulatory criteria
for approval and deny approval or require additional clinical studies. Future
federal, state, local or foreign legislation or administrative acts could also
prevent or delay regulatory approval of our biologic candidates.
THERE IS UNCERTAINTY REGARDING THE AVAILABILITY OF HEALTH CARE REIMBURSEMENT FOR
PURCHASERS OF OUR ANTICIPATED PRODUCTS; HEALTH CARE REFORM MAY NEGATIVELY IMPACT
THE ABILITY OF PROSPECTIVE PURCHASERS OF OUR ANTICIPATED PRODUCTS TO PAY FOR
SUCH PRODUCTS.
Our ability to commercialize any of our product candidates will
depend in part on the extent to which reimbursement for the costs of the
resulting drug or biologic will be available from government health
administration authorities, private health insurers and others. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. There can be no assurance of the availability of third-party insurance
reimbursement coverage enabling us to establish and maintain price levels
sufficient for realization of a profit on our investment in developing
pharmaceutical and biological products. Government and other third-party payers
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new drug or biologic products
approved for marketing by the FDA and by refusing, in some cases, to provide any
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coverage for uses of approved products for disease indications for which the FDA
has not granted marketing approval. If adequate coverage and reimbursement
levels are not provided by government and third-party payers for uses of our
anticipated products, the market acceptance of these products would be adversely
affected.
Health care reform proposals have previously been introduced in
Congress and in various state legislatures and there is no guarantee that such
proposals will not be introduced in the future. We cannot predict when any
proposed reforms will be implemented, if ever, or the effect of any implemented
reforms on our business. There can be no assurance that any implemented reforms
will not have a material adverse effect on our business. Such reforms, if
enacted, may affect the availability of third-party reimbursement for our
anticipated products as well as the price levels at which we are able to sell
such products. In addition, if we are able to commercialize products in overseas
markets then our ability to achieve success in such markets may depend, in part,
on the health care financing and reimbursement policies of such countries.
CONFIDENTIALITY AGREEMENTS MAY NOT ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY.
We require our employees and consultants to execute confidentiality
agreements upon the commencement of their relationship with the Company. The
agreements generally provide that trade secrets and all inventions conceived by
the individual and all confidential information developed or made known to the
individual during the term of the relationship shall be Immtech's exclusive
property and shall be kept confidential and not disclosed to third parties
except in specified circumstances. There can be no assurance, however, that
these agreements will provide meaningful protection for our proprietary
information in the event of unauthorized use or disclosure of such information.
POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE.
Sales of our Common Stock (including the issuance of shares upon
conversion of preferred stock and the exercise of outstanding options and
warrants at prices substantially below the current closing bid price) in the
public market could materially and adversely affect the market price of shares
of our Common Stock. Such sales also might make it more difficult for us to sell
equity securities or equity-related securities in the future at a time and price
that we deem appropriate.
As of July 10, 2002, we had 6,270,603 shares of Common Stock
outstanding (not including 860,288 shares of Common Stock reserved for
conversion of Series A Convertible Preferred Stock, 498,474 shares of Common
Stock reserved for exercise of outstanding options and 2,435,250 shares of
Common Stock reserved for exercise of outstanding warrants held by certain
investors). Of the shares outstanding, 4,224,181 shares of Common Stock are
freely tradable without restriction. All of the remaining 2,046,422 shares are
restricted from resale except pursuant to certain exceptions under the
Securities Act of 1933, as amended.
POTENTIAL ADVERSE EFFECT OF OUTSTANDING COMMON STOCK OPTIONS AND WARRANTS.
We have outstanding options and warrants for the purchase of shares
of our Common Stock which may adversely affect our ability to consummate future
equity financings. Further, the holders of such warrants and options may
exercise them at a time when we would otherwise be able to obtain additional
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equity capital on more favorable terms. To the extent any such options and
warrants are exercised, the outstanding shares of our Common Stock will be
diluted.
THE LISTING OF OUR COMMON STOCK HAS BEEN TRANSFERRED FROM THE NASDAQ NATIONAL
MARKET SYSTEM TO THE NASDAQ SMALLCAP MARKET.
On March 6, 2002 we received notice from a NASDAQ listing review
panel that our stock would be transferred from the NASDAQ National Market System
to the NASDAQ SmallCap Market effective March 8, 2002. On March 8, 2002 our
Common Stock began trading on the NASDAQ SmallCap Market. Our ability to remain
listed on the NASDAQ SmallCap Market is contingent upon continued compliance
with all NASDAQ SmallCap Market requirements including, but not limited to, (i)
$35 million market capitalization and, (ii) net tangible assets in excess of $2
million or stockholders equity of $2.5 million. Our Common Stock has been
trading in the $5.00 per share range. Our market capitalization as of July 10,
2002 was approximately $30 million and our net tangible assets and stockholders'
equity are currently also below the requirements. Trading on the NASDAQ SmallCap
Market may result in a reduced market for our Common Stock and consequently
reduced liquidity for our stockholders.
IF WE CANNOT SATISFY NASDAQ'S SMALLCAP MAINTENANCE REQUIREMENTS, NASDAQ MAY
TRANSFER OUR COMMON STOCK TO THE OTC BULLETIN BOARD.
If we fail to continue to meet the listing maintenance requirements
of the NASDAQ SmallCap Market and NASDAQ rules, which require, among other
things, minimum net tangible assets of $2 million or $35 million market
capitalization and a minimum bid price for our Common Stock of $1.00, we may be
subject to transfer from the NASDAQ SmallCap Market. Trading, if any, of our
Common Stock would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or on the National Association of Securities Dealers,
Inc. "electronic bulletin board." As a consequence of any such transfer, a
stockholder would likely find it more difficult to dispose of, or to obtain
accurate quotations as to the prices, of our Common Stock.
IF OUR COMMON STOCK IS TRANSFERRED TO THE PINK SHEETS OR THE ELECTRONIC BULLETIN
BOARD, IT MAY BECOME SUBJECT TO THE SEC'S "PENNY STOCK" RULES, WHICH MAY MAKE
SHARES OF OUR COMMON STOCK MORE DIFFICULT TO SELL.
SEC rules require brokers to provide certain information to
purchasers of securities traded at less than $5.00 and not traded on a national
securities exchange or quoted on the NASDAQ Stock Market (a "penny stock"). If
our Common Stock becomes a penny stock that is not exempt from these SEC rules,
these disclosure requirements may have the effect of reducing trading activity
in our Common Stock and making it more difficult for investors to sell. The
rules require a broker to deliver a risk disclosure document that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker must also give bid and offer quotations and broker and
salesperson compensation information to the customer orally or in writing before
or with the confirmation. The SEC rules also require a broker to make a special
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written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction
before completion of the transaction.
THE MARKET PRICE OF OUR COMMON STOCK MAY EXPERIENCE SIGNIFICANT VOLATILITY.
The securities markets from time to time experience significant
price and volume fluctuations unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have been and can be
expected to be especially volatile. Announcements of technological innovations
or new products by us or our competitors, developments or disputes concerning
patents or proprietary rights, publicity regarding actual or potential clinical
trial results relating to products under development by us or our competitors,
regulatory developments in both the United States and foreign countries, delays
in our testing and development schedules, public concern as to the safety of
vaccines or biological products and economic and other external factors, as well
as period-to-period fluctuations in our financial results, may have a
significant impact on the market price of our Common Stock. The realization of
any of the risks described in these "Risk Factors" may have a significant
adverse impact on such market prices.
WE DO NOT PAY DIVIDENDS ON OUR COMMON STOCK.
We have never declared or paid dividends on our Common Stock and we
do not intend to pay any Common Stock dividends in the foreseeable future. Our
Series A Convertible Preferred Stock earns a 6% per annum dividend payable
semi-annually on each April 15 and October 15 while outstanding, which at our
option may be paid in cash or in shares of Immtech Common Stock. On April 15,
2002 we paid to the holders of our Series A Convertible Preferred Stock the
dividend on the Series A Convertible Preferred Stock in shares of Common Stock,
with the dividends owed on fractional shares in cash.
THERE ARE LIMITATIONS ON THE LIABILITY OF OUR DIRECTORS, AND WE MAY HAVE TO
INDEMNIFY OUR OFFICERS AND DIRECTORS IN CERTAIN INSTANCES.
Our Certificate of Incorporation limits, to the maximum extent
permitted by the Delaware Law, the personal liability of our directors for
monetary damages for breach of their fiduciary duties as directors. Our Bylaws
provide that the we shall indemnify our officers and directors and may indemnify
our employees and other agents to the fullest extent permitted by law. We have
entered into indemnification agreements with our officers and directors
containing provisions which are in some respects broader than the specific
indemnification provisions contained in Delaware Law. The indemnification
agreements may require us, among other things, to indemnify such officers and
directors against certain liabilities that may arise by reason of their status
or service as directors or officers (other than liabilities arising from willful
misconduct of a culpable nature), to advance their expenses incurred as a result
of any proceeding against them as to which they could be indemnified, and to
obtain directors' and officers' insurance, if available on reasonable terms.
Section 145 of the Delaware Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he was a director, officer, employee or agent
of the corporation or was serving at the request of the corporation, against
expenses actually and reasonably incurred in connection with such action if he
or she acted in good faith and in a manner he or she reasonably believed to be
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in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The Delaware Law does not permit a corporation to
eliminate a director's duty of care, and the provisions of our Certificate of
Incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
ITEM 2. PROPERTIES
The Company's administrative offices and research laboratories are
located at 150 Fairway Drive, Suite 150, in Vernon Hills, Illinois. The Company
occupies approximately 9,750 square feet of space under a lease that expires on
March 14, 2005. As part of a joint venture with Franklin Research Group the
Company shares its facility, which includes space for research and development
activities, with NextEra Therapeutics, Inc. The Company's annual rent for this
facility is $12,100 per month through March 2003 and $12,800 from April 2003
through March 2005, plus a portion of the real estate taxes and common area
operating expenses. The Company also pays approximately $8,900 per month on a
month-to-month basis for approximately 2,500 square feet of space for its New
York office. (See Item 13 "Certain Relationships and Related Transactions") The
Company believes its current facilities are adequate for its needs for the
foreseeable future, and in the opinion of its management, the facilities are
adequately insured.
ITEM 3. LEGAL PROCEEDINGS
Gerhard Von der Ruhr and Marc Von der Ruhr v. Immtech International,
Inc., T. Stephen Thompson, Gary C. Parks and Eric L. Sorkin:
On March 28, 2001, the United States District Court for the Eastern
District of Wisconsin granted the defendants' motion to dismiss the complaint
and directed the clerk to enter a judgment accordingly.
Dale M. Geiss v. Immtech International, Inc. and Criticare Systems,
Inc.:
On January 14, 2002 plaintiff filed a complaint in the Circuit Court
of the Nineteenth Judicial Circuit, Lake County, State of Illinois against the
Company and Criticare Systems, Inc. ("Criticare"). Plaintiff's complaint alleged
that defendants refused to authorize the Company's transfer agent to remove the
restrictive legends from plaintiff's Immtech stock certificates. Plaintiff
sought relief in the form of monetary compensation in excess of $364,000,
punitive damages, prejudgment interest and costs.
On April 5, 2002, the Company and Criticare each filed a motion to
dismiss the plaintiff's January 14, 2002 complaint. On May 9, 2002, plaintiff
filed opposition papers to the Company's and Criticare's motions to dismiss. The
Company and Criticare each filed a reply memorandum on May 30, 2002.
On June 13, 2002, the Court granted Immtech's motion to dismiss,
without prejudice. Plaintiff was given thirty days within which to file and
serve an amended complaint, which plaintiff so filed on July 10, 2002, alleging
the same claims previously filed. The Company believes the amended complaint is
meritless and intends to vigorously defend against this proceeding.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders in the
quarter ended March 31, 2002.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is quoted on the NASDAQ Small Cap Market
under the symbol "IMMT" (The Company's Common Stock was quoted on the NASDAQ
National Market System under the Symbol "IMMT" from April 26, 1999 to March 8,
2002). Following are the reported high and low share trade prices as reported by
NASDAQ Online for each of the quarters set forth below since the fiscal quarter
ended June 30, 2000.
HIGH LOW
------- -------
Quarter ended June 30, 2000 $28.500 $10.563
Quarter ended September 30, 2000 $23.000 $11.563
Quarter ended December 31, 2000 $17.500 $ 8.625
Quarter ended March 31, 2001 $11.750 $ 5.750
Quarter ended June 30, 2001 $11.210 $ 4.050
Quarter ended September 30, 2001 $11.500 $ 5.000
Quarter ended December 31, 2001 $ 7.485 $ 4.250
Quarter ended March 31, 2002 $ 7.400 $ 4.000
Shareholders
There were approximately 186 shareholders of record of the Company's
Common Stock, and the number of beneficial owners of shares of Common Stock was
approximately 658 as of July 10, 2002. As of July 10, 2002, there were
approximately 6,270,603 shares of Common Stock issued and outstanding.
Dividends
The Company has never declared or paid dividends on its Common Stock
and does not intend to declare or pay any dividends in the foreseeable future.
Our Series A Convertible Preferred Stock earns 6% per annum dividend payable
semi-annually, at our option, in cash or in shares of Immtech Common Stock. On
April 15, 2002 we paid to the holders of our Series A Convertible Preferred
Stock the dividend on the Series A Convertible Preferred Stock in shares of
Common Stock, with the dividends owed on fractional shares in cash.
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Recent Sales of Unregistered Securities
There were sales of unregistered securities during the fiscal year
ending March 31, 2002 that were not previously reported on the Company's Form
10-Qs during the year. These sales consisted of an option exercise on February
24, 2002 of 1,088 shares of Common Stock by Steven M. Wolinsky for $641.25.
Series A Convertible Preferred Stock Private Placements
On February 14, 2002, the Company filed a Certificate of Designation
("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 ("Series A Preferred Stock"). Dividends
on the Series A Preferred Stock accrue at a rate of 6% 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. If Common Stock
is to be used to pay the Preferred Stock dividend such Common Stock is to be
valued at the 10 day volume weighed average price immediately prior to the date
of payment.
Each share of Series A Convertible Preferred Stock is convertible by
the holder at any time into shares of the Company's common stock at a conversion
rate determined by dividing the $25.00 stated value, plus any accrued and unpaid
dividends (the "Liquidation Price"), by a $4.42 conversion price (the
"Conversion Price") subject to antidilution adjustment. The Company may at any
time after February 14, 2003, require that any or all outstanding shares of
Series A Convertible Preferred Stock be converted into shares of the Company's
common stock, provided that the shares of common stock into which the Series A
Convertible Preferred Stock is convertible is registered pursuant to an
effective registration statement. The number of shares of common stock shall be
determined by (i) dividing the Liquidation Price by the Conversion Price
provided that the closing bid price for the Company's common stock exceeds $9.00
for 20 consecutive tracking days within 180 days prior to notice of conversion,
or (ii) if the requirements of (i) above are not met, the number of shares of
common stock is determined by dividing 110% of the Liquidation Price by the
Conversion Price. The Conversion Price is subject to antidilution adjustments,
as set forth in the Certificate of Designation.
The Company may, 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 with respect to any and all matters presented to the
stockholders of the Company for their action or consideration. Except as
provided by law or by the provisions establishing any other series of preferred
stock, Series A Convertible Preferred stockholders and holders of any other
outstanding preferred stock shall vote together with the holders of common stock
as a single class.
On February 14, 2002 and February 22, 2002, the Company issued an
aggregate of 160,100 shares of its Series A Preferred Stock and 400,250 related
Warrants in private placements to certain accredited and non-United States
investors in reliance on Regulation D and Regulation S, respectively, under the
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Securities Act of 1933, as amended ("Securities Act"). The gross proceeds of the
offering were $4,002,500. The securities were sold pursuant to exemptions from
registration under the Securities Act and were subsequently registered on Form
S-3 (Registration Statement No. 333-84326).
Subject to adjustment for dilution protection triggered by issuances
of Common Stock or securities convertible or exercisable into Common Stock at a
price below $4.42 prior to January 1, 2003, each share of Preferred Stock is
convertible into 5.6561 shares of Common Stock and each purchaser of Series A
Preferred Stock was granted a warrant to purchase 2.5 shares of Common Stock for
each share of Series A Preferred Stock purchased.
The warrants issued to holders of Series A Preferred Stock have an
exercise price of $6.00 per share of Common Stock. The exercise period for each
such warrant commences upon the redemption or conversion of the shares of Series
A Preferred Stock purchased concurrently with such warrant and expire five years
from the date of grant. The Company may redeem any unexercised portion of
outstanding warrants for $0.10 per share underlying such warrants any time after
the first anniversary of the date of grant if the Common Stock underlying the
warrant trades at 200% of the exercise price ($12.00) for twenty consecutive
trading days. If the Company exercises its right to redeem the unexercised
portion of the warrants, it must do so on a pro rata basis (based upon the
number of warrants outstanding) and upon 20 trading days' prior written notice
to the warrant holders. Warrant holders may exercise their warrants during such
notice period if the warrants are then exercisable. The warrants are only
exercisable if the warrant holder's Series A Preferred Stock has been redeemed
or converted to Common Stock. The warrants contain antidilution provisions.
In connection with the Series A Preferred Stock private placements
mentioned above, on January 31, 2002 and February 1, 2002 the Company entered
into a consulting agreement with Yorkshire Capital Limited ("Yorkshire") and an
introductory brokerage agreement with Pacific Dragons Group, Ltd. ("Pacific
Dragons") and Ace Champion Investments, Ltd. ("Ace Champion"), respectively, for
assistance to be provided in connection with raising equity capital. For their
efforts, Yorkshire was granted 60,000 Shares of Common Stock and warrants to
purchase 360,000 shares of Common Stock and Pacific Dragons and Ace Champion
were granted warrants to purchase 400,000 shares of Common Stock in the
aggregate.
Yorkshire's warrants were granted in three tranches; the first
100,000 shares were immediately exercisable at $6.00 per share, the second
130,000 shares are exercisable at $9.00 per share if our Common Stock trades at
or above $9.00 for 20 consecutive trading days prior to January 31, 2003, and
the third 130,000 shares are exercisable at $12.00 per share if our Common Stock
trades at or above $12.00 for 20 consecutive trading days prior to January 31,
2003. The second and third tranche warrants terminate if our Common Stock fails
to meet the trading price requirement by January 31, 2003. Pursuant to the terms
of the consulting agreement the Company registered on Form S-3 (Registration
Statement No. 333-84326) the Common Stock granted to Yorkshire
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and the Common Stock underlying the warrants granted to Yorkshire and agreed to
keep such registration effective for the lesser of two years or until all of
such shares of Common Stock are sold.
Pursuant to the terms of the introductory brokerage agreement, each
of Pacific Dragons and Ace Champion were granted warrants to purchase 300,000
and 100,000 shares of Common Stock, respectively, each for an exercise price of
$6.00 per share. The Company has agreed to, and will, use reasonable efforts to
register the resale by Pacific Dragons and Ace Champion of the Common Stock
issuable upon exercise of the warrants and to keep such registration effective
for the lesser of two years or until all of such shares of Common Stock are
sold.
On June 12, 2002 the Company's Registration Statement on Form S-3
(File No. 333-84326) became effective, registering (i) the shares of Common
Stock to be issued upon conversion of the Series A Preferred Stock, (ii) the
shares underlying the warrants issued to holders of Series A Preferred Stock,
(iii) the Common Stock issued to Yorkshire, (iv) the shares underlying the
warrants issued to Yorkshire and (v) shares of Common Stock underlying certain
other warrants.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data that
was derived from the financial statements of the Company:
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(in thousands, except for per share data)
Years Ended March 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 3,522 $ 1,355 $ 369 $ 267 $ 20
---------- ---------- ---------- ---------- --------
EXPENSES:
Research and development 3,958(6) 6,695 10,255(4) 739 312
General and administrative 2,928 4,719(5) 1,732 2,685(1) 537
Equity in loss of joint venture 135
---------- ---------- ---------- ---------- --------
Total expenses 6,886 11,414 12,122 3,424 849
LOSS FROM OPERATIONS (3,364) (10,059) (11,753) (3,157) (829)
---------- ---------- ---------- ---------- --------
OTHER INCOME(EXPENSE):
Interest income 41 199 319 6
Interest expense (68) (242)
Loss on sales of investment securities - net (3)
Cancelled offering costs (74)
---------- ---------- ---------- ---------- --------
Other income (expense) - net 41 196 319 (62) (316)
---------- ---------- ---------- ---------- --------
LOSS BEFORE EXTRAORDINARY ITEM (3,323) (9,863) (11,434) (3,219) (1,145)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,428(2)
---------- ---------- ---------- ---------- --------
NET LOSS (3,323) (9,863) (11,434) (1,791) (1,145)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (938)(7)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS 3,575(3) (332)
---------- ---------- ---------- ---------- --------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (4,261) $ (9,863) $ (11,434) $ 1,784 $ (1,477)
========== ========== ========== ========== ========
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Loss before extraordinary gain $ (0.55) $ (1.78) $ (2.27) $ (1.31) $ (1.69)
Extraordinary gain 0.58
---------- ---------- ---------- ---------- --------
Net loss (0.55) (1.78) (2.27) (0.73) (1.69)
Convertible preferred stock dividends (0.16)
Redeemable preferred stock conversion, premium
amortization and dividends 1.46 (0.49)
---------- ---------- ---------- ---------- --------
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE
ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (0.71) $ (1.78) $ (2.27) $ 0.73 $ (2.18)
========== ========== ========== ========== ========
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET (LOSS) INCOME PER SHARE 6,011,416 5,545,190 5,036,405 2,446,297 676,471
BALANCE SHEETS DATA:
Cash and cash equivalents $ 2,038 $ 2,098 $ 4,556
Restricted funds on deposit 602 3,813
Investment securities available for sale 1,361
Working capital (deficiency) 1,567 663 4,422 $ (992) $ (3,639)
Total assets 2,876 6,168 6,224 552 71
Shareholder advances 985
Notes payable 1,576
Redeemable preferred stock 5,440
Convertible preferred stock 4,032
Deficit accumulated during development stage (37,036) (32,775) (22,912) (11,478) (13,262)
Stockholders' equity (deficiency) 1,736 859 4,620 (448) (9,022)
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(1) Includes $2,220 of costs related to the issuance of warrants to purchase
750,000 shares of common stock to RADE Management Corporation as
compensation for management consulting, market analysis and strategic
advisory services.
(2) See Note 9 to Notes Financial Statements for discussion on the
extraordinary gain on extinguishment of debt.
(3) Includes $3,713 of benefit related to the difference between the carrying
value of the redeemable preferred stock and the estimated fair value of
common shares exchanged which was credited to deficit accumulated during
the development stage upon conversion (see Note 9 to Notes to Financial
Statements).
(4) Includes $6,113 of research and development costs related to the
acquisition of rights to technology and dications which were acquired
through the issuance of 611,250 shares of common stock (see Note 7 to
Notes to Financial Statements).
(5) Includes $1,288 of costs related to the issuance of warrants to purchase
300,000 shares of common stock as compensation for financial consulting
services (see Note 6 to Notes to Financial Statements).
(6) Includes $1,159 credit to (reduction in) research and development costs
for the settlement of certain disputed costs previously expensed during
the year ended March 31, 2000 (see Note 7 to Notes to Financial
Statements).
(7) See Note 6 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Immtech International, Inc. (the "Company" or "Immtech") is a
pharmaceutical company focused on the development and commercialization of drugs
to treat infectious diseases that include fungal infections, Malaria,
tuberculosis, Hepatitis C, pneumonia, diarrhea and African sleeping sickness,
and cancer. Since its formation in October 1984, the Company has engaged in
research and development programs, expanding its network of scientists and
scientific advisors, negotiating and consummating technology licensing
agreements, and advancing the technology platform toward commercialization. The
Company uses the expertise and resources of strategic partners and contracted
parties in a number of areas, including: (i) laboratory research, (ii)
pre-clinical and human clinical trials and (iii) the manufacture of
pharmaceutical products. The Company holds worldwide patents, licenses and
rights to license worldwide patents, patent applications and technologies from
third parties that are integral to the Company's business. The Company has
licensing and exclusive commercialization rights to a dicationic anti-infective
pharmaceutical platform and is developing drugs intended for commercial use
based on that platform. These dication pharmaceuticals work by blocking
life-sustaining enzymes from binding to the key sites in the "minor groove" of
an organism's deoxyribonucleic acid ("DNA"), thereby killing the infectious
organisms that cause fungal, parasitic, bacterial and viral diseases. The minor
groove or key site on an organism's DNA is an area where enzymes interact with
the DNA as part of their normal life cycle. The Company does not have
any commercially available products nor does it expect to have any commercially
available until after March 31, 2003, if at all.
With the exception of certain research funding agreements and
certain grants, the Company has not generated any revenue from operations. For
the period from inception (October 15, 1984) to March 31, 2002, the Company
incurred cumulative net losses of approximately $38,468,000. The Company has
incurred additional losses since such date and expects to incur additional
operating losses for the foreseeable future. The Company expects that its
revenue sources for at least the next several years will be limited to:
o research grants such as Small Business Technology Transfer Program
("STTR") grants and Small Business Innovation Research ("SBIR") grants;
o payments from The University of North Carolina at Chapel Hill,
foundations and other research collaborators under arrangements that may
be entered into in the future; and
o borrowing or the issuance of securities.
The timing and amounts of grant and payment revenues, if any, will
likely fluctuate sharply and depend upon the achievement of specified milestones
and results of operations for any period may be unrelated to the results of
operations for any other period.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are described in Note 1 to the
Notes to the Financial Statements. These financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
on-going basis, we evaluate our estimates, including those related to the fair
value of our preferred and common stock and related options and warrants, the
recognition of revenues and costs related to our research contracts, and the
useful lives or impairment of our property and equipment. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis of
judgments regarding the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe that the accounting policies affecting these estimates
are our critical accounting policies.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 2002, the Company has financed its
operations with:
o proceeds from various private placements of debt and equity
securities, an initial public offering and other cash
contributed from stockholders, which in the aggregate raised
approximately $26,896,000,
o payments from research agreements, foundation grants and SBIR
grants and STTR Program grants of approximately $7,234,000,
and
o the use of stock, options and warrants in lieu of cash
compensation.
On February 14, 2002 and February 22, 2002 the Company issued an
aggregate of 160,100 shares of its Series A Convertible Preferred Stock ("Series
A Preferred Stock") and 400,250 related Warrants in private placements to
certain accredited and non-United States investors in reliance on Regulation D
and Regulation S, respectively, under the Securities Act of 1933, as amended
("Securities Act"). In connection with this offering the Company issued in the
aggregate 60,000 shares of common stock and 760,000 warrants to purchase shares
of Common Stock to consultants assisting in the private placements. The warrants
have an exercise period of five years from the date of issuance and exercise
prices of (i) $6.00 per share for 500,000 warrants, (ii) $9.00 per share for
130,000 warrants and (iii) $12.00 per share for 130,000 warrants. The $9.00 and
$12.00 warrants will not vest and therefore will not be exercisable unless the
Company's common stock meets or exceeds the respective exercise price for 20
consecutive trading days prior to January 31, 2003. The offerings raised
approximately $3,849,000 of additional net equity.
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On December 8, 2000, the Company completed a private placement
offering which raised net proceeds of approximately $4,306,000 of additional net
equity capital through the issuance of 584,250 shares of common stock.
On April 26, 1999, the Company issued 1,150,000 shares of common
stock through an initial public stock offering ("IPO") resulting in net proceeds
of approximately $9,173,000. The underwriters received warrants to purchase
100,000 additional shares of common stock at $16.00 per share. Those warrants
expire on April 30, 2003. The Company used $110,000 of the net proceeds of the
IPO to repay amounts due to the State of Illinois and Northwestern University.
Substantially all of the remaining net proceeds of the IPO were used to fund the
Company's research and development efforts, including clinical and pre-clinical
studies. Any net proceeds not applied to the Company's research and development
efforts were used for working capital and general corporate purposes, including
hiring additional employees.
The Company's cash resources have been used to finance research and
development, including sponsored research, capital expenditures, expenses
associated with the efforts of the Consortium and general and administrative
expenses. Over the next several years, the Company expects to incur substantial
additional research and development costs, including costs related to
early-stage research in pre-clinical and clinical trials, increased
administrative expenses to support research and development operations and
increased capital expenditures for expanded research capacity, various equipment
needs and facility improvements or relocation.
As of March 31, 2002, the Company had federal net operating loss
carryforwards of approximately 32,292,000 which expire from 2006 through 2022.
The Company also has approximately 29,620,000 of stated net operating loss
carryforwards as of March 31, 2002, which expire from 2009 through 2022,
available to offset certain future taxable income for state (primarily Illinois)
income tax purposes. Because of "change of ownership" provisions of the Tax
Reform Act of 1986, approximately $920,000 of the Company's net operating loss
carryforwards for federal purposes are subject to an annual limitation regarding
utilization against taxable income in future periods. As of March 31, 2002, the
Company had federal income tax credit carryforwards of approximately $624,000
which expire from 2008 through 2022.
The Company believes its existing resources, but not including
proceeds from any grants the Company may receive, to be sufficient to meet the
Company's planned expenditures through October 2002, although there can be no
assurance the Company will not require additional funds. In addition, the
Company anticipates the receipt of a $3.4 million payment (restricted funds)
under the Clinical Research Subcontract with the University of North Carolina at
Chapel Hill ("UNC") (funded by The Gates Foundation) in calendar year 2002. The
Company's working capital requirements will depend upon numerous factors,
including the progress of the Company's research and development programs (which
may vary as product candidates are added or abandoned), pre-clinical testing and
clinical trials, achievement of regulatory milestones, the Company's corporate
partners fulfilling their obligations to the Company, the timing and cost of
seeking regulatory approvals, the level of resources that the Company devotes to
the development of manufacturing, the ability of the Company to maintain
existing, and establish new, collaborative arrangements with other companies to
provide funding to the Company to support these activities and other factors. In
any event, the Company will require substantial funds in addition to its
existing working capital to develop its product candidates and otherwise to meet
its business objectives.
-42-
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 2002 COMPARED WITH YEAR ENDED MARCH 31, 2001
Revenues under collaborative research and development agreements
were approximately $3,522,000 and $1,355,000 in the years ended March 31, 2002
and 2001, respectively. In 2002, the Company recognized revenues of
approximately $2,946,000 relating to a clinical research subcontract agreement
with UNC funded by a grant UNC received from the Gates Foundation compared to
approximately $791,000 in 2001. The Company also recognized approximately
$576,000 from SBIR grants in 2002, while in 2001 there were grant revenues of
approximately $564,000 from STTR and SBIR programs from the NIH.
Research and development expenses decreased from approximately
$6,695,000 in 2001 to $3,958,000 in 2002. The decrease is primarily attributable
to an April 20, 2001 settlement agreement with Pharm-Eco Laboratories, Inc.
("Pharm-Eco"), whereby Immtech received from Pharm-Eco a cash payment of
$1,000,000 and certain accounts payable obligations to Pharm-Eco of
approximately $159,000 were forgiven. The cash payment received and the accounts
payable obligation forgiven were recorded as a credit to (reduction of) research
and development expenses because we had previously expensed to research and
development the estimated fair value of the shares of our common stock received
by Pharm-Eco at the time of our initial public offering on April 26, 1999 and
the accounts payable obligations. The Company had significant expenses relating
to pre-clinical studies required for regulatory filings in the year ended March
31, 2001, which were not incurred in 2002.
General and administrative expenses were approximately $2,928,000 in
2002, compared to approximately $4,719,000 in 2001. In the year ended 2001 there
were general and administrative compensation expenses of approximately
$1,308,000 related to services by Stonegate Securities, Inc. and The Kriegsman
Group for warrants issued for advisory services for which there was no
comparable charge in 2002. The remaining reduction in general and administrative
expenses was a decrease in legal fees of approximately $419,000.
The Company incurred a net loss of approximately $3,323,000 for the
year ended March 31, 2002 as compared to a net loss of approximately $9,863,000
for the year ended March 31, 2001.
The Company in 2002 also charged deficit accumulated during the
development stage approximately $938,000 in convertible preferred stock
dividends.
YEAR ENDED MARCH 31, 2001 COMPARED WITH YEAR ENDED MARCH 31, 2000
Revenues under collaborative research and development agreements
were approximately $1,355,000 and $369,000 in the years ended March 31, 2001 and
2000, respectively. In 2001, the Company recognized revenues of approximately
$791,000 relating to a clinical research subcontract agreement with UNC funded
by a grant UNC received from the Gates Foundation and approximately $564,000
from SBIR grants, while for 2000 there were grant revenues of approximately
$369,000 from STTR and SBIR programs from the NIH.
-43-
Research and development expenses decreased from approximately
$10,255,000 in 2000 to $6,695,000 in 2001. This is primarily due to 2000
expenses of approximately $6,113,000 for non-cash expenses for the issuance of
611,250 shares of common stock pursuant to an agreement with Pharm-Eco and UNC,
acting on behalf of the Consortium, a decrease of $250,000 of payments to the
Consortium on the "Agreement," a decrease of non-cash compensation expenses for
services related to research and development covered through the issuance of
stock options totaling approximately $125,000, and pre-clinical, manufacturing,
and contract services costs increasing by approximately $2,928,000.
General and administrative expenses in 2001 were approximately
$4,719,000 compared to $1,731,000 in 2000. The Company recorded approximately
$1,288,000 as compensation expenses for services by Stonegate Securities, Inc.
and the Kriegsman Group for warrants issued for advisory services performed
during 2001. Incremental increases of general and administrative expenses in
2001 above 2000 consisted of approximately $1,322,000 relating to legal fees,
$188,000 relating to marketing and the New York office, approximately $123,000
in additional contract services and professional fees, and approximately $67,000
non-cash compensation expenses for advisory services covered through the
issuance of stock options.
The Company incurred a net loss of approximately $11,434,000 for the
year ended March 31, 2000, compared with a net loss of approximately $9,863,000
for the year ended March 31, 2001. The primary component of the net loss in 2000
was the $6,113,000 non-cash expense incurred for the issuance of common stock to
Pharm-Eco and the Consortium. In addition, there was a $135,000 loss recognized
related to the Company's investment in NextEra.
IMPACT OF INFLATION
Although it is difficult to predict the impact of inflation on our
costs and revenues in connection with our operations, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when marketed.
UNAUDITED SELECTED QUARTERLY INFORMATION
The following table sets forth certain unaudited selected quarterly
information:
-44-
Fiscal Quarters Ended
(in thousands, except for per share data)
----------------------------------------------------
2002
----------------------------------------------------
March 31, December 31, September 30, June 30,
2002 2001 2001 2001
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 607 $ 955 $ 837 $ 1,123
---------- ---------- ---------- ----------
EXPENSES:
Research and development 970 1,206 1,237 545(3)
General and administrative 558 689 712 969
---------- ---------- ---------- ----------
Total expenses 1,528 1,895 1,949 1,514
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (971) (940) (1,112) (391)
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE):
Interest income 2 2 11 26
Loss on sales of investment
securities - net
---------- ---------- ---------- ----------
Other income - net 2 2 11 26
---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (919) (938) (1,101) (365)
---------- ---------- ---------- ----------
NET LOSS (919) (938) (1,101) (365)
CONVERTIBLE PREFERRED STOCK (938)(4)
DIVIDENDS
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (1,857) $ (938) $ (1,101) $ (365)
========== ========== ========== ==========
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $ (0.15) $ (0.16) $ (0.18) $ (0.06)
Convertible preferred stock dividends (0.16)
---------- ---------- ---------- ----------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (0.31) $ (0.16) $ (0.18) $ (0.06)
========== ========== ========== ==========
Fiscal Quarters Ended
(in thousands, except for per share data)
-------------------------------------------------------
2001
-------------------------------------------------------
March 31, December 31, September 30, June 30,
2001 2000 2000 2000
STATEMENTS OF OPERATIONS DATA:
REVENUES $ 931 $ 86 $ 203 $ 135
---------- ---------- ---------- ----------
EXPENSES:
Research and development 1,601 1,207 1,710 2,177
General and administrative 1,476(2) 1,928(1) 719 596
---------- ---------- ---------- ----------
Total expenses 3,077 3,135 2,429 2,773
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (2,146) (3,049) (2,226) (2,638)
---------- ---------- ---------- ----------
OTHER INCOME(EXPENSE):
Interest income 48 13 41 97
Loss on sales of investment
securities - net (3)
---------- ---------- ---------- ----------
Other income - net 48 13 41 94
---------- ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM (2,098) (3,036) (2,185) (2,544)
---------- ---------- ---------- ----------
NET LOSS (2,098) (3,036) (2,185) (2,544)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (2,098) $ (3,036) $ (2,185) $ (2,544)
========== ========== ========== ==========
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $ (0.35) $ (0.55) $ (0.41) $ (0.48)
Convertible preferred stock dividends
---------- ---------- ---------- ----------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (0.35) $ (0.55) $ (0.41) $ (0.48)
========== ========== ========== ==========
(1) Includes $866 of costs related to the issuance of warrants to purchase
100,000 shares of common stock to the principals of Stonegate Securities,
Inc. as compensation for financial consulting services (see Note 6 to
Financial Statements).
(2) Includes $442 of costs related to the issuance of warrants to purchase
100,000 shares of common stock to The Kriegsman Group as compensation for
financial consulting services (see Note 6 to Notes to Financial
Statements).
(3) Includes $1,159 credit to (reduction in) research and development costs for
the settlement of certain disputed costs previously expensed during the
year ended March 31, 2001 (see Note 7 to Notes to Financial Statements).
(4) See Note 6 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
-45-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure of market risk associated with risk associated with
risk-sensitive instruments is not material, as our operations are conducted
primarily in United States dollars and we invest primarily in short-term
government obligations and other cash equivalents.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements appear following Item 14 of this
report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS, AND DIRECTORS
The executive officers, and directors of the Company are as follows:
NAME AGE POSITION
T. Stephen Thompson 55 Director, President and Chief Executive Officer
Cecilia Chan 39 Director and Executive Vice President
Gary C. Parks 52 Treasurer, Secretary and Chief Financial Officer
Harvey R. Colten, MD 63 Director
Eric L. Sorkin 42 Director
Frederick W. Wackerle 63 Director
T. Stephen Thompson, President, Chief Executive Officer and
Director. Mr. Thompson has served as a Director since 1991. He joined Immtech in
April 1991 from Amersham Corporation, where he was President and Chief Executive
Officer. He was responsible for Amersham Corporation's four North American
divisions: Life Sciences, Radiopharmaceuticals, Diagnostics, and Quality and
Safety Products. In addition, he had direct responsibility for the Clinical
Reagent (in vitro diagnostic) Division in the United Kingdom. He was employed by
Amersham Corporation from 1986 to 1991. Mr. Thompson has 20 years' experience in
healthcare with previous positions as President of a small diagnostic start-up,
General Manager of the Infectious Disease and Immunology Business Unit in the
Diagnostic Division of Abbott Laboratories from 1981 to 1986, and Group
-46-
Marketing Manager for the Hyland Division of Baxter International Inc. from 1978
to 1981. Mr. Thompson is a member of the Board of Directors of Matritech, Inc.
(NASDAQ: NMPS). Mr. Thompson holds a B.S. from the University of Cincinnati and
an MBA from Harvard University.
Cecilia Chan, Executive Vice President and Director. Ms. Chan began
to work on Immtech in 1997, joined the Company in 1999 and was appointed to the
Board of Directors in November of 2001. As Executive Vice President she is
responsible for fund raising, evaluating and creating joint venture
opportunities, and licensing developments in addition to directing the Company's
capital resources as the Company advances through its various stages of
development. Prior to joining Immtech, Ms. Chan was a Vice President at Dean
Witter Realty Inc. until 1993. During her eight years at that firm Ms. Chan
completed over $500 million in investments and served as Vice-President in
publicly traded partnerships with assets totaling over $800 million. Since 1993,
Ms. Chan has developed and funded investments in the United States and China.
She graduated from New York University in 1985 with a B.S. in International
Business.
Gary C. Parks, Treasurer, Secretary and Chief Financial Officer. Mr.
Parks joined Immtech in January 1994, having previously served at Smallbone,
Inc. from 1989 until 1993, where he was Vice President, Finance. Mr. Parks was a
Division Controller with International Paper from 1986 to 1989. Prior to that,
he was Vice President, Finance, of SerckBaker, Inc., a subsidiary of BTR plc,
from 1982 to 1986 and a board member of SerckBaker de Venezuela. Mr. Parks holds
a BA from Principia College and an MBA from the University of Michigan.
Harvey Colten, MD, Director. Dr. Colten is currently Vice President
and Senior Associate Dean for Translational Research at Columbia University
Health Sciences Division and College of Physicians and Surgeons. Prior to this
he served as Chief Medical Officer at iMetrikus, Inc. a healthcare Internet
company focused on improving the communication between the patient, physician
and the medical industry from 2000 until 2002, and prior to that he was the Dean
of the Medical School and Vice President for Medical Affairs at Northwestern
University from 1997 to 2000. He previously served as the Harriet B. Spoehrer
Professor and Chair of the Department of Pediatrics and Professor of Molecular
Microbiology at Washington University School of Medicine, St. Louis, Mo., whose
faculty he joined in 1986. He earned a B.A. at Cornell in 1959, an MD from
Western Reserve University in 1963, and an M.A. (honorary) from Harvard in 1978.
Following his clinical training he was a researcher at the National Institutes
of Health from 1965-70. In 1970, he was appointed to the faculty at the Harvard
Medical School, where he was named Professor of Pediatrics in 1979 and Chief of
the Division of Cell Biology, Pulmonary Medicine, and Director of the Cystic
Fibrosis Program at Children's Hospital Medical Center, Boston. He is a member
of the Institute of Medicine and was Vice-Chair of its Council. He is a member
of the American Society for Clinical Investigation, the Society for Pediatric
Research, the Association of American Physicians, the American Pediatric
Society, the American Association of Immunologists (former secretary and
treasurer), and the American Society for Biochemistry and Molecular Biology. He
is also a Fellow of the American Association for the Advancement of Science, the
American Academy of Allergy and Immunology and the American Academy of
Pediatrics. Dr. Colten is a Diplomat of the American Board of Pediatrics, served
on the American Board of Allergy and Immunology, and was a member of the
National Heart, Lung, and Blood Institute Advisory Council, serves on the Board
of Directors of the Oasis Institute, the March of Dimes Scientific Advisory
Council, in addition to many
-47-
other Federal and private health groups that advise on scientific and policy
issues. He also served as Vice Chairman of the Board of Directors of Parents as
Teachers National Center. Dr. Colten has been on editorial boards and advisory
committees of several leading scientific and medical journals, including the New
England Journal of Medicine, Journal of Clinical Investigation, Journal of
Pediatrics, Journal of Immunology, Annual Review of Immunology, Proceedings of
the Association of American Physicians, and American Journal of Respiratory Cell
and Molecular Biology.
Eric L. Sorkin, Director. Mr. Sorkin is a private investor. Prior to
1994, Mr. Sorkin worked for eleven years at Dean Witter Realty Inc., a wholly
owned subsidiary of Morgan Stanley, which grew to hold an investment portfolio
of real estate and other assets of over $3 billion. He became a Managing
Director in 1988 and was responsible for the acquisition, structuring, and debt
placement of various investments including real estate, fund management and
asset backed securities. Mr. Sorkin managed Dean Witter Realty's retail
(shopping center) portfolio of over 2 million square feet, and participated in
the development of office, residential, industrial, and retail property and in
the acquisition of over 5 million square feet of properties. He is a graduate of
Yale University with a Bachelor of Arts degree in Economics.
Frederick W. Wackerle, Director. Mr. Wackerle is an author, private
investor and President of Fred Wackerle, Inc. He has been an advisor to CEOs and
boards and an executive search consultant for the past thirty-five years. Mr.
Wackerle specializes in advising corporate boards on management succession and
the recruiting of Chief Executive Officer ("CEO") positions. In the past ten
years, he devoted a significant amount of his time to investing in and advising
biotechnology companies on succession planning, and recruited CEO candidates and
Board members for companies that include Biogen, Inc., ICOS Corp., Amylin
Pharmaceuticals, Inc., Enzon, Inc., Medtronic Inc., and Ventana Medical Systems.
Mr. Wackerle frequently writes management articles for Chicago Crain's Business,
recently completed a book on management succession: "The Right CEO-Straight Talk
About Making CEO Selection Decisions" (Jossey-Bass), and is a graduate of
Monmouth College where he has been active on their Board of Trustees. He is also
a board member of The Rehabilitation Institute of Chicago.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer, its Executive Vice
President and its Chief Financial Officer for the fiscal years ended March 31,
2000, 2001 and 2002.
-48-
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
YEAR SALARY ($) OPTIONS/SARS (#)
------ ------------- ----------------
T. Stephen Thompson 2002 $ 150,000 0
President, Chief Executive Officer, and 2001 $ 150,000 0
Director 2000 $ 143,750 0
Cecilia Chan 2002 $ 120,000 0
Executive Vice President, and 2001 $ 75,000 0
Director 2000 $ 45,000 0
Gary C. Parks 2002 $ 125,000 0
Secretary, Treasurer, and Chief Financial 2001 $ 125,000 0
Officer 2000 $ 120,833 0
------------------------------------------------------ ---------- --------------------------------------
Option/SAR Grants In Year Ended March 31, 2002
% OF TOTAL
NUMBER OF OPTIONS/SARS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE OR BASE
NAME OPTIONS/SARS GRANTED FISCAL YEAR PRICE ($/SHARE) EXPIRATION DATE
------------- -------------------- ------------ ---------------- ---------------
T. Stephen Thompson 0 N/A N/A N/A
Cecilia Chan 0 N/A N/A N/A
Gary C. Parks 10,000 28.8 $10.00 7/19/2011
-------------------------------- --------------------- -------------------- --------------------- -----------------
-49-
Aggregate Option/Warrant Exercises In Year Ended March 31, 2002 And
Option/Warrant Values At March 31, 2002
VALUE OF UN-EXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS/WARRANTS
OPTIONS/WARRANTS AT 3/31/02 (#) AT 3/31/02 ($)
SHARES ------------------------------- -----------------------------
ACQUIRED ON REALIZED
EXERCISE (#) VALUE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
T. Stephen Thompson 13,066 $58,274(1) 23,067 20,000 $81,941(2) 0
Cecilia Chan 0 0 225,000 0 0 0
Gary C. Parks 14,195 $61,536(3) 16,140 9,055 $43,436(4) 0
-------------------------- --------------- -------------- -------------- ----------------- --------------- ---------------
(1) Based on the March 28, 2002, value of $4.80 per share, minus the average
per share exercise price of $0.34 multiplied by the number of shares
underlying the option/warrant.
(2) Based on the March 28, 2002, value of $4.80 per share, minus the average
per share exercise price of $1.25 multiplied by the number of shares
underlying the option/warrant.
(3) Based on the March 28, 2002, value of $4.80 per share, minus the average
per share exercise price of $0.46 multiplied by the number of shares
underlying the option/warrant.
(4) Based on the March 28, 2002, value of $4.80 per share, minus the average
exercise price of $1.74 multiplied by the number of shares underlying the
option/warrant.
Employment Agreements
The Company entered into an employment agreement with Mr. Thompson
in 1992, pursuant to which the Company retained Mr. Thompson as its President
and Chief Executive Officer for an annual base salary of $150,000 (subject to
annual adjustment by the Board), plus reimbursement for related business
expenses. The agreement, which includes certain confidentiality and
non-disclosure provisions, grants to Mr. Thompson the right to receive an annual
bonus to be established by the Board in an amount not to exceed 60% of Mr.
Thompson's annual base salary for the year and certain other fringe benefits. If
the Company breaches the agreement or Mr. Thompson is terminated by the Company
without cause, he is entitled to all payments which he would otherwise accrue
over the greater of nine months from the date of termination or the remaining
term under the agreement. Additionally, rights to all options granted to Mr.
Thompson pursuant to the agreement vest immediately upon his termination without
cause or a change of control of the Company. The term of Mr. Thompson's
agreement expired on May 11, 1999, however, the agreement is subject to
automatic renewal for successive one-year terms unless terminated by either
party upon 30 days notice. Except for $12,500 paid to Mr. Thompson during the
fiscal year ended March 31, 1998, Mr. Thompson has waived any right to receive
-50-
salary due under his employment agreement prior to June 30, 1998. Beginning July
1, 1998 and continuing until April 30, 1999, Mr. Thompson agreed to accept
one-half of his annual salary as full satisfaction of the Company's salary
obligation under his employment agreement. Mr. Thompson, effective May 1, 1999,
has resumed his full salary rate of $150,000 per annum under his employment
agreement, but will not be paid amounts previously waived.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock of the Company as of July 10, 2002, by
(i) each of the Company's Directors and Executive Officers, (ii) all directors
and executive officers as a group, and (iii) each person known to be the
beneficial owner of more than 5% of the shares.
-51-
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
OF COMMON STOCK BENEFICIALLY SHARES
NAME AND ADDRESS OWNED (1) OF COMMON STOCK
-------------------------------------------------- -------------------------------- -------------------------
T. Stephen Thompson (2) 370,257 shares 5.82%
c/o Immtech international, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061
Cecilia Chan (3) 227,000 shares 3.49%
c/o Immtech International, Inc.
One North End Ave., Ste. 1111
New York, NY 10282
Gary C. Parks (4) 42,670 shares 0.68%
c/o Immtech international, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061
Harvey Colten, MD (5) 13,756 shares 0.22%
c/o Office of the Dean Columbia University,
College of Physicians and Surgeons,
630 West 168th Street,
New York, NY 10032
Eric L. Sorkin (6) 285,049 shares 4.36%
c/o Immtech International, Inc.
One North End Ave., Ste. 1111
New York, NY 10282
Frederick W. Wackerle(7) 69,588 shares 1.10%
3750 N. Lake Shore Drive
Chicago IL 60613
All directors and executive officers as a group 1,008,320 shares 14.58%
(6 persons)
James Ng (8) 452,800 shares 6.74%
c/o RADE Management Corporation
New York Mercantile Exchange,
Box 415
New York, NY 10282
Criticare Systems, Inc. (9) 456,374 shares 7.28%
20925 Crossroads Circle
Waukesha, WI 53186
-52-
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
OF COMMON STOCK BENEFICIALLY SHARES
NAME AND ADDRESS OWNED (1) OF COMMON STOCK
-------------------------------------------------- -------------------------------- -------------------------
Johnson Matthey Public Limited 423,750 shares 6.76%
Company (10)
2-4 Cockspur Street
Trafalgar Square
London SW1Y 5BQ
United Kingdom
Matthey Holdings Limited (10) 423,750 shares 6.76%
2-4 Cockspur Street
Trafalgar Square
London SW1Y 5BQ
United Kingdom
Matthey Finance Ltd. (10) 423,750 shares 6.76%
2-4 Cockspur Street
Trafalgar Square
London SW1Y 5BQ
United Kingdom
Johnson Matthey Investments, Ltd. (10) 423,750 shares 6.76%
2-4 Cockspur Street
Trafalgar Square
London SW1Y 5BQ
United Kingdom
423,750 shares 6.76%
Johnson Matthey America Holdings
Limited (10)
2-4 Cockspur Street
Trafalgar Square
London SW1Y 5BQ
United Kingdom
Johnson Matthey Holdings, Inc. (10) 423,750 shares 6.76%
c/o Organization Service Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
-53-
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
OF COMMON STOCK BENEFICIALLY SHARES
NAME AND ADDRESS OWNED (1) OF COMMON STOCK
-------------------------------------------------- -------------------------------- -------------------------
Johnson Matthey Investments, Inc. (10) 423,750 shares 6.76%
c/o Organization Service Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Johnson Matthey Pharmaceutical Materials, Inc. 423,750 shares 6.76%
(10)
c/o Organization Service Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Pharm-Eco Laboratories, Inc. (10) 423,750 shares 6.76%
460 East Swedesford Road
Suite 2000
Wayne, PA 19087
(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares beneficially owned
by them, subject to applicable community property laws.
(2) Includes 281,941 shares of Common Stock, 45,249 shares of Common Stock
upon the conversion of Series A Preferred Stock, 20,000 shares of Common
Stock issuable upon the exercise of warrants as follows: warrant to
purchase 20,000 shares of Common Stock at $6.00 per share by February 14,
2007 only after the Series A Preferred Stock has been converted, and
23,067 shares of Common Stock issuable upon the exercise of options as
follows: option to purchase 8,872 shares of Common Stock at $0.46 per
share by March 21, 2006; and option to purchase 14,195 shares of Common
Stock at $1.74 per share by April 16, 2008.
(3) Includes 2,000 shares of Common Stock, and 225,000 shares of Common Stock
issuable upon the exercise of warrants as follows: warrant to purchase
51,923 shares of Common Stock at $6.47 per share by July 24, 2004; and
warrant to purchase 173,077 shares of Common Stock at $6.47 per share by
October 12, 2004.
(4) Includes 21,602 shares of Common Stock, 2,262 shares of Common Stock upon
the conversion of Series A Preferred Stock, 1,000 shares of Common Stock
issuable upon the exercise of warrants as follows: warrant to purchase
1,000 shares of Common Stock at $6.00 per share by February 14, 2007 only
after the Series A Preferred Stock has been converted, and 17,806 shares
of Common Stock issuable upon the exercise of options as follows: vested
options to purchase 14,195 shares of Common Stock at $1.74 per share by
April 16, 2008; and 3,611 vested options to purchase 10,000 shares of
Common Stock at $10.00 per share by July 19, 2011.
-54-
(5) Includes 1,088 shares of Common Stock, and 12,668 shares of Common Stock
issuable upon the exercise of options as follows: 1,556 vested options to
purchase 7,000 shares of Common Stock at $4.75 per share by December 18,
2006; and 11,112 vested options to purchase 20,000 shares of Common Stock
at $10.50 per share by December 28, 2005.
(6) Includes 24,687 shares of Common Stock, 20,362 shares of Common Stock upon
the conversion of Series A Preferred Stock, 234,000 shares of Common Stock
issuable upon the exercise of warrants as follows: warrant to purchase
51,923 shares of Common Stock at $6.47 per share by July 24, 2004, warrant
to purchase 173,077 shares of Common Stock at $6.47 per share by October
12, 2004 and warrant to purchase 9,000 shares of Common Stock at $6.00 per
share by February 14, 2007 only after the Series A Preferred Stock has
been converted; and 6,000 vested options to purchase 27,000 shares of
Common Stock at $4.75 per share by December 18, 2006.
(7) Includes 30,124 shares of Common Stock, 13,575 shares of Common Stock upon
the conversion of Series A Preferred Stock, 6,000 shares of Common Stock
issuable upon the exercise of warrants as follows: warrant to purchase
6,000 shares of Common Stock at $6.00 per share by February 14, 2007 only
after the Series A Preferred Stock has been converted; and 19,889 shares
of Common Stock issuable upon the exercise of options as follows: option
to purchase 15,000 shares of Common Stock at $10.50 per share by December
28, 2005, and 4,889 vested options to purchase 22,000 shares of Common
Stock at $4.75 per share by December 18, 2006.
(8) Includes 2,800 shares of Common Stock, and 320,000 shares of Common Stock
issuable upon the exercise of warrants as follows: warrant to purchase
73,845 shares of Common Stock at $6.47 per share by July 24, 2004; and
warrant to purchase 246,155 shares of Common Stock at $6.47 per share by
October 12, 2004. As beneficial owner of RADE Management Corporation
("RADE"), includes 130,000 shares of Common Stock issuable upon the
exercise of warrants as follows: warrant to purchase 30,000 shares of
Common Stock at $6.47 per share by July 24, 2004; and warrant to purchase
100,000 shares of Common Stock at $6.47 per share by October 12, 2004.
(9) Includes 456,374 shares of Common Stock. Criticare Systems, Inc. (NASDAQ:
CXIM) designs, manufacturers and markets globally patient monitoring
systems and noninvasive sensors for a wide range of hospitals and
alternate health care environments.
(10) As of April 20, 2001, Pharm-Eco Laboratories owns 423,750 shares of Common
Stock. Johnson Matthey Public Limited Company is the ultimate parent
company of Johnson Matthey Holdings Limited, Matthey Finance Ltd., Johnson
Matthey Investments, Ltd., Johnson Matthey America Holdings Limited,
Johnson Matthey Holdings, Inc., Johnson Matthey Investments, Inc., Johnson
Matthey Pharmaceutical Materials, Inc., and Pharm-Eco Laboratories, Inc.
According to a Schedule 13G filed by Johnson Matthey Public Limited
Company the aforementioned companies are members of a group, each of which
has shared voting power and may be deemed to be beneficial owners of the
shares.
-55-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the transactions discussed in Item 6 under Liquidity
and Capital Resources, the following related-party transactions are disclosed.
RADE Management Corporation
RADE Management Corporation ("RADE") leases an office facility which
is occupied by both the Company and RADE. The office space is paid for by
Immtech on RADE's behalf. During the years ended March 31, 2000, 2001, and 2002,
the Company paid approximately $75,000, $102,000 and $106,000 respectively, for
the use of the facility. In addition, during the years ended March 31, 2000,
2001 and 2002, the Company paid RADE approximately $131,000 $41,000 and $18,000,
respectively, as reimbursement for certain administrative expenses paid on
behalf of the Company.
The Company had previously engaged RADE as a consultant from July
1998 to April 1999 to assist the Company in various aspects of the Company's
ongoing operations, including analyzing the market potential of the Company's
product candidates, developing a long term strategy for exploitation of the
Company's product candidates and assisting in the negotiation of agreements with
other parties which perform services for the Company.
Prior to their affiliation with the Company, Mr. Eric L. Sorkin
(Company Director) and Ms. Cecilia Chan (Company Director and Executive Vice
President) provided assistance to RADE as independent consultants in connection
with aforementioned services provided by RADE to the Company. Mr. Sorkin and Ms.
Chan received from RADE as compensation for their services, a portion of the
warrants granted to RADE by the Company in connection with RADE's services.
-56-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: 7/15/02 By: /s/ T. Stephen Thompson
------------------------------ ------------------------
T. Stephen Thompson
Chief Executive Officer and President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE DATE
/s/ T. Stephen Thompson 7/15/02
----------------------------------- --------------------
T. Stephen Thompson
Chief Executive Officer, and President
/s/ Gary C. Parks 7/15/02
----------------------------------- --------------------
Gary C. Parks
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Cecilia Chan 7/15/02
----------------------------------- --------------------
Cecilia Chan
Director
/s/ Harvey Colten 7/15/02
----------------------------------- --------------------
Harvey Colten
Director
/s/ Eric L. Sorkin 7/15/02
----------------------------------- --------------------
Eric L. Sorkin
Director
/s/ Frederick W. Wackerle 7/15/02
----------------------------------- --------------------
Frederick W. Wackerle
Director
-57-
PART IV.
ITEM 14. EXHIBITS, REPORTS ON FORM 8-K AND FINANCIAL STATEMENTS
(a) The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as part of this report.
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
3.1 (2) Certificate of Incorporation of the Company, as amended
3.2 (8) By-laws of the Company, with amendment
4.1 (3) Form of Common Stock Certificate
4.2 (2) Warrant Agreement relating to the Underwriters' Warrants
4.3 (2) Warrant Agreement, dated July 24, 1998, by and between the
Company and RADE Management Corporation
4.4 (2) Warrant Agreement, dated October 12, 1998, by and between
the Company and RADE Management Corporation
4.5 (8) Warrant Agreement, dated March 15, 2001, by and between the
Company and The Kriegsman Group
4.6 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Griffith Shelmire Partners, Inc.
4.7 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Scott R. Griffith
4.8 (8) Warrant Agreement, dated July 31, 2000, by and between the
Company and Jesse B. Shelmire
4.9 (9) Certificate of Designation for February 14, 2002 Private
Placement
4.10 (9) Stock Purchase Warrant, dated February 14, 2002 for February
14, 2002 Private Placement
10.1 (1) Letter Agreement, dated January 15, 1997, by and between the
Company, Pharm-Eco Laboratories, Inc. and The University of
North Carolina at Chapel Hill, as amended
10.1 (1) Consulting Agreement, dated May 15, 1998, by and between the
Company and RADE Management Corporation
10.2 (1) 1993 Stock Option and Award Plan
10.3 (6) 2000 Stock Option and Award Plan
10.4 (1) Letter Agreement, dated May 29, 1998, between the Company
and Franklin Research Group, Inc.
-58-
10.5 (1) Indemnification Agreement, dated June 1, 1998, between the
Company and RADE Management Corporation
10.6 (1) Letter Agreement, dated June 24, 1998, between the Company
and Criticare Systems, Inc.
10.7 (1) Letter Agreement, dated June 25, 1998, between the Company
and Criticare Systems, Inc.
10.8 (2) Amendment, dated January 15, 1999, to Letter Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.9 (5) Office Lease, dated August 26, 1999, by and between the
Company and Arthur J. Rogers & Co.
10.10 (8) License Agreement, dated August 25, 1993, by and between the
University of North Carolina at Chapel Hill and Pharm-Eco
Laboratories, Inc.
10.11 (8) Assignment Agreement, dated as of March 27, 2001, by and
between the Company and Pharm-Eco Laboratories, Inc.
10.12 (8) Clinical Research Subcontract, dated as of March 29, 2001,
by and between The University of North Carolina at Chapel
Hill and the Company
10.13 (1) Material Transfer and Option Agreement, dated March 23,
1998, by and between the Company and Sigma Diagnostics, Inc.
10.14 (1) License Agreement, dated March 10, 1998, by and between the
Company and Northwestern University
10.15 (1) License Agreement, dated October 27, 1994, by and between
the Company and Northwestern University
10.16 (1) Assignment of Intellectual Properties, dated June 29, 1998,
between the Company and Criticare Systems, Inc.
10.18 (1) Assignment Agreement, dated June 26, 1998, by and between
the Company and Criticare Systems, Inc.
10.19 (1) Assignment Agreement, dated June 29, 1998, by and between
the Company and Criticare Systems, Inc.
10.20 (1) International Patent, Know-How and Technology License
Agreement, dated June 29, 1998, by and between the Company
and Criticare Systems, Inc.
10.21 (1) Employment Agreement, dated 1992, by and between the Company
and T. Stephen Thompson
10.22 (2) Funding and Research Agreement, dated September 30, 1998, by
and among the Company, NextEra Therapeutics, Inc. and
Franklin Research Group, Inc.
-59-
10.23 (4) Two Year Plus 200% Lock-Up Agreement executed by James Ng
10.24 (4) Employment Agreement, dated 1998, by and between NextEra and
Lawrence Potempa
10.25 (7) Form of Regulation D Subscription Agreement for December 8,
2000 Private Placement
10.26 (7) Form of Regulation S Subscription Agreement for December 8,
2000 Private Placement
10.27 (9) Form of Regulation D Subscription Agreement for February 14,
2002 Series A Preferred Private Placement
10.28 (9) Form of Regulation S Subscription Agreement for February 14,
2002 Series A Preferred Private Placement
10.29 (10) Amendment, dated January 28, 2002, to License Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
(1) Incorporated by Reference to the Company's Registration Statement on Form
SB-2 (Registration Statement No. 333-64393), as filed with the Securities
and Exchange Commission on September 28, 1998.
(2) Incorporated by Reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-64393), as filed
with the Securities and Exchange Commission on February 11, 1999.
(3) Incorporated by Reference to Amendment No. 2 the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-64393), as filed
with the Securities and Exchange Commission on March 30, 1999.
(4) Incorporated by Reference to the Company's Form 10-KSB for the fiscal year
ended March 31, 1999 (File No. 001-14907), as filed with the Securities
and Exchange Commission on June 29, 1999.
(5) Incorporated by Reference to the Company's Annual Report on Form 10-KSB
for the fiscal year ended March 31, 2000 (File No. 000-25669), as filed
with the Securities and Exchange Commission on June 26, 2000.
(6) Incorporated by Reference to Annex A to the Company's Definitive Proxy
Statement (File No. 000-25669), as filed with the Securities and Exchange
Commission on August 25, 2000.
(7) Incorporated by Reference to the Company's Quarterly Report on Form 10-QSB
(File No. 000-25669), as filed with the Securities and Exchange Commission
on February 14, 2001.
(8) Incorporated by Reference to the Company's Annual Report on Form 10-KSB/A
(File No. 000-25669), as filed with the Securities and Exchange Commission
on June 29, 2001, as amended on July 6, 2001.
-60-
(9) Incorporated by Reference to the Exhibits to the Company's Form 8-K (File
No. 000-25669), as filed with the Securities and Exchange Commission on
February 14, 2002.
(10) Incorporated by Reference to the Company's Form 10-Q (File No. 000-25669),
as filed with the Securities and Exchange Commission on February 14, 2002,
as amended on June 10, 2002.
(b) Reports on Form 8-K filed in the past quarter
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on February 14, 2002 regarding private placements. The
Company filed another report on Form 8-K with the Securities and Exchange
Commission on March 13, 2002 regarding their transfer onto the NASDAQ SmallCap
Market.
-61-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND 2002, THE YEARS ENDED MARCH 31,
2000, 2001 AND 2002 AND FOR THE PERIOD OCTOBER 15, 1984 (DATE OF INCEPTION) TO
MARCH 31, 2002 (UNAUDITED) AND INDEPENDENT AUDITORS' REPORT
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS AS OF MARCH 31, 2001 AND 2002 AND FOR
THE YEARS ENDED MARCH 31, 2000, 2001 AND 2002 AND FOR THE
PERIOD FROM OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH
31, 2002 (UNAUDITED):
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity (Deficiency in Assets) 4-5
Statements of Cash Flows 6
Notes to Financial Statements 7-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Immtech International, Inc.
(A Development Stage Enterprise):
We have audited the accompanying balance sheets of Immtech International, Inc.
(a development stage enterprise) (the "Company") as of March 31, 2001 and 2002,
and the related statements of operations, stockholders' equity (deficiency in
assets) and cash flows for each of the three years in the period ended March 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 2001 and 2002,
and the results of its operations and its cash flows for each of the three years
in the period ended March 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in the discovery, development and commercialization of
pharmaceutical and therapeutic drugs. As discussed in Note 1 to the financial
statements, the Company's operating losses since inception, negative cash flow
and shortage of unrestricted working capital raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Milwaukee, Wisconsin
July 5, 2002
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
MARCH 31, 2001 AND 2002
--------------------------------------------------------------------------------
ASSETS 2001 2002
CURRENT ASSETS:
Cash and cash equivalents $ 2,097,718 $ 2,037,813
Restricted funds on deposit 3,812,553 602,400
Other current assets 28,289 39,881
------------ ------------
Total current assets 5,938,560 2,680,094
PROPERTY AND EQUIPMENT - Net 210,024 175,950
OTHER ASSETS 19,848 19,848
------------ ------------
TOTAL $ 6,168,432 $ 2,875,892
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,695,721 $ 545,017
Accrued expenses 70,862 4,257
Deferred revenue 3,509,194 563,435
------------ ------------
Total current liabilities 5,275,777 1,112,709
DEFERRED RENTAL OBLIGATION 33,511 27,145
------------ ------------
Total liabilities 5,309,288 1,139,854
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 1, 3, 6, 7, 8 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock, par value
$.01 per share, 5,000,000
and 4,680,000 shares
authorized and unissued as
of March 31, 2001 and
2002, respectively
Series A convertible
preferred stock, par value
$0.01 per share, stated
value $25 per share,
320,000 shares authorized,
160,100 shares issued and
outstanding, aggregate
liquidation
preference of $4,031,900 4,031,900
Common stock, par value $0.01 per share, 30,000,000 shares
authorized, 5,955,245 and 6,066,459 shares issued and
outstanding as of March 31, 2001 and 2002, respectively 59,552 60,664
Additional paid-in capital 33,574,917 34,679,844
Deficit accumulated during the developmental stage (32,775,325) (37,036,370)
------------ ------------
Total stockholders' equity 859,144 1,736,038
------------ ------------
TOTAL $ 6,168,432 $ 2,875,892
============ ============
See notes to financial statements.
-2-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2000, 2001 AND 2002 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
OCTOBER 15,
1984
YEARS ENDED MARCH 31, (INCEPTION)
------------------------------------------- TO MARCH 31,
2000 2001 2002 2002
REVENUES $ 368,844 $ 1,354,943 $ 3,522,113 $ 7,233,973
------------ ------------ ----------- ------------
EXPENSES:
Research and development 10,255,301 6,694,546 3,958,107 28,501,161
General and administrative 1,731,348 4,719,298 2,927,726 17,340,486
Equity in loss of joint venture 135,000 135,002
------------ ------------ ----------- ------------
Total expenses 12,121,649 11,413,844 6,885,833 45,976,649
------------ ------------ ----------- ------------
LOSS FROM OPERATIONS (11,752,805) (10,058,901) (3,363,720) (38,742,676)
------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 318,879 198,559 40,610 563,728
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942) (2,942)
Cancelled offering costs (584,707)
------------ ------------ ----------- ------------
Other income (expense) - net 318,879 195,617 40,610 (1,153,423)
------------ ------------ ----------- ------------
LOSS BEFORE EXTRAORDINARY ITEM (11,433,926) (9,863,284) (3,323,110) (39,896,099)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,427,765
------------ ------------ ----------- ------------
NET LOSS (11,433,926) (9,863,284) (3,323,110) (38,468,334)
CONVERTIBLE PREFERRED STOCK DIVIDENDS (937,935) (937,935)
REDEEMABLE PREFERRED STOCK CONVERSION,
PREMIUM AMORTIZATION AND DIVIDENDS 2,369,899
------------ ------------ ----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $(11,433,926) $ (9,863,284) $(4,261,045) $(37,036,370)
============ ============ =========== ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $ (2.27) $ (1.78) $ (0.55)
Convertible preferred stock dividends (0.16)
------------ ------------ -----------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (2.27) $ (1.78) $ (0.71)
============ ============ ===========
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 5,036,405 5,545,190 6,011,416
See notes to financial statements.
-3-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED MARCH 31, 2000, 2001 AND 2002 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
Series A Convertible Deficit Accumulated Total
Preferred Stock Common Stock Accumulated Other Stockholders'
----------------------- ------------------- Additional During the Comprehensive Equity
Issued and Issued and Paid-in Development Income (Deficiency in
Outstanding Amount Outstanding Amount Capital Stage (Loss) Assets)
----------- ---------- ----------- ------- ------------ ------------ ------------- -------------
October 15, 1984 (date
of inception)
Issuance of common
stock to founders 113,243 $ 1,132 $ 24,868 $ 26,000
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1985 113,243 1,132 24,868 26,000
Issuance of common
stock 85,368 854 269,486 270,340
Net loss $ (209,569) (209,569)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1986 198,611 1,986 294,354 (209,569) 86,771
Issuance of common
stock 42,901 429 285,987 286,416
Net loss (47,486) (47,486)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1987 241,512 2,415 580,341 (257,055) 325,701
Issuance of common
stock 4,210 42 28,959 29,001
Net loss (294,416) (294,416)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1988 245,722 2,457 609,300 (551,471) 60,286
Issuance of common
stock 62,792 628 569,372 570,000
Provision for
compensation 489,975 489,975
Net loss (986,746) (986,746)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1989 308,514 3,085 1,668,647 (1,538,217) 133,515
Issuance of common
stock 16,478 165 171,059 171,224
Provision for
compensation 320,980 320,980
Net loss (850,935) (850,935)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1990 324,992 3,250 2,160,686 (2,389,152) (225,216)
Issuance of common
stock 218 2 1,183 1,185
Provision for
compensation 6,400 6,400
Net loss (163,693) (163,693)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1991 325,210 3,252 2,168,269 (2,552,845) (381,324)
Issuance of common
stock 18,119 181 85,774 85,955
Provision for
compensation 864,496 864,496
Issuance of stock
options in exchange
for cancellation of
indebtedness 57,917 57,917
Net loss (1,479,782) (1,479,782)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1992 343,329 3,433 3,176,456 (4,032,627) (852,738)
Issuance of common
stock 195,790 1,958 66,839 68,797
Provision for
compensation 191,502 191,502
Net loss (1,220,079) (1,220,079)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1993 539,119 5,391 3,434,797 (5,252,706) (1,812,518)
Issuance of common
stock 107,262 1,073 40,602 41,675
Provision for
compensation 43,505 43,505
Net loss (2,246,426) (2,246,426)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1994 646,381 6,464 3,518,904 (7,499,132) (3,973,764)
Net loss (1,661,677) (1,661,677)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1995 646,381 6,464 3,518,904 (9,160,809) (5,635,441)
Issuance of common
stock for
compensation 16,131 161 7,339 7,500
Net loss (1,005,962) (1,005,962)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1996 662,512 6,625 3,526,243 (10,166,771) (6,633,903)
Issuance of common
stock 12,986 130 5,908 6,038
Provision for
compensation -
employees 45,086 45,086
Provision for
compensation -
nonemployees 62,343 62,343
Issuance of warrants
to purchase common
stock 80,834 80,834
Net loss (1,618,543) (1,618,543)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
(Continued)
-4-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED MARCH 31, 2000, 2001 AND 2002 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
Series A Convertible Deficit Accumulated Total
Preferred Stock Common Stock Accumulated Other Stockholders'
----------------------- ------------------- Additional During the Comprehensive Equity
Issued and Issued and Paid-in Development Income (Deficiency in
Outstanding Amount Outstanding Amount Capital Stage (Loss) Assets)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1997 675,498 $ 6,755 $ 3,720,414 $(11,785,314) $ (8,058,145)
Exercise of options 68,167 682 28,862 29,544
Provision for
compensation -
employees 50,680 50,680
Provision for
compensation -
nonemployees 201,696 201,696
Contributed capital -
common stockholders 231,734 231,734
Net loss (1,477,132) (1,477,132)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1998 743,665 7,437 4,233,386 (13,262,446) (9,021,623)
Issuance of common
stock under private
placement offering 575,000 5,750 824,907 830,657
Exercise of options 40,650 406 12,944 13,350
Provision for
compensation -
nonemployees 2,426,000 2,426,000
Issuance of common
stock to Criticare 86,207 862 133,621 134,483
Conversion of
Criticare debt to
common stock 180,756 1,808 856,485 858,293
Conversion of debt to
common stock 424,222 4,242 657,555 661,797
Conversion of
redeemable preferred
stock to common
stock 1,195,017 11,950 1,852,300 3,713,334 5,577,584
Net loss (1,929,003) (1,929,003)
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 1999 3,245,517 32,455 10,997,198 (11,478,115) (448,462)
Comprehensive loss:
Net loss (11,433,926) (11,433,926)
Other comprehensive loss:
Unrealized loss on
investment
securities
available for
sale $ (1,178) (1,178)
Comprehensive loss (11,435,104)
Issuance of common
stock under initial
public offering 1,150,000 11,500 9,161,110 9,172,610
Exercise of options
and warrants 247,420 2,474 424,348 426,822
Provision for
compensation -
nonemployees 509,838 509,838
Issuance of common
stock for
compensation -
nonemployees 611,250 6,113 6,106,387 6,112,500
Issuance of common
stock for accrued
interest 28,147 281 281,189 281,470
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 2000 5,282,334 52,823 27,480,070 (22,912,041) (1,178) 4,619,674
Comprehensive loss:
Net loss (9,863,284) (9,863,284)
Other comprehensive
income (loss):
Unrealized loss on
investment
securities
available for
sale (1,764) (1,764)
Reclassification
adjustment for
loss included in
net loss 2,942 2,942
Comprehensive loss (9,862,106)
Issuance of common
stock under private
placement offering 584,250 5,843 4,299,806 4,305,649
Exercise of options 88,661 886 41,922 42,808
Provision for
compensation -
nonemployees 1,739,294 1,739,294
Contributed capital -
common stockholder 13,825 13,825
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 2001 5,955,245 59,552 33,574,917 (32,775,325) 859,144
Net loss (3,323,110) (3,323,110)
Issuance of Series A
convertible
preferred stock
under private
placement offerings,
less cash offering
costs of $153,985 160,100 $4,002,500 754,550 (908,535) 3,848,515
Issuance of common
stock as offering
costs under private
placement offerings 60,000 600 (600)
Accrual of preferred
stock dividends 29,400 (29,400)
Exercise of options 51,214 512 18,972 19,484
Provision for
compensation -
nonemployees 332,005 332,005
------- ---------- --------- ------- ------------ ------------ ----------- ------------
Balance, March 31, 2002 160,100 $4,031,900 6,066,459 $60,664 $ 34,679,844 $(37,036,370) $ 0 $ 1,736,038
======= ========== ========= ======= ============ ============ =========== ============
(Concluded)
See notes to financial statements.
-5-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2000, 2001 AND 2002 AND THE PERIOD FROM
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
OCTOBER 15,
1984
YEARS ENDED MARCH 31, (INCEPTION)
------------------------------------------ TO MARCH 31,
2000 2001 2002 2002
OPERATING ACTIVITIES:
Net loss $ (11,433,926) $ (9,863,284) $ (3,323,110) $(38,468,334)
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 6,622,338 1,739,294 332,005 13,582,600
Depreciation and amortization of property and equipment 40,341 89,616 98,893 543,760
Deferred rental obligation 39,879 (6,368) (6,366) 27,145
Equity in loss of joint venture 135,000 135,002
Loss on sales of investment securities - net 2,942 2,942
Amortization of debt discounts and issuance costs 134,503
Extraordinary gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit (3,812,553) 3,210,153 (602,400)
Other current assets (2,836) (17,089) (11,592) (39,881)
Other assets (19,848) (19,848)
Accounts payable 1,351,919 164,710 (1,150,704) 874,157
Accrued expenses (16,447) 36,958 (66,605) 667,270
Deferred revenue 3,509,194 (2,945,759) 563,435
------------ ------------ ------------ ------------
Net cash used in operating activities (3,283,580) (8,156,580) (3,863,085) (24,027,414)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities (1,603,473) (199,996) (1,803,469)
Proceeds from sales and maturities of investment securities 242,484 1,558,043 1,800,527
Purchases of property and equipment (247,614) (62,350) (64,819) (693,186)
Investment in and advances to joint venture (135,000) (135,002)
------------ ------------ ------------ ------------
Net cash used in investing activities (1,743,603) 1,295,697 (64,819) (831,130)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments of) advances from stockholders and affiliates (50,000) 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (110,000) (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Net proceeds from issuance of redeemable preferred stock 3,330,000
Net proceeds from issuance of convertible preferred stock
and warrants 3,848,515 3,848,515
Net proceeds from issuance of common stock 9,783,502 4,348,457 19,484 16,317,155
Additional capital contributed by stockholders 13,825 245,559
------------ ------------ ------------ ------------
Net cash provided by financing activities 9,623,502 4,362,282 3,867,999 26,896,357
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,596,319 (2,498,601) (59,905) 2,037,813
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0 4,596,319 2,097,718 0
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,596,319 $ 2,097,718 $ 2,037,813 $ 2,037,813
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION (Note 10)
See notes to financial statements.
-6-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2000, 2001 AND 2002
--------------------------------------------------------------------------------
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (the "Company") is a
pharmaceutical company focused on the discovery, development and
commercialization of drugs to treat infectious diseases that include fungal
infections, malaria, tuberculosis, hepatitis C, pneumonia, diarrhea,
African Sleeping Sickness and cancer. The Company is a development stage
enterprise and since its inception on October 15, 1984, the Company has
engaged in research and development programs, expanding its network of
scientists and scientific advisors, negotiating and consummating technology
licensing agreements, and advancing their technology platform toward
commercialization. The Company uses the expertise and resources of
strategic partners and contracted parties in a number of areas, including:
(i) laboratory research, (ii) pre-clinical and human clinical trials and
(iii) the manufacture of pharmaceutical products. The Company holds
worldwide patents, licenses and rights to license worldwide patents, patent
applications and technologies from third parties that are integral to the
Company's business. The Company has licensing and commercialization rights
to a dicationic anti-infective pharmaceutical platform and is developing
drugs intended for commercial use based on that platform.
The Company does not have any products currently available for sale, and no
products are expected to be commercially available for sale until after
March 31, 2003, if at all.
Going Concern Presentation and Related Risks and Uncertainties - The
accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business.
Since inception, the Company has incurred accumulated losses of
approximately $38,468,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
continues its research and development activities and clinical trial
efforts. In addition, the Company has various research and development
agreements with various entities that are thinly capitalized and are
dependent upon their ability to raise additional funds to continue their
research and development activities. There can be no assurance that the
Company's continued research will lead to the development of commercially
viable products. The Company's operations to date have consumed substantial
amounts of cash. The negative cash flow from operations is expected to
continue in the foreseeable future. The Company will require substantial
funds to conduct research and development and laboratory and clinical
testing, and to manufacture (or have manufactured) and market (or have
marketed) its product candidates.
In February 2002, the Company completed private placement offerings which
raised approximately $3,849,000 of additional equity capital (after cash
offering costs of approximately $154,000) through the issuance of 160,100
shares of Series A Convertible Preferred stock and warrants to purchase
400,250 shares of common stock. The net proceeds from the private placement
offerings are not sufficient to fund the Company's operations through the
commercialization of one or more products yielding sufficient revenues to
support the Company's operations; therefore, the Company will need to raise
additional funds.
-7-
The Company believes its existing unrestricted cash and cash equivalents,
and the grants the Company has received or has been awarded and is awaiting
disbursement of, will be sufficient to meet the Company's planned
expenditures through October 2002, although there can be no assurance the
Company will not require additional funds. These factors, among others,
indicate that the Company may be unable to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
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 obtain profitable operations. Management's plans
for the forthcoming year, in addition to normal operations, include
continuing their efforts to obtain additional equity and/or debt financing,
obtain additional research grants and enter into various research and
development agreements with other entities.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of an amount on deposit
at a bank and an investment in a money market mutual fund, stated at cost,
which approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash
on deposit at a bank which is restricted for use in accordance with a
clinical research subcontract agreement with The University of North
Carolina at Chapel Hill.
Investment Securities - The Company classified certain investments in debt
securities as available for sale. Securities available for sale were
recorded at fair value, with unrealized gains (losses) recorded as a
separate component of stockholders' equity (deficiency in assets) as
accumulated other comprehensive income (loss). Gains (losses) on the sale
of investment securities were recorded on the specific identification
method.
The Company did not hold any investment securities as of March 31, 2001 and
2002. As of March 31, 2000, the net unrealized losses on investment
securities available for sale aggregated $1,178. Proceeds from the sales of
investment securities during the year ended March 31, 2001 were $1,558,043.
Gross gains and gross losses of $212 and $3,154, respectively, were
realized on such sales during the year ended March 31, 2001.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method (see Note 3). The
investment balance is zero as of March 31, 2001 and 2002.
Property and Equipment - Property and equipment are recorded at cost and
depreciation and amortization are provided using primarily the
straight-line method over estimated useful lives ranging from three to
seven years.
Long-Lived Assets - The Company periodically evaluates the carrying value
of its property and equipment in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 difference
between the fair value and carrying value of the asset.
-8-
Deferred Rental Obligation - Rental obligations with scheduled rent
increases are recognized on a straight-line basis over the lease term.
Revenue Recognition - Revenue under grants and research and development
agreements is recognized based on the Company's estimates of the stage of
completion under the terms of the respective agreements. Amounts received
in excess of completion under the terms of the respective agreements are
recorded as deferred revenues.
Research and Development Costs - Research and development costs are
expensed as incurred.
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 SFAS No. 128, "Earnings Per Share." Basic net income (loss)
per share and diluted net (loss) per share are computed by dividing net
income (loss) attributable to common stockholders by the weighted average
number of common shares outstanding. Diluted net income per share, when
applicable, is computed by dividing net income attributable to common
stockholders by the weighted average number of common shares outstanding
increased by the number of potential dilutive common shares based on the
treasury stock method. Diluted net loss per share was the same as the basic
net loss per share for the years ended March 31, 2000, 2001 and 2002, as
the Company's common stock options and warrants were antidilutive.
During the years ended March 31, 2000, 2001 and 2002, potentially dilutive
shares for common stock options and warrants and conversion of Series A
Convertible Preferred Stock were not included in net income (loss) per
share as their effect was antidilutive for the years then ended.
Fair Value of Financial Instruments - The Company believes that the
carrying amount of its financial instruments (cash and cash equivalents,
restricted funds on deposit, accounts payable and accrued expenses)
approximates the fair value of such instruments as of March 31, 2001 and
2002 based on the short term nature of the instruments.
Segment Reporting - The Company is a development stage pharmaceutical
company that operates as one segment.
Comprehensive Loss - Comprehensive loss for the year ended March 31, 2000
and 2001 includes the effects of net changes in unrealized losses on
investment securities available for sale. There was no income tax effect on
the components of comprehensive loss. There were no differences between
comprehensive loss and net loss for the year ended March 31, 2002.
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
-9-
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications - Certain amounts previously reported have been
reclassified to conform with the current presentation.
2. RECAPITALIZATION, PRIVATE PLACEMENTS AND INITIAL PUBLIC OFFERING
On July 24, 1998 (the "Effective Date"), the Company completed a
recapitalization (the "Recapitalization") pursuant to which, among other
items: (i) the Company's debt holders converted approximately $3,151,000 in
stockholder advances, notes payable and related accrued interest and
accounts payable outstanding immediately prior to the Effective Date into
1,209,962 shares of common stock and approximately $203,000 in cash (see
Note 9); and (ii) the Company's Series A Redeemable Preferred stockholders
converted 1,794,550 shares of Series A Redeemable Preferred Stock issued
and outstanding immediately prior to the Effective Date into 1,157,931
shares of common stock (see Note 9); (iii) the Company's Series B
Redeemable Preferred stockholders converted 1,600,000 shares of Series B
Redeemable Preferred Stock issued and outstanding immediately prior to the
Effective Date into 1,232,133 shares of common stock (see Note 9).
Contemporaneously with the completion of the Recapitalization, the Company
issued and sold 575,000 shares of common stock for $1.74 per share, or
aggregate consideration to the Company of $1,000,000 to certain accredited
investors under a private placement offering. For services and expenses
involved with this Recapitalization, the placement agent, New China Hong
Kong Securities Limited ("NCHK") received $50,000 and warrants to purchase
75,000 shares of the Company's common stock at $.10 per share. On May 17,
1999, NCHK exercised their warrants. For advisory services in this
transaction, RADE Management Corporation ("RADE") received warrants to
purchase 225,000 shares of the Company's common stock at $.10 per share. On
April 22, 1999, the warrant agreement with RADE was amended to increase the
exercise price from $.10 per share to $6.47 per share. The warrants expire
July 24, 2004 (see Note 6). The private placement offering resulted in net
proceeds of approximately $831,000. RADE leases an office facility which is
occupied by both the Company and RADE. The office space is paid for by
Immtech on RADE's behalf (see Note 8). During the years ended March 31,
2000, 2001, and 2002, the Company paid approximately $75,000, $102,000 and
$106,000 respectively, for the use of the facility. In addition, during the
years ended March 31, 2000, 2001 and 2002, approximately $131,000 $41,000
and $18,000, respectively, was paid to RADE as reimbursement for certain
administrative expenses paid on behalf of the Company.
On April 26, 1999, the Company issued 1,150,000 shares of common stock
through an initial public stock offering resulting in net proceeds of
approximately $9,173,000. Costs incurred of approximately $513,000 as of
March 31, 1999, including approximately $329,000 of costs that were unpaid
and included in accounts payable as of such date, with respect to the
offering were deferred pending the completion of the offering and netted
with the proceeds of the offering. The underwriters received warrants to
purchase 100,000 additional shares of common stock at $16.00 per share (see
Note 6). The warrants expire April 30, 2003.
On December 8, 2000, the Company completed a private placement offering
which raised approximately $4,306,000 of additional equity capital through
the issuance of 584,250 shares of common stock.
In February 2002, the Company completed private placement offerings which
raised approximately $3,849,000 of additional equity capital (net of
approximately $154,000 of cash offering costs) through the issuance of
-10-
160,100 shares of Series A Convertible Preferred Stock and warrants to
purchase 400,250 shares of the Company's common stock at an exercise price
of $6.00 per share of Common Stock. The warrants expire five years from the
date of grant (see Note 6).
3. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and related
diseases. The Company and Franklin have a research and funding agreement
with NextEra in which Franklin provided funding of $1,350,000 to NextEra to
fund the scale-up of manufacturing for and initiation of certain clinical
trials of NextEra's product candidates. The Company contributed its rmCRP
technology as well as use of its current laboratory facilities for shares
of common stock of NextEra. During the year ended March 31, 2000, the
Company advanced $135,000 to NextEra to fund its operations. The Company's
advance to NextEra was expensed during the year ended March 31, 2000. The
Company did not advance any funds to NextEra during the years ended March
31, 2001 and 2002.
NextEra funded the operation of the Company's primary facility, including
certain salaries related to work on rmCRP, rent and overhead associated
with the project from July 1998 through December 1999. Since January 1,
2000, NextEra has funded only their own compensation expenses, as they
stopped funding the Company's primary facility and any associated overhead.
In addition, NextEra has funded and is required to fund the cost of
maintaining and defending the patents that are part of the intellectual
property transferred to NextEra by the Company.
NextEra has incurred accumulated losses of approximately $2,604,000 since
inception (July 8, 1998) through March 31, 2002. NextEra is expected to
continue to incur significant losses during the next several years. In
addition, as of March 31, 2002, NextEra's current liabilities exceeded its
current assets by approximately $462,000 and NextEra had a stockholders'
equity of approximately $180,000.
As of March 31, 2001 and 2002, the Company owned approximately 43% and 28%,
respectively, of the issued and outstanding shares of NextEra common stock.
On April 27, 2000, Franklin filed a complaint against the Company in the
United States District Court for the Southern District of Ohio, Eastern
Division alleging fraud, negligent misrepresentation and breach of the
implied covenant of good faith and fair dealing in connection with the
research and funding agreement entered into between Franklin, the Company
and NextEra. The complaint sought compensatory damages, unquantified
punitive damages, attorneys' fees, costs and expenses. On March 23, 2001,
Franklin voluntarily dismissed its complaint against the Company and
together with NextEra filed a new complaint in the Court of Common Pleas,
Franklin County, Ohio alleging fraud, negligent misrepresentation and
breach of the implied covenant of good faith and fair dealing in connection
with the research and funding agreement entered into between Franklin, the
Company and NextEra. In addition, NextEra alleged the Company tortuously
interfered with an employment agreement between NextEra and the chief
scientific officer of NextEra. The complaint sought compensatory damages in
excess of $25,000, unquantified punitive damages, attorneys' fees, costs
and expenses. On May 25, 2001, the case was dismissed without prejudice by
the Court of Common Pleas, Franklin County, Ohio. The Company is currently
in negotiations with Franklin and its designees to resolve certain issues,
including the possible restructuring of the joint venture and relationship
with NextEra to better position NextEra in its fund raising efforts, and
increasing the Company's ownership interest in NextEra as consideration for
services provided to NextEra, expenses the Company previously incurred on
behalf of NextEra and funds previously advanced to NextEra.
-11-
NextEra's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become
due and, ultimately, to obtain profitable operations. NextEra's financial
plans for the forthcoming year include continuing efforts to obtain
additional equity financing.
The Company has recognized an equity loss in NextEra to the extent of the
basis of its investment. Recognition of any investment income on the equity
method by the Company for its investment in NextEra will occur only after
NextEra has earnings in excess of previously unrecognized equity losses. As
of March 31, 2001 and 2002, the Company's net investment in Next Era is
zero.
The following is summarized financial information for NextEra as of March
31, 2000, 2001, and 2002 and for the years then ended:
2000 2001 2002
Current assets $ 32,000 $ 309,000
Noncurrent assets 25,000 $ 22,000 642,000
Current liabilities:
Advances from Franklin 1,084,000 872,000 71,000
Advances from the Company 135,000 135,000 135,000
Advances from other shareholders 20,000 343,000 40,000
Other 18,000 262,000 525,000
Stockholders' (deficiency) equity (1,200,000) (1,590,000) 180,000
Revenues 77,000 46,000
Net loss (1,019,000) (660,000) (528,000)
Net loss (inception to date) (1,416,000) (2,076,000) (2,604,000)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2001 and
2002:
2001 2002
Research and laboratory equipment $ 401,740 $ 457,033
Furniture and office equipment 153,116 154,642
Leasehold improvements 28,525 28,525
-------- --------
Property and equipment - at cost 583,381 640,200
Less accumulated depreciation and amortization 373,357 464,250
-------- --------
Property and equipment - net $210,024 $175,950
======== ========
5. INCOME TAXES
The Company accounts for income taxes using an asset and liability approach
which generally requires the recognition of deferred income tax assets and
liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements
or tax returns. In addition, a valuation allowance is recognized if it is
more likely than not that some or all of the deferred income tax assets
-12-
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.
The Company has no significant deferred income tax liabilities. Significant
components of the Company's deferred income tax assets are as follows:
March 31
--------------------------------
2001 2002
Deferred income tax assets:
Federal net operating loss carryforwards $ 8,772,000 $ 10,979,000
State net operating loss carryforwards 1,085,000 1,422,000
Federal income tax credit carryforwards 400,000 624,000
Deferred revenue 1,358,000 219,000
------------ ------------
Total deferred income tax assets 11,615,000 13,244,000
------------ ------------
Valuation allowance (11,615,000) (13,244,000)
------------ ------------
Net deferred income taxes recognized
in the accompanying balance sheets $ 0 $ 0
============ ============
As of March 31, 2002, the Company had federal net operating loss
carryforwards of approximately $32,292,000 which expire from 2006 through
2022. The Company also has approximately $29,620,000 of state net operating
loss carryforwards as of March 31, 2002, which expire from 2009 through
2022, available to offset future taxable income for state (primarily
Illinois) income tax purposes. Because of "change of ownership" provisions
of the Tax Reform Act of 1986, approximately $920,000 of the Company's net
operating loss carryforwards for federal income tax purposes are subject to
an annual limitation regarding utilization against taxable income in future
periods. As of March 31, 2002, the Company had federal income tax credit
carryforwards of approximately $624,000 which expire from 2008 through
2022.
The income tax provision was $0 for each of the years ended March 31, 2000,
2001 and 2002.
A reconciliation of the provision for income taxes (benefit) at the federal
statutory income tax rate to the effective income tax rate follows:
YEARS ENDED MARCH 31,
-------------------------
2000 2001 2002
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes (4.8) (4.8) (4.8)
Non-deductible compensation and expenses 1.7 6.8 4.9
Benefit of federal and state net operating loss
and tax credit carryforwards and other deferred
income tax assets not recognized 37.1 32.0 33.9
----- ----- -----
Effective income tax rate 0% 0% 0%
===== ===== =====
-13-
6. STOCKHOLDERS' EQUITY
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share and
are payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined. As of
March 31, 2002, the Company recorded $29,400 of accrued preferred stock
dividends which are included in the carrying value of the Series A
Convertible Preferred Stock in the accompanying balance sheet. Each share
of Series A Convertible Preferred Stock shall be convertible by the holder
at any time into shares of the Company's common stock at a conversion rate
determined by dividing the $25.00 stated value, plus any accrued and unpaid
dividends (the "Liquidation Price"), by a $4.42 conversion price (the
"Conversion Price"), subject to certain antidilution adjustments, as
defined in the Certificate of Designation.
The Company may at any time after February 14, 2003, require that any or
all outstanding shares of Series A Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series A Convertible Preferred Stock are
convertible are registered pursuant to an effective registration statement,
as defined. The number of shares of common stock to be received by the
holders of the Series A Convertible Preferred Stock upon conversion at the
request of the Company shall be determined by (i) dividing the Liquidation
Price by the Conversion Price provided that the closing bid price for the
Company's common stock exceeds $9.00 for 20 consecutive trading days within
180 days prior to notice of conversion, as defined, or if the requirements
of (i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price. The
Conversion Price is subject to certain antidilution adjustments, as defined
in the Certificate of Designation.
The Company may at any time, upon 30 day's notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series A Convertible Preferred Stock into
shares of Common Stock during the 30 day period. The Series A Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share of
Series A Convertible Preferred Stock shall be entitled to 5.6561 votes with
respect to any and all matters presented to the stockholders of the Company
for their action or consideration. Except as provided by law or by the
provisions establishing any other series of preferred stock, Series A
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class.
Common Stock Options - On October 12, 2000, the Company's stockholders
approved the issuance of options to purchase shares of common stock to
certain employees and other nonemployees who have been engaged to assist
the Company in various research and administrative capacities as part of
the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan provides for
the issuance of up to 350,000 shares of common stock in the form of
incentive stock options and non-qualified stock options. Expiring stock
options which were issued under the 2000 Stock Incentive Plan are available
for reissuance. During the year ended March 31, 2002, there were 2,000
options previously granted under the 2000 Stock Incentive Plan that expired
and are available to be reissued. The incentive stock options must be
granted at a price at least equal to fair market value at the date of
grant.
-14-
The Company has granted common stock options to individuals who have
contributed to the Company in various capacities. The options contain
various provisions regarding vesting periods and expiration dates. The
options generally vest over periods ranging from 0 to 4 years and expire
after five or ten years. As of March 31, 2002, there were a total of 75,750
shares available for grant, which includes 34,000 shares which are reserved
for issuance under certain consulting agreements with nonemployees.
During the year ended March 31, 2000, the Company issued options to
purchase 2,176 shares of common stock to nonemployees and recognized
expense of approximately $510,000 related to such options and certain other
options issued in the prior year which vest over a four year service
period. During the year ended March 31, 2001, the Company issued options to
purchase 105,000 shares of common stock to nonemployees and recognized
expense of approximately $452,000 related to such options and certain other
options issued in prior years which vest over a four year service period.
During the year ended March 31, 2002, the Company issued options to
purchase 12,000 shares of common stock to nonemployees and recognized
expense of approximately $332,000 related to such options and certain other
options issued in prior years which vest over a four year service period.
The expense was determined based on the estimated fair value of the options
issued.
The activity during the years ended March 31, 2000, 2001 and 2002 for the
Company's stock options is summarized as follows:
WEIGHTED
AVERAGE
NUMBER OF STOCK OPTIONS EXERCISE
SHARES PRICE RANGE PRICE
Outstanding as of March 31, 1999 516,992 $0.31 - 2.70 $ 0.64
Granted 2,176 0.59 0.59
Exercised (103,120) 0.31 - 2.70 0.71
-------- ------------- ------
Outstanding as of March 31, 2000 416,048 0.31 - 1.74 0.63
Granted 168,500 8.50 - 11.50 11.05
Exercised (88,661) 0.31 - 0.59 0.48
Expired (29,751) 0.31 - 0.59 0.57
-------- ------------- ------
Outstanding as of March 31, 2001 466,136 0.34 - 11.50 4.43
Granted 107,750 4.75 - 10.00 7.16
Exercised (51,214) 0.34 - 0.59 0.38
Expired (14,194) 0.34 - 11.50 1.91
-------- ------------- ------
Outstanding as of March 31, 2002 508,478 $0.34 - 11.50 $ 5.48
======== ============= ======
Exercisable as of March 31, 2000 379,493 $0.31 - 1.74 $ 0.64
Exercisable as of March 31, 2001 330,885 0.34 - 11.50 2.33
Exercisable as of March 31, 2002 340,186 0.34 - 11.50 3.86
-15-
The following table summarizes information about stock options outstanding as of
March 31, 2002:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Shares Weighted Shares
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of March 31, Contractual Exercise March 31, Exercise
Exercise Prices 2002 Life-Years Price 2002 Price
$0.34 24,390 0.10 0.34 24,390 $ 0.34
0.46 to 0.59 154,348 4.80 0.46 153,283 0.46
1.74 55,490 6.04 1.74 55,490 1.74
4.75 56,000 4.71 4.75 4,666 4.75
8.50 to 11.50 218,250 6.96 10.74 102,357 10.88
------- ---- ------ ------- ------
508,478 5.62 $ 5.48 340,186 $ 3.86
======= ==== ====== ======= ======
Warrants - For advisory services in connection with the Recapitalization
(see Note 2), RADE received warrants to purchase 225,000 shares of the
Company's common stock at $.10 per share. On April 22, 1999, the warrant
agreement with RADE was amended to increase the exercise price from $.10
per share to $6.47 per share. The warrants expire July 24, 2004. On October
12, 1998, RADE received warrants to purchase 750,000 shares of the
Company's common stock at $.10 per share. On April 22, 1999, the warrant
agreement was amended to increase the exercise price from $.10 per share to
$6.47 per share. The warrants were issued as compensation for management
consulting, market analysis and strategic advisory services performed from
July 1998 through December 1998. The warrants expire October 12, 2004.
In connection with an initial public offering, the underwriters received
warrants to purchase 100,000 additional shares of common stock at $16.00
per share. The warrants expire April 30, 2003.
On July 31, 2000, the Company entered into an agreement with the principals
of Stonegate Securities, Inc. ("Stonegate") for assistance by Stonegate in
connection with raising additional equity capital for the consideration of
warrants to purchase 200,000 shares of the Company's common stock. Pursuant
to a notice of termination of the agreement dated December 8, 2000, 100,000
of the warrants shall not vest. The remaining 100,000 warrants expire on
July 31, 2005 and have an exercise price of $12.06 per share. The Company
recorded a general and administrative expense of $866,000 during the year
ended March 31, 2001, as the warrants were for compensation unrelated to
the December 8, 2000 private placement offering. The expense was determined
based on the estimated fair value of the 100,000 issued and vested
warrants.
On March 15, 2001, the Company entered into a one year agreement with The
Kriegsman Group ("Kriegsman") for assistance by Kriegsman with respect to
financial consulting, planning, structuring, business strategy, public
relations and promotions. This agreement was terminated by the Company,
effective September 14, 2001. As compensation for these services, the
Company paid a retainer fee to Kriegsman of $20,000 per month for the term
of the agreement. The Company also granted Kriegsman warrants to purchase
250,000 shares of the Company's common stock at $10.75 per share. Warrants
to purchase 100,000 shares vested immediately and the remaining 150,000
warrants did not vest and were cancelled. The warrants are exercisable over
a five year period and contain a cashless exercise provision. The Company
recorded a general and administrative expense of approximately $422,000
during the year ended March 31, 2001 for the estimated fair value of the
100,000 issued and vested warrants.
In February 2002, the Company, in connection with the Series A Convertible
Preferred Stock private placement offerings, issued warrants to purchase
400,250 shares of the Company's common stock at an exercise price of $6.00
-16-
per share of common stock. The warrants expire at various dates in February
2007. The warrant exercise period commences upon the conversion or the
redemption of the Series A Convertible Preferred Stock that was
concurrently issued to such warrant holder. At any time after the first
anniversary of the date of grant and if the Company's common stock closes
at $12.00 per share or above for 20 consecutive trading days, the Company
may, upon 20 days notice, redeem any unexercised portion of any warrants
for a redemption fee of $.10 per share of common stock underlying the
warrants. During the 20 day notice period, if the warrants are then
exercisable as a result of the conversion or redemption of the Series A
Convertible Preferred Stock, such warrant holder may then exercise all or a
portion of the warrant by tendering the appropriate exercise price. The
warrants contain certain antidilution provisions.
The warrants issued in February 2002 to the holders of the Series A
Preferred Convertible Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $908,535 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series A Convertible Preferred Stock resulting in a $908,535
preferred stock dividend calculated in accordance with the Emerging Issues
Task Force ("EITF") Issue No. 00-27, "Application of Issue No. 98-5 to
Certain Convertible Instruments." The dividend on the Series A Convertible
Preferred Stock was charged to deficit accumulated during the development
stage immediately upon issuance, as the preferred stock is immediately
convertible. The preferred stock dividend of $908,535 and the accrued
preferred stock dividends of $29,400 were reported as dividends in
determining the net loss attributable to common stockholders in the
accompanying statement of operations for the year ended March 31, 2002.
On January 31, 2002, the Company entered into a one year consulting
agreement with Yorkshire Capital Limited ("Yorkshire") for services related
to identifying investors and raising funds in connection with the
aforementioned February 2002 private placement offerings (see Note 2) and
assistance to be provided by Yorkshire to the Company with respect to
financial consulting, planning, structuring, business strategy, public
relations and promotions, among other items. In connection with the closing
of the private placement offerings, the Company granted Yorkshire warrants
to purchase 360,000 shares of the Company's common stock at prices ranging
from $6.00 to $12.00 per share. Warrants to purchase 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share vested upon
the closing of the private placement offerings. Warrants to purchase
130,000 shares of the Company's common stock at a price of $9.00 per share
shall vest, should the Company's common stock trade at or above the $9.00
exercise price per share for 20 consecutive trading days prior to January
31, 2003. Warrants to purchase 130,000 shares of the Company's common stock
at a price of $12.00 per share shall vest, should the Company's common
stock trade at or above the $12.00 exercise price per share for 20
consecutive trading days prior to January 31, 2003. All unvested warrants
will terminate on January 31, 2003. The warrants expire on February 14,
2007 and contain certain antidilution provisions. The Company may, upon 30
days notice, redeem any vested warrants for $0.10 per share if the
Company's Common Stock trades at 200% of the exercise price for 20
consecutive trading days. Yorkshire may exercise any vested warrants during
such notice period. In addition, Yorkshire received 60,000 shares of the
Company's common stock as additional consideration for identifying
investors and raising funds in connection with the closing of the private
placement offerings. As compensation for the consulting services, the
Company is required to pay a retainer fee to Yorkshire of $10,000 per month
for the term of the agreement.
In addition, on February 1, 2002, the Company entered into an introductory
brokerage agreement with Ace Champion, Ltd. ("Ace") and Pacific Dragon
Group, Ltd. ("Pacific Dragon") (collectively, the "Introductory Brokers")
for assistance to be provided by the Introductory Brokers to the Company
with respect to obtaining funds in connection with the aforementioned
February 2002 private placement offerings (see Note 2). As compensation for
-17-
such services, Ace and Pacific Dragon received warrants to purchase 100,000
shares and 300,000 shares, respectively, of the Company's common stock at
an exercise price of $6.00 per share, subject to certain conditions. The
Company may, after February 22, 2003, upon 30 days' notice, provided that
the Company's common stock has traded at or above 200% of the exercise
price for 20 consecutive trading days, redeem any unexercised warrants for
$0.10 per share, as defined. The Introductory Brokers may exercise their
warrants during the 30 day notice period. The warrants expire on February
22, 2007 and contain certain antidilution provisions.
During the year ended March 31, 2000, certain warrant holders exercised
warrants to purchase 69,300 shares of common stock at $5.00 per share,
respectively. The warrants, which were issued during the year ended March
31, 1997, had an August 29, 1999 expiration date. Warrants to purchase
22,100 shares of common stock expired as of such date. In addition, on May
17, 1999, NCHK exercised warrants to purchase 75,000 shares of common stock
at $.10 per share.
There were warrants outstanding as of March 31, 2001 to purchase 850,000
shares of the Company's common stock with an exercise price of $20.52 per
share that were cancelled as of April 20, 2001 (see Note 7).
The activity during the years ended March 31, 2000, 2001 and 2002 for the
Company's warrants to purchase shares of common stock is summarized as
follows:
WEIGHTED
AVERAGE
NUMBER OF WARRANTS PRICE
SHARES PRICE RANGE EXERCISE
Outstanding as of March 31, 1999 1,141,400 $ 0.10- 6.47 $ 5.93
Granted 950,000 0.10-20.52 20.04
Exercised (144,300) 0.10- 5.00 2.45
Expired (22,100) 5.00 5.00
---------- ------------ ------
Outstanding as of March 31, 2000 1,925,000 6.47-20.52 13.17
Granted 350,000 10.75-12.06 11.12
---------- ------------ ------
Outstanding as of March 31, 2001 2,275,000 6.47-20.52 12.85
Granted 1,160,250 6.00-12.00 7.01
Cancelled (1,000,000) 10.75-20.52 19.05
---------- ------------ ------
Outstanding as of March 31, 2002 2,435,250 $ 6.00-16.00 $ 7.52
========== ============ ======
Exercisable as of March 31, 2000 975,000 $ 6.47 $ 6.47
Exercisable as of March 31, 2001 1,275,000 6.47-16.00 7.49
Exercisable as of March 31, 2002 1,775,000 6.00-16.00 7.43
-18-
The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2002:
EXERCISE PRICE WARRANTS
PER SHARE OUTSTANDING EXPIRATION DATE
$ 6.00 486,750 February 14, 2007
6.00 413,500 February 22, 2007
6.47 225,000 July 24, 2004
6.47 750,000 October 12, 2004
9.00 130,000 February 22, 2007
10.75 100,000 March 15, 2006
12.00 130,000 February 22, 2007
12.06 100,000 July 31, 2005
16.00 100,000 April 30, 2003
----------
Total warrants outstanding 2,435,250
==========
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," but
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans.
There were no stock options issued to employees and directors during the
year ended March 31, 2000 and during the years ended March 31, 2001 and
2002, the Company issued 63,500 and 95,750 options, respectively, to
certain employees and directors. If the Company had recognized compensation
expense for the options granted during the years ended March 31, 2000,
2001,and 2002, consistent with the method prescribed by SFAS No. 123, net
loss and net loss per share would have been changed to the pro forma
amounts indicated below:
YEARS ENDED MARCH 31,
----------------------------------------------
2000 2001 2002
Net loss attributable to common shareholders - as reported $(11,433,926) $(9,863,284) $ (4,261,045)
Net loss attributable to common shareholders - pro forma $(11,440,266) $(9,939,284) $ (4,531,374)
Net loss per share attributable to common shareholders -
as reported $ (2.27) $ (1.78) $ (0.71)
Net loss per share attributable to common shareholders -
pro forma $ (2.27) $ (1.79) $ (0.75)
The following assumptions were used for grants during the year ended March
31, 2001: 1) expected dividend yield of 0%, 2) risk-free interest rate of
5.6%, 3) expected volatility of 74.1%, and 4) expected option life of 8.2
years. The following assumptions were used for grants during the year ended
March 31, 2002: 1) expected dividend yield of 0%, 2) risk-free interest
rate of 4.98%, 3) expected volatility of 87%, and 4) expected option life
of 7.1 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from traded options, and because
changes in the subjective input assumptions can materially affect the fair
value estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single value of its options and may not be
representative of the future effects on reported net income (loss) or the
-19-
future stock price of the Company. There were no stock options granted to
any employees during the year ended March 31, 2000. The weighted average
estimated fair value of employee stock options granted during the years
ended March 31, 2001 and 2002 was $7.98 per share and $5.46 per share,
respectively. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting
period.
7. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional fees
for the attainment of certain milestones. The Company may receive royalties
on the sales of such products. The other parties generally receive
exclusive marketing and distribution rights for certain products for set
time periods in specific geographic areas.
The Company initially acquired its rights to the platform technology and
dictations developed by a consortium of universities consisting of The
University of North Carolina at Chapel Hill ("UNC"), Duke University,
Auburn University and Georgia State University (the "Consortium") pursuant
to an agreement, dated January 15, 1997 (as amended, the "Consortium
Agreement") among the Company, Pharm-Eco Laboratories, Inc. ("Pharm-Eco"),
and UNC (to which each of the other members of the Consortium agreed
shortly thereafter to become a party). The Consortium Agreement commits the
parties to, collectively, research, develop, finance the research and
development of, manufacture and market both the technology and compounds
owned by the Consortium and previously licensed or optioned to Pharm-Eco
(the "Current Compounds") and to be licensed to the Company in accordance
with the Consortium Agreement, and all technology and compounds developed
by the Consortium after January 15, 1997, through use of Company-sponsored
research funding or National Cooperative Drug Development grant funding
made available to the Consortium (the "Future Compounds" and, collectively
with the Current Compounds, the "Compounds").
The Consortium Agreement contemplated that upon the completion of the
Company's initial public offering ("IPO") of shares of its common stock
with gross proceeds of at least $10,000,000 by April 30, 1999, the Company
and Pharm-Eco, with respect to the Current Compounds, and the Company and
UNC, (on behalf of the Consortium), with respect to Future Compounds, would
enter into license agreements for, or assignments of, the intellectual
property rights relating to the Compounds held by Pharm-Eco and the
Consortium; pursuant to which the Company would pay royalties and other
payments based on revenues received for the sale of products based on the
Compounds.
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000. Pursuant to the Consortium Agreement, both Pharm-Eco
and the Consortium then became obligated to grant or assign to the Company
an exclusive worldwide license to use, manufacture, have manufactured,
-20-
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
Consortium and 448,750 shares were issued to Pharm-Eco or persons
designated by Pharm-Eco.
Pursuant to the Consortium Agreement, the Company may, subject to the
satisfaction of certain conditions, be required to issue 100,000 shares of
common stock to the Consortium upon the filing by the Company of the first
new drug application or an abbreviated new drug application with the Food
and Drug Administration with respect to a product incorporating certain
Compounds. In addition, the Company will pay the Consortium an aggregate
royalty of up to 5.0% of net sales derived from the Compounds, except that
the royalty rate payable on any Compound developed at Duke University will
be determined by negotiation at the time such Compound is developed. In the
event that the Company sublicenses its rights with respect to the Compounds
to a third party, the Company will pay the Consortium a royalty based on a
percentage of any royalties the Company receives, and a percentage of all
signing, milestone and other payments made to the Company pursuant to the
sublicense agreement.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Consortium whereby the
Company received the exclusive license to commercialize dication technology
and compounds developed or invented by one or more of the Consortium
scientists after January 15, 1997, and which also incorporated into such
License Agreement the Company's existing license with the Consortium with
regard to the Current Compounds.
In June 1999, the Company entered into a research and manufacturing
agreement with Pharm-Eco for Pharm-Eco to produce good manufacturing
practices quality, as defined, diatonic drugs and products for clinical
testing and for early commercialization. Pharm-Eco was unable to
manufacture certain required compounds and the Company subsequently engaged
alternate suppliers who successfully manufactured the compounds.
In August 2000, Pharm-Eco and two of its senior executives filed suit in
Delaware against the Company in connection with a dispute under the
Consortium Agreement. The Company responded by denying the allegations and
filing a counter-claim against Pharm-Eco for breach of contract.
The Company filed a Motion for Summary Judgment, which was granted on
February 21, 2001. In his Memorandum Opinion, the Vice Chancellor hearing
the proceeding dismissed all of the plaintiffs' claims against the Company
and held that Pharm-Eco had breached the Consortium Agreement by failing to
grant or assign to the Company a license for the Current Compounds. On
March 12, 2001, the Vice Chancellor signed a Final Order and Judgment
directing Pharm-Eco to execute and deliver to the Company an agreement
granting or assigning to the Company the license. On March 27, 2001,
Pharm-Eco and the Company entered into an agreement assigning the license.
No further claims against the Company remain in this proceeding, and on May
1, 2001, a Stipulation of Dismissal was filed with the Court.
On April 20, 2001, the Company entered into a settlement agreement with
Pharm-Eco and certain other parties resolving all remaining matters between
them. Pursuant to this agreement, the Company received a cash payment of
$1,000,000; an assignment from Pharm-Eco of various contract rights; and a
termination of all of the Company's obligations to Pharm-Eco, including,
without limitation, (a) the obligation to issue an aggregate of 850,000
warrants for shares of the Company's stock (see Note 6), (b) the obligation
to issue shares of common stock upon the occurrence of a certain future
event, (c) the obligation to pay a percentage of all non-royalty payments
that the Company might receive under any sublicense that the Company might
enter into with respect to certain compounds, and (d) certain accounts
payable which Pharm-Eco claimed to be owed of approximately $159,000; and a
release of any and all claims that Pharm-Eco may have had against the
Company. The cash payment received and the accounts payable obligations
which were forgiven, aggregating approximately $1,159,000, was recorded as
-21-
a credit to (reduction of) research and development expense during the year
ended March 31, 2002; as the Company had previously expensed the estimated
fair value of the shares of common stock issued to Pharm-Eco at the time of
the IPO and the accounts payable obligations, as research and development
expense.
The Company was required to make quarterly research grants in the amount of
$100,000 to UNC through April 30, 2002. During the years ended March 31,
2000, 2001 and 2002, the Company expensed grant payments to UNC of
$650,000, $400,000 and $400,000, respectively. Such payments were expensed
as research and development costs.
During the year ended March 31, 2000, the Company recognized revenues of
approximately $6,000 for research related to a specific research grant that
the Company was awarded from the National Institutes of Health ("NIH") and
expensed payments to UNC and certain other Consortium universities of
approximately $6,000 for contracted research related to this grant. In
August 1999 and 2000, the Company was awarded three Small Business
Innovation Research ("SBIR") grants aggregating approximately $1,429,000
from the NIH to research various infections. During the years ended March
31, 2000, 2001 and 2002, the Company recognized revenues of approximately
$363,000, $564,000 and $502,000, respectively, from these grants and
expensed payments to UNC and certain other Consortium universities of
approximately $56,000, $215,000 and $163,000, respectively, for contracted
research related to these grants. There is no additional funding available
to the Company under these grants.
In August 2001, the Company was awarded an additional SBIR grant from the
NIH of approximately $144,000 as the third year grant to continue research
on "Novel Procedures for Treatment of Opportunistic Infections." During the
year ended March 31, 2002, the Company recognized revenues of approximately
$74,000 from this grant and expensed payments of approximately $65,000 to
UNC and certain other Consortium universities for contracted research
related to this grant. There is additional funding available to the Company
under this grant of approximately $70,000 as of March 31, 2002.
During the years ended March 31, 2000, 2001 and 2002, the Company expensed
approximately $411,000, $477,000 and $438,000, respectively, of other
payments to UNC and certain other Consortium universities for patent
related costs and other contracted research. Total payments expensed to UNC
and certain other Consortium universities were approximately $1,123,000,
$1,093,000 and $1,066,000 during the years ended March 31, 2000, 2001 and
2002, respectively. Included in accounts payable as of March 31, 2001 and
2002, were approximately $250,000, and $267,000, respectively, due to UNC
and certain other Consortium universities.
In November 2000, The Bill & Melinda Gates Foundation ("Gates Foundation")
awarded a $15,114,000 grant to UNC to develop new drugs to treat Human
Trypanosomiasis (African sleeping sickness) and Leishmaniasis. On March 29,
2001, UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company is to receive up to $9,800,000, subject to
certain terms and conditions, over a five year period to conduct certain
clinical and research studies. The proceeds from this agreement are
restricted and must be segregated from the Company's other funds and used
for specific purposes. On March 29, 2001, the Company received the first
installment of $4,300,000, of which approximately $791,000 and $2,946,000
was utilized for clinical and research purposes conducted and expensed
during the years ended March 31, 2001 and 2002, respectively. The Company
recognized revenues of approximately $791,000 and $2,946,000 during the
years ended March 31, 2001 and 2002, respectively, for services performed
under the agreement. The remaining amount (approximately $3,509,000 and
-22-
$563,000 as of March 31, 2001 and 2002, respectively) has been deferred and
will be recognized as revenue over the term of the agreement as the
services are performed.
On May 4, 2001, the Company entered into a four-year subcontract agreement
with a research company located in Switzerland for clinical research to be
performed for the Company in connection with its subcontract agreement with
UNC related to the Gates Foundation grant. The agreement provides for
payments of up to approximately $1,195,000 over the term of the agreement,
provided the Company receives additional funding from UNC or the Gates
Foundation, otherwise the Company's commitment is limited to approximately
$317,000 during the initial year of the agreement. The Company recognized
expense of approximately $317,000 during the year ended March 31, 2002
related to such agreement. No amounts are included in accounts payable as
of March 31, 2002.
8. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In December 1999, the Company began leasing its main
office and research facility under an operating lease that requires lease
payments starting in March 2000 of approximately $12,100 per month through
March 2003 and $12,800 from April 2003 through March 2005. The Company is
required to pay certain real estate and occupancy costs. In July 1999, the
Company began leasing an additional office facility from RADE that is
occupied by both the Company and RADE, on a month-to-month basis, for
approximately $8,900 per month.
As discussed in Note 3, NextEra paid a portion of the Company's lease
obligation under a former operating lease agreement. This lease expired in
December 1999, at which time NextEra discontinued making any lease payments
on the Company's behalf. NextEra made approximately $35,000 of lease
payments for the Company during the year ended March 31, 2000.
In addition, the Company leases certain office equipment under an operating
lease agreement.
Total rent expense was approximately $270,000, $282,000 and $270,000 for
all leases during the years ended March 31, 2000, 2001, and 2002,
respectively.
As of March 31, 2002, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
Years
Ending Lease
March 31, Payments
2003 $146,000
2004 153,000
2005 140,000
--------
Total $439,000
========
Other Contingencies - In connection with obtaining the consent of Criticare
Systems, Inc. ("Criticare"), a significant stockholder of the Company, to
the private placement of stock by NCHK in 1998 the Company transferred to
Criticare, on July 2, 1998, certain of its intangible assets and 86,207
shares of the Company's common stock for $150,000. These intangible assets
included (1) a license for rmCRP as a therapy for treating sepsis (a
bacterial infection which quickly overwhelms the immune system and can lead
to sudden death), and (2) rights to certain diagnostic products.
-23-
The license granted to Criticare for rmCRP included patents and know-how
developed by the Company. NextEra has licensed the rights for producing
rmCRP back to the Company for use with sepsis applications. Criticare
assigned the technology to another party and the assignee had until July 2,
1999, to raise a minimum of $500,000 to fund both the development of the
sepsis technology and the initiation of clinical trials. The Company has
not received notification from the assignee as to whether or not the funds
have been raised. The Company is required to pay the cost of maintaining
and defending the patents until the initial financing is completed by the
assignee.
The rights transferred to Criticare for the diagnostic products included
rights to the Company's diagnostic products for measuring hemoglobin A1c in
diabetic patients and Carbohydrate Deficient Transferring ("CDT") as a
marker in the blood for long-term alcohol abuse, as well as patents that
have been issued for both technologies and exclusive worldwide rights from
Northwestern University to develop and sell the products, which now inure
to the benefit of Criticare. Criticare is responsible for the maintenance
and prosecution of the patents for both technologies.
In June 2000, Technikrom, Inc. ("Technikrom") filed a claim against the
Company with the American Arbitration Association in Chicago, Illinois. In
that proceeding, Technikrom sought to recover $124,000 in fees, interest
and costs for certain method development services provided to the Company
relating to the purification of a protein known as rmCRP. The Company has
filed a counterclaim against Technikrom for fraudulent inducement of
contract which sought compensatory damages of at least $224,000, plus
interest and costs. The Company has also sought a declaratory judgment that
Technikrom, inter alia, failed to use its best efforts to develop a
purification method within the time parameters set by the parties. The
parties engaged an arbitrator and in November 2001 Technikron was awarded a
$95,000 settlement, which the Company subsequently paid.
The Company is involved in various claims and litigation incidental to its
operations. In the opinion of management, ultimate resolution of these
actions will not have a material effect on the Company's financial
statements.
9. OTHER RETIRED OBLIGATIONS
Recapitalization - In connection with the Recapitalization (see Note 2) the
following transactions occurred on July 24, 1998:
o Criticare, a significant stockholder of the Company, who, prior to the
Recapitalization, owned 1,000,000 shares of Series A Redeemable
Preferred Stock, 1,200,000 shares of Series B Redeemable Preferred
Stock and 198,708 shares of common stock, had advanced $597,722 to the
Company. The advances were payable on demand. Criticare exchanged
$597,722 of advances and $68,368 of related accrued interest for
145,353 shares of common stock. The Company also had certain notes
payable to Criticare aggregating $148,777 and related accrued interest
of $43,426 that were exchanged for 35,403 shares of common stock. The
carrying value of the outstanding Criticare indebtedness in excess of
the estimated fair value of the shares of common stock and cash
exchanged was accounted for as additional paid-in capital.
o Certain other stockholders exchanged $387,450 of advances for 196,824
shares of common stock. The Company recognized an extraordinary gain
on the extinguishment of debt of $80,404 for the outstanding
indebtedness under the advances in excess of the estimated fair value
of the 196,824 shares of common stock ($307,046).
-24-
o Certain other notes payable aggregating $1,306,673, related accrued
interest aggregating $337,290 and accounts payable aggregating
$261,597 were exchanged for 227,398 shares of common stock and
$203,450 cash. The Company recognized an extraordinary gain on the
extinguishment of debt of $1,347,361 for the outstanding aggregate
indebtedness under such notes ($1,306,673), related accrued interest
($337,290) and accounts payable ($261,597) in excess of the estimated
fair value of the shares of common stock ($354,749) and cash
($203,450) exchanged.
o Series A and B Redeemable Preferred stockholders exchanged their
preferred shares for an aggregate 1,195,017 shares of common stock.
The holders of the Series A and Series B Redeemable Preferred Stock
had cumulative dividend preferences at the rate of 8% per annum,
compounded daily, of the liquidation value thereof, plus accumulated
and unpaid dividends thereon, in preference to any dividend on common
stock, payable when and if declared by the Company's Board of
Directors. Dividends accrued whether or not they had been declared and
whether or not there were profits, surplus or other funds of the
Company legally available for the payment of dividends. The difference
between the initial estimated fair value of the Series A Redeemable
Preferred Stock and the aggregate redemption value of $440,119 was a
premium which was amortized by a credit to retained earnings (deficit
accumulated during the developmental stage) and a debit to the
carrying value of the redeemable preferred stock during the period
from issuance to the required redemption date, using the interest
method. In addition, while the redeemable preferred shares were
outstanding, dividends aggregating $1,783,354 were charged to retained
earnings (deficit accumulated during the development stage). The
Series A and Series B Redeemable Preferred Stock had redemption
(carrying) values of $2,780,324 and $2,797,260, respectively, as of
the date of the Recapitalization. In connection with the
Recapitalization, the Series A and Series B Redeemable Preferred
stockholders agreed to accept 578,954 and 616,063 shares of common
stock, respectively, for their shares of the preferred stock. The
difference between the carrying value of the Series A and Series B
Redeemable Preferred Stock and the estimated fair value of the common
shares exchanged of $1,877,138 and $1,836,196, respectively, was
credited to deficit accumulated during the development stage.
Advances from Stockholder and Affiliate - As of March 31, 1999, the
Company's president and NextEra had each advanced $25,000 to the Company.
The advances were non-interest bearing and were repaid in May 1999.
10. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years ended
March 31, 2000, 2001 and 2002.
NON-CASH FINANCING ACTIVITIES:
During the years ended March 31, 2000, 2001 and 2002, the Company issued
common stock, common stock options and warrants as compensation for
services. During the year ended March 31, 2000, the Company issued 28,147
shares of common stock as consideration for an accrued interest obligation
on a $100,000 note. During the year ended March 31, 1999, the Company paid
and deferred certain offering
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costs which were netted with the proceeds of an initial public offering
during the year ended March 31, 2000. The amounts of these transactions are
summarized as follows:
YEARS ENDED MARCH 31,
2000 2001 2002
Expense related to issuance of common stock
as compensation for services $ 6,112,500
Expense related to issuance of common stock options
as compensation for services 509,838 $ 451,565 $332,005
Expense related to issuance of warrants to purchase
common stock as compensation for services 1,287,729
Common stock issued as consideration for payment of
accrued interest 281,470
Offering costs paid and deferred in prior year netted
with proceeds of initial public offering as a reduction of
additional paid-in capital 184,070
Convertible preferred stock dividends accrued 29,400
11. SUBSEQUENT EVENTS
On April 22, 2002, the Company entered into a Confidentiality, Testing and
Option Agreement with Neurochem, Inc., ("Neurochem"), a Canadian
corporation, to supply Neurochem with selected dicationic compounds for the
testing, evaluation and potential future licensing of such compounds for
(i) the treatment and diagnosis of amyloidosis and the related underlying
conditions of Alzheimer's Disease, cerebral amyloid angiopathy, primary
amyloidosis, diabetes, rheumatic diseases and (ii) the treatments of
conditions related to secondary amyloidosis. Neurochem has the right to
license tested compounds upon the conclusion of the Confidentiality,
Testing and Option Agreement, as defined in the agreement.
In June 2002, the Company entered into a Finder's Agreement with an
individual to develop and qualify potential strategic partners for the
purpose of testing and/or the commercialization of Company products in
China. As consideration for entering into the agreement, the individual
received 150,000 shares of the Company's common stock.
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