United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 2004.
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from [___] to [___].
Commission file number 000-25669
IMMTECH INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1523370
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
150 Fairway Drive, Suite 150,
Vernon Hills, Illinois 60061
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (847) 573-0033
Securities registered pursuant to Section 12(b) of the Act:
None
------------------------
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |__|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of our 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 19,
2004, was $78,184,192.
As of July 19, 2004, the total number of shares of the registrant's common
stock outstanding was 9,915,324 shares.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None.
IMMTECH INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
----
PART I.
ITEM 1. BUSINESS.........................................................1
EMPLOYEES
RISK FACTORS
ITEM 2. PROPERTIES......................................................44
ITEM 3. LEGAL PROCEEDINGS...............................................45
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............46
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................46
ITEM 6. SELECTED FINANCIAL DATA.........................................51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................66
ITEM 9A CONTROLS AND PROCEDURES
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............67
ITEM 11. EXECUTIVE COMPENSATION..........................................71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................76
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................77
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.............................................................78
FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "may," "intends," "plans," "believes," "anticipates" or
"expects" or similar words and may include statements concerning our strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this annual report,
the following: (i) we are in an early stage of product development, (ii) the
possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our product candidates not
to be viable, (v) uncertainties as to the requirement that a drug product be
found to be safe and effective after extensive clinical trials and the
possibility that the results of such trials, if completed, will not establish
the safety or efficacy of our drug product candidates, (vi) risks relating to
requirements for approvals by governmental agencies, such as the Food and Drug
Administration, before products can be marketed and the possibility that such
approvals will not be obtained in a timely manner or at all or will be
conditioned in a manner that would impair our ability to market our product
candidates successfully, (vii) the risk that our patents could be invalidated or
narrowed in scope by judicial actions or that our technology could infringe upon
the patent or other intellectual property rights of third parties, (viii) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of commercializing a successful product or that
future financing will be completed on unfavorable terms, (ix) the possibility
that any products successfully developed by us will not achieve market
acceptance and (x) other risks and uncertainties that may not be described
herein. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
PART I.
ITEM 1. BUSINESS
A. Business Overview
Immtech International, Inc. is a pharmaceutical company advancing
the development and commercialization of oral drugs to treat infectious
diseases, and neoplastic (cancer) and metabolic (diabetes) disorders. We have
drug development programs that include treatments for fungal infections,
malaria, tuberculosis, diabetes, Pneumocystis carinii pneumonia ("PCP") and
tropical diseases, including African sleeping sickness (trypanosomiasis) and
leishmaniasis. We recently signed an agreement with CombinatoRx, Inc. to
evaluate our first drug DB289 (in combination with other drugs on the market)
for anticancer activity; currently CombinatoRx is using a drug similar in
structure to DB289 as a combination partner in Phase II
clinical trials for the treatment of solid tumors. We hold worldwide patents and
patent applications, and licenses and rights to license technology, primarily
from a scientific consortium that has granted us exclusive rights to
commercialize products from, and license rights to, the technology. Our
scientific consortium includes scientists from The University of North Carolina
at Chapel Hill ("UNC"), Georgia State University ("Georgia State"), Duke
University ("Duke University") and Auburn University ("Auburn University")
(collectively, the "Scientific Consortium").
Our strategy is to develop oral drugs effective against infectious
diseases and neoplastic and metabolic disorders utilizing a dicationic
technology platform. Infectious diseases in the global population have increased
significantly during the past 20 years and are the most common cause of death
worldwide according to the World Health Organization ("WHO"). Relatively few new
drugs for treatment of infectious diseases have been brought to market during
this period. New antibiotics are needed to overcome the problems of multi-drug
resistance and the increasing number of new pathogens that are causing diseases
in the world. Neoplastic and metabolic disorders, including cancer and diabetes,
cause illness and death worldwide. Scientists have struggled for decades to find
effective treatments for both cancer and diabetes. In our initial laboratory
studies, the dication platform demonstrated positive therapeutic activity to
treat these two devastating disorders.
Since our formation in October 1984, we have engaged in
pharmaceutical research and drug development, expanding our scientific
capabilities and collaborative network, developing technology licensing
agreements, and advancing the commercialization of our proprietary technologies,
including the development of aromatic cations (which include dications)
commencing in 1997. In addition to our internal resources, we use the expertise
and resources of strategic partners and third parties in a number of areas,
including (i) discovery research, (ii) pre-clinical and human clinical trials
and (iii) manufacture of pharmaceutical drugs.
We intend to continue to work with our scientific and foundation
partners (See "Products and Programs - Malaria" and "Products and Programs -
African sleeping sickness" below) to validate our technology platform,
illustrating dications' low toxicity, broad application, and oral
deliverability. We believe we will be permitted to sell drugs in niche markets
in certain African nations as we further develop drugs to target multi-billion
dollar markets such as antifungal, TB, cancer and diabetes treatments. Because
we demonstrated to the United States Food and Drug Administration ("FDA")
DB289's potential to provide improvement over currently available alternative
therapies for African sleeping sickness, the FDA granted "fast-track"
designation to DB289 for treatment of African sleeping sickness. Fast-track
designation may allow for accelerated FDA review of DB289 for treatment of
African sleeping sickness, however, there is no guarantee that fast-track
designation will result in faster product development or impact the likelihood
and timing of product approval.
For the fiscal year ended March 31, 2004, we had revenues of
approximately $2,416,000 and a net loss of $12,846,000 which consisted primarily
non-cash compensation expense related to the vesting of common stock options and
warrants issued during the year which was approximately $7,501,000. Our
management believes we have sufficient capital for operations through our next
fiscal year. There is no guarantee that we will not need additional
-2-
funds before then or that sufficient funds will be available after April 2005 to
fund further operations.
A predecessor of our Company was incorporated under the laws of the
State of Wisconsin on October 15, 1984, and subsequently merged into the current
Delaware corporation on April 1, 1993. Our executive offices are located at 150
Fairway Drive, Suite 150, Vernon Hills, Illinois 60061, telephone number (847)
573-0033 or toll-free (877) 898-8038. Our common stock is listed on The American
Stock Exchange under the ticker symbol "IMM". Trading on the AMEX commenced on
August 11, 2003.
We file annual, quarterly and current reports, proxy statements and
other documents with the United States Securities and Exchange Commission (the
"SEC"), under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). You may read and copy any materials that we file with the SEC at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Our reports, proxy statements and other
documents filed electronically with the SEC are available at the website
maintained by the SEC at http://www.sec.gov. We also make available free of
charge on or through our Internet website, http://www.immtech-international.com,
our annual, quarterly and current reports, and, if applicable, amendments to
those reports, filed or furnished pursuant to Section 13(a) of the Exchange Act,
as soon as reasonably practicable after we electronically file such reports with
the SEC. Information on our website is not a part of this report.
Generally, when we use the words "we," "our," "us," the "Company" or
"Immtech" in this report, we are referring to Immtech International, Inc. and
its subsidiaries.
B. Products and Programs
We currently have three human clinical trials and several more
laboratory development programs underway testing the safety and effectiveness of
DB289 for various indications. We are able to coordinate the development of
simultaneous treatment programs by building on the results of our African
sleeping sickness Phase IIb safety and efficacy trial to initiate Phase II
studies in malaria and PCP. Dosage and treatment regimen for certain indications
vary in each trial; however, our safety data from Phase I trials and Phase II
trials of DB289 for treatment of African sleeping sickness have allowed us to
expedite development of the dication technology for new indications.
1. Malaria
Malaria is the second most deadly infectious disease in the
world and is a significant problem for over 2.4 billion people exposed to
this mosquito-borne disease. Malaria affects 300 to 500 million people
each year and is especially devastating to children under the age of five
for whom the fatality rate is very high. It is estimated by the WHO that
over a million children die every year from malaria. The Global Fund to
Fight AIDS, Tuberculosis and Malaria and Medicines for Malaria Venture
("MMV"), both foundations supported by The Bill and Melinda Gates
Foundation ("The Gates
-3-
Foundation"), are supporting the development of new oral drugs for safe
and effective treatment of patients with drug-resistant forms of malaria.
In November 2003, we received a grant of approximately
$668,000 from MMV to fund clinical studies and manufacturing of DB289 for
treatment of malaria. Subject to reaching certain milestones, MMV has
committed approximately $8.2 million to fund further clinical testing of
DB289 to treat malaria and to commercially license its use.
In 2003, we commenced and completed a Phase IIa clinical trial
of DB289 targeting two strains of the malaria parasite (Plasmodium vivax
and Plasmodium falciparum, the two most common human forms of malaria in
the world). Our pre-clinical data and pharmacokinetics (pharmacokinetics
is the study of the uptake, distribution and rate of movement of a drug in
the body from the time it is absorbed until it is eliminated) studies
conducted in humans indicated that sufficient levels of DB289 could be
reached in the blood to have a therapeutic effect on malaria in humans.
DB289 demonstrated positive activity against several non-human forms of
malaria (used as surrogates for the human disease) in animal models of the
disease. DB289 also showed positive activity in vitro against known
drug-resistant strains of malaria, including chloroquine-resistant strains
of malaria. Chloroquine is the drug most frequently used to treat malaria
in developing countries.
In December 2003, we reported results of our Phase IIa malaria
trial that was conducted in Thailand. The patients who participated in the
malaria trial were treated with 100 mg capsules of DB289 twice per day for
five consecutive days. The patients' blood samples were evaluated for
parasites in the prescreening process to establish a baseline and checked
every six hours for the first three days, every 12 hours for the next four
days and on days 10, 14, 21 and 28. For purposes of this study, patients
were considered to be cured if malaria parasites were eliminated at 28
days after treatment. All 32 patients treated cleared the malaria parasite
and malaria symptoms (i.e., fever) disappeared within the treatment
period; 50% of the patients cleared the malaria parasite within 24 hours
of the first dose. DB289 was well tolerated with no significant adverse
side-effects reported. All patients were followed and monitored for 28
days after treatment to ensure that the malaria parasite had been
eliminated.
Out of the 32 patients in the malaria trial, nine were
infected with Plasmodium vivax and 23 were infected with Plasmodium
flaciparum (the most deadly form of malaria contracted by humans). P.
vivax infected patients usually have less severe symptoms, but
reoccurrence is very high and a large percentage develop chronic forms of
the disease. P. falciparum has more severe symptoms (including high
fever), and causes over 2 million deaths per year. Chloroquine, the most
commonly used treatment, has high levels of drug-resistance.
The P. falciparum patients were treated with DB289 as a
monotherapy (not in combination with any other drugs). Of the 23 patients
treated for P. falciparum, approximately 95% (22 of 23 patients) cleared
the malaria parasite (and were considered to be cured) in the 28 day
trial period. Blood samples from two of the patients
-4-
contained malaria parasites at the end of this trial; however, after more
extensive testing the principal investigator (an independent third-party)
concluded that one of the two failed patients had been infected with a new
malaria infection and had cleared the original malaria parasite. Nine P.
vivax patients were treated with DB289 for five days followed by oral
Primaquine (drug combination therapy is used as standard therapy for P.
vivax treatment). Eight of the nine patients treated with both drugs for
P. vivax remained clear of any parasites on the 28th day of the trial
without any significant adverse events or safety issues with the
combination therapy; one patient showed some signs of relapse on the 28th
day and was administered an additional one day regimen of oral Primaquine
after which all malaria parasites were cleared.
Based on the results of the Phase IIa malaria trial in Thailand, we
initiated several new trials in July, 2004; (1) a new study in Thailand will
evaluate DB289 in combination with a synthetic analog of Artemisinin, (thereby
potentially creating a new drug cocktail to treat malaria) and (2) a study in
uninfected, normal volunteers to determine the maximum tolerable dose of DB289
in a three day treatment regimen. In addition, the study in uninfected, normal
volunteers will include three different ethnic groups to compare metabolism of
DB289 and to compare 5 day dosing to 3 day dosing. The combination study is
designed to evaluate potential drug interactions between the Artemisinin
synthetic analog and DB289 in patients with acute to moderate malaria. The study
incorporates several dose levels and regimens (once daily versus twice daily
dosing) and will be conducted in Thailand. The study design is set forth below.
----------------------------- ------------------------------ -------------------------------- ------------------------
Clinical Trial Trial Design End Points Sites
----------------------------- ------------------------------ -------------------------------- ------------------------
DB289 in combination with a o Phase II o Drug interactions
synthetic analog of o Oral Dosing 3 days o Safety Thailand
Artemisinin o Artemisinin & DB289 o Parasite clearance
o Clinical improvement
----------------------------- ------------------------------ -------------------------------- ------------------------
DB289 alone o Phase I o Maximum tolerable dose
o Healthy volunteers o Safety France
o Single doses for 3 o Pharmacokinetics
days
o Compare 3 and 5 day
dosing
o Different ethnic
groups
a. MMV Agreement
-------------
On November 26, 2003, we entered into a Testing
Agreement with MMV, a foundation established in Switzerland, and UNC
pursuant to which we, with the support of MMV and UNC, are
conducting a study of DB289 as a treatment for malaria. The studies
to be performed include Phase II and Phase III
-5-
human clinical trials, and drug development activities of DB289
alone, and in combination with other anti-malarial drugs, with the
goal of obtaining regulatory approval of a product for the treatment
of malaria.
Under the terms of the agreement, MMV has committed to
advance funds to the Company to pay for human clinical trials and
regulatory preparation and filing costs to obtain approval to market
DB289 for treatment of malaria. MMV will pay for regulatory
approvals for DB289 in at least one internationally accepted
regulatory body and at least one malaria endemic country. We have
forecasted such costs to be approximately $8.2 million. MMV has
agreed to fund the forecasted amount based on progress achieved.
Through the fiscal year ended March 31, 2004, MMV has funded
$668,000 for human clinical trials conducted from June to December
2003. Under this agreement, UNC will receive approximately $50,000
for its work to evaluate synergistic qualities of other drugs that
may be used in combination with DB289 as a malarial drug "cocktail".
b. Related MMV/UNC Agreement
-------------------------
In a related "Discovery Agreement" between MMV and UNC,
MMV has agreed to fund a research program with a three year budget
of approximately $1.4 million. The goals of the Discovery Agreement
are to design, synthesis and optimize new compounds for testing and
evaluation of effectiveness for treatment of malaria. Immtech is a
third party beneficiary of the Discovery Agreement and, pursuant to
the terms of the Consortium Agreement (defined below), has the
rights to develop and commercialize the discoveries resulting
therefrom.
2. African Sleeping Sickness (Human trypanosomiasis)
African sleeping sickness is a parasitic disease that is
spread by tsetse flies in sub-Sahara Africa. Doctors Without Borders
estimates that the geographical range in sub-Sahara Africa where human
African sleeping sickness occurs encompasses 36 countries, wherein over 60
million persons are at risk of contracting the disease. Existing
treatments for African sleeping sickness can be highly toxic and cannot be
administered orally. African sleeping sickness is fatal if left untreated.
WHO estimates that there are 500,000 to 750,000 active cases
of human African sleeping sickness in central Africa. A WHO survey reports
that an "epidemic situation" for African sleeping sickness exists in the
sub-Sahara region of Africa which includes the countries of Angola, Sudan,
Uganda and the Democratic Republic of the Congo ("DRC").
Human African sleeping sickness may take one of two forms
depending upon the origin of the parasite that transmits the disease: (1)
West African sleeping sickness is caused by Trypanosoma brucei gambiense
and (2) East African sleeping sickness is caused by Trypanosoma brucei
rhodesiense. Although DB289 has shown in
-6-
in vitro and in vivo (animal) tests activity in both forms, thus far we
have conducted human clinical trials of DB289 only as a treatment for the
West African sleeping sickness strain found in the area of sub-Sahara
Africa that has an ongoing epidemic.
In September 2002, we completed an open-label, non-controlled
Phase IIa study of DB289 in the Democratic Republic of Congo ("DRC") for
treatment of African sleeping sickness. Initial results showed that the
compound was well tolerated with no significant adverse side-effects and
over 93% of the patients (28 of 30) treated were cleared of the African
sleeping sickness parasite (blood and lymph node samples taken 2 days
after completion of treatment were parasite free). Patients evaluated at
three and six months after treatment (21 of 27 due for follow-up returned
for six month testing) remained parasite free with one relapse detected.
Based upon the promising results of the Phase IIa clinical trial, The
Gates Foundation made an additional grant of $2.7 million to the UNC
Scientific Consortium to accelerate Phase IIb/III clinical trials.
In April 2003 we commenced the first arm of a multi-arm,
multi-site 350-patient Phase II/III randomized human clinical trial to
treat African sleeping sickness with DB289 that may serve as the pivotal
study to support approval. The Phase IIb arm of the study included the
testing of 80 patients at two sites in the DRC where we administered twice
daily dosing of 100 mg of DB289 for five days and the current extended
regimen program in 30 patients who are receiving twice daily dosing of 100
mg of DB289 for ten days. We anticipate that the extended regimen program
will conclude in 3rd calendar quarter 2004 at which time we intend to
commence the Phase III arm of the study by adding three additional sites
and adding 250 additional patients overall at the five testing sites.
Assuming consistent positive results, we intend upon completion of the
final report of the pivotal Phase IIb trial including the extended regimen
program (expected 4th calendar quarter 2004) to schedule conferences with
the FDA and other regulatory agencies to present our Phase IIb results and
to finalize requirements to file an NDA under Accelerated Approval or
similar other regulatory licensure program for DB289 to treat African
sleeping sickness. We expect to file the above-described NDA or other
regulatory licensure program upon completion of treatment of 200 patients,
which may for safety review purposes, include some patients treated with
DB289 for other indications.
In the initial stage of the randomized clinical trial (Phase
IIb), half the patients in the study receive DB289 and half the patients
receive pentamidine intramuscular injections (standard first line
therapy). In February 2004 we completed the first 80 patients in the
pivotal Phase IIb trial. The initial clinical trial commenced in two
larger sites in Maluku and Vanga in the DRC where patients receive
extensive safety monitoring. Patient monitoring included EKG monitoring,
blood sampling to check clinical chemistry and hematology parameters and
various other clinical measurements and tests, including the clearance of
parasites from blood. The results from the initial 80 patients continued
to show DB289 to be well tolerated with a favorable safety profile. In the
patients treated at the Vanga site several patients did not clear the
parasite from the lymph nodes. Based on this information, we opened a new
extended regimen arm of the study with 30 patients using DB289 for 10 days
(twice daily at 100 mg per dose); twice
-7-
the duration of the prior treatment regimen. We expect that the new dose
term will clear the small number of parasites found in the lymph nodes of
those patients.
Once the extended regimen trial is completed, we plan to (i)
open three additional clinical sites, two in the DRC and one in Angola,
where we intend collectively with the two original sites to enroll 250
additional patients and (ii) designate this study a Phase III trial and
obtain regulatory approval regarding such designation. (See trial design
below) Concurrently, if we meet the designated end points in our extended
regimen trial, we plan to file a New Drug Application, or NDA, with the
FDA (or similar applications with regulatory agencies in foreign
countries) for approval of DB289 in treating African sleeping sickness and
to apply for an Accelerated Approval of our NDA (or similar accelerated
approval under the foreign regulatory programs). The FDA has indicated
that it would consider a NDA for DB289 to treat African sleeping sickness
upon submission of safety and efficacy data on 200 patients. Accelerated
Approval is often granted to drugs intended for compassionate use in
treating serious or life-threatening diseases after completion of safety
and efficacy studies (often Phase II). If approval is based upon
Accelerated Approval or other recognized governments' similar accelerated
approval programs continued testing, often including clinical Phase IV
trials, is typically required to validate the surrogate endpoints used in
the prior safety and efficacy trials. There can be no guarantee that we
will be granted Accelerated Approval quickly or at all or, that if
granted, such approval will not be later revoked. (See this section -
"Governmental Regulation")
If our NDA for DB289 to treat African sleeping sickness
receives approval from the FDA or another recognized government regulatory
agency (pursuant to Accelerated Approval or otherwise), we intend to apply
to the WHO to have DB289 listed on their Essential Medicines List. The WHO
generally accepts NDA approvals for the Essential Medicines List from drug
regulatory agencies in the United States, UK, European Union and Japan as
well as other countries with established regulatory agencies. In most
cases, inclusion on the list is the primary requirement to selling drugs
in sub-Sahara Africa. We believe we will then be able to sell DB289 to
treat African sleeping sickness while continuing to perform post-approval
studies as and if required. In addition to listing on the WHO Essential
Medicines List, the distribution of pharmaceutical drugs in sub-Sahara
Africa requires individual approval from each country where the drugs are
sold. Once approved, certain governmental and charitable agencies have
expressed willingness to purchase DB289 from us and distribute the drug in
the sub-Sahara nations for compassionate use. We anticipate three to six
months' lead time to manufacture, receive export clearance and deliver our
first drug shipment after receipt of a purchase order pursuant to the
above plan, although there could be delays that result in longer lead
times.
We have engaged a large scale pharmaceutical contract
manufacturer, Cambrex Charles City Inc., to produce DB289 for the clinical
trials and commercial sales. We plan concurrently with process validation
to seek final regulatory approval (as described above) to commercially
distribute the product into approved countries.
All clinical trials of DB289 are being conducted under an
Investigational New Drug ("IND") application with the FDA. In addition to
an IND filed with the FDA,
-8-
on April 23, 2004 the FDA granted "Fast-Track" drug development
designation for use of DB289 to treat human African sleeping sickness. We
believe our studies have demonstrated DB289's potential to treat human
African sleeping sickness, a life-threatening disease for which no other
oral treatment exists, without the serious side-effects associated with
alternative (non-orally deliverable) therapies. Fast-track designation of
DB289 to treat African sleeping sickness increases the likelihood that the
FDA will grant Accelerated Approval of our NDA for DB289, however, there
is no guarantee that fast-track designation will result in faster product
development or impact the likelihood and timing of product approval.
We believe that our data to date suggests that DB289 can be
used to treat human African sleeping sickness without the serious
side-effects and high toxicity profile associated with pentamidine, the
primary treatment in use in Africa. Pentamidine is usually administered
intravenously, by intramuscular injection, or via inhalation and generally
requires medical personnel and hospital or clinic facilities for delivery.
The oral deliverability of DB289 can be particularly important in remote
geographic areas where this disease is endemic and where access to medical
personnel and facilities needed to deliver the current therapy are
limited.
Our pivotal clinical trial design for using DB289 to treat
human African sleeping sickness is set forth below:
----------------------- -------------------------------------- --------------------------------- --------------------
Clinical Trial Trial Design / Phase End Points Sites
----------------------- -------------------------------------- --------------------------------- --------------------
DB289 Pivotal Trial
o African sleeping o Oral dosing for 5 to 10 days (BID) o Safety o Democratic
sickness Republic of the
o Randomized comparison to o Clearance of parasite from Congo (4 sites)
pentamidine blood after treatment and 3,
6 months o Angola (1 site)
o Phase IIb
o 110 patients - stage 1 disease o Improvement of symptoms
o Phase III
o 250 patients - stage 1 disease
a. Gates Grant
-----------
In November 2000, The Gates Foundation awarded a $15.1
million grant to a research group led by UNC to develop new drugs to
treat African sleeping sickness and leishmaniasis, two
life-threatening diseases endemic in sub-Sahara Africa. The research
group led by UNC includes Immtech and five other universities and
research centers around the world which collectively employ
scientists and physicians considered to be the foremost experts in
one or both of these diseases.
b. Gates Acceleration Grant
------------------------
In June 2003, the Gates Foundation awarded an additional
$2.7 million grant to the UNC led research group to (i) expand the
Phase IIb trial of
-9-
DB289 for treatment of African sleeping sickness into the pivotal
multi-arm, multi-site 350-patient Phase II/III randomized human
clinical trial described above, (ii) implement an improved method of
synthesizing DB289 to reduce drug manufacturing costs and (iii)
improve DB289's formulation to facilitate increased drug absorption
into the blood circulation. Pursuant to the terms of the Clinical
Research Subcontract described below, ninety-one percent of this
grant ($2,466,475) is directed to Immtech. On June 26, 2003 we
received $1,025,201 to advance the goals set forth above.
c. Clinical Research Subcontract with UNC
--------------------------------------
On March 29, 2001, we entered into a clinical research
subcontract ("Clinical Research Subcontract") with UNC to advance
the work funded by The Gates Foundation $15.1 million grant.
Pursuant to the Clinical Research Subcontract, UNC is to pay to us
$9.8 million of the $15.1 million grant in installments over a
period not to exceed five years based on our achieving certain
milestones (approximately $7.7 million of which has been paid to us
to date). Under the terms of the Clinical Research Subcontract, we
are responsible for the oversight of Phase II and Phase III human
clinical trials of the drug candidate DB289 for African sleeping
sickness. The terms of the Clinical Research Subcontract require us
to segregate the Clinical Research Subcontract funds from our other
funds and to use the proceeds only for developing a drug for
treatment of African sleeping sickness. We have or will receive The
Gates Foundation grant funds under the Clinical Research Subcontract
as follows: (a) $4.3 million was received in fiscal year 2001 to
fund Phase II clinical trials to test DB289's effectiveness against
African sleeping sickness in approximately 30 patients, (b) $1.4
million was paid to us in September 2002 upon the successful
completion of our Phase IIa clinical trial, (c) $2.0 million was
paid to us in December 2002 upon the delivery of the final Phase IIa
report in respect of the Phase II clinical trial and (d) $2.1
million is scheduled to be paid to fund Phase IIb and Phase III
clinical trials to test compound DB289's effectiveness against
African sleeping sickness on a larger, more diverse group of
patients in calendar year 2005.
The Clinical Research Subcontract will continue in
effect until November 17, 2005, unless otherwise terminated by a
material breach by either party.
3. PCP pneumonia
In 2002, we received approval from the FDA and the Ministry of
Health in Peru to commence a pilot Phase IIa clinical trial of DB289 to
treat Pneumocystis carinii pneumonia ("PCP"). PCP is a fungus that
overgrows the air sacs in the lungs of immunosuppressed patients, causing
pneumonia that can be life-threatening. We conducted a proof of concept
trial in 8 patients with acquired immune disease syndrome ("AIDS") who had
failed standard therapy. The patients were each given 50 mg of DB289 twice
per day for 21 days; the treatment regimen was completed in February
-10-
2003. At the conclusion of the study, all patients showed improved lung
function and, during the 21 days of treatment, normal lung function
returned to three of the patients.
In July 2003, we commenced a second Phase IIb human clinical
trial in Peru in 30 AIDS patients with PCP who had previously failed other
therapies to treat PCP with a dosage of 100 mg twice per day (a higher
dose than the pilot study). The initial data from 19 patients who have
completed the trial indicates that all patients returned to normal lung
function within 12 days. The higher dosage regimen appears to
significantly increase the number of patients who clear the infection
(demonstrate improved lung function) and decreased the time in which the
infection is cleared.
Our current clinical trial protocol for testing of DB289's
safety and effectiveness against PCP is set forth below:
----------------------- -------------------------------------- --------------------------------- --------------------
Clinical Trial Trial Design / Phase End Points Sites
----------------------- -------------------------------------- --------------------------------- --------------------
DB289
o PCP o Phase IIb o Safety o Peru
o Patients who failed o Improvement in lung
standard treatment function (fungal
o Oral dosing for 21 days clearance)
o Twice daily dosages of o Improvement in
100mg clinical symptoms
4. Antifungal Program
Scientific Consortium scientists from Duke University, UNC and
Georgia State have identified several compounds with the potential to
treat both Candida and Aspergillus, two fungal infections that in the
aggregate account for approximately 90% of the systemic fungal infection
that make up the $4 billion annual anti-fungal drug market (as estimated
by DataMonitor). In vitro studies have identified 20-30 dications that
display both broad based and selective antifungal activity against
Candida, Aspergillus and Cryptococcus, including activity against fungi
which had previously been shown to be drug resistant. Our objective in
2004 is to select an oral drug candidate for the treatment of fungal
infections and begin preclinical safety and pharmacology studies required
prior to human trials.
The market for an effective antifungal drug was estimated by
DataMonitor in 2003 to be approximately $4 billion annually and growing
rapidly due to the increasing number of patients who are susceptible to
fungal diseases, such as patients undergoing cancer chemotherapy, patients
with HIV and those who have undergone organ transplants. In addition, the
frequency of nosocomial infection (infection acquired while being treated
in a hospital) caused by fungi has increased drastically and is now the
third most common cause of sepsis, replacing Escherichia coli ("E. coli").
Sepsis is an infection that quickly overwhelms the immune system and can
lead to sudden death. Recently, strains of fungi have developed that are
resistant to currently available treatments. There is a significant
opportunity for new oral drugs effective against specific strains of fungi
as well as drugs with broad spectrum effectiveness across fungal strains.
-11-
Duke University researchers have developed an animal model of
Candida and Aspergillus and are testing compounds in this model. In
addition, we have a contract with Case Western University ("Case Western")
to test in animal models of fungal infections compounds believed to have
potential to treat fungal infections. We and consortium scientists, after
several years of testing, have selected approximately ten lead dication
compounds for testing in Case Western's animal models. Case Western is
evaluating dose responses for a number of our compounds to determine which
of the lead compounds will be the best to move forward into preclinical
development.
5. Tuberculosis
Tuberculosis ("TB") is the world's number one killer among
infectious diseases and is the cause of over two million deaths per year,
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 and in Eastern Europe.
Japan has declared TB as its most threatening disease. An alarming
increase in TB cases is also developing in the United States. The
combination of the rapid spread of TB and the appearance of multi-drug
resistant strains ("MDR") of the TB organism make TB a major health threat
throughout the world. TB is a difficult infection to treat given that the
bacteria is often sequestered in various tissues and organs of the body.
The organisms that cause the disease can "hide" inside white blood cells
where the organisms are protected against antibiotic drugs. To be
effective, a drug must eliminate the TB organisms from the lungs, tissues,
and infected white blood cells.
WHO and the National Institutes of Health ("NIH") have
significantly increased research efforts to discover drugs to treat TB.
Their research is focused on developing oral drugs that are effective
against drug resistant strains of TB and the 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 two- to six- months.
NIH laboratories screened over 500 of our dication compounds
looking for potential drug candidates for treatment of TB. The NIH
screening program identified approximately 10 to 15 dications with in
vitro activity comparable or superior in performance to drugs currently
available to treat TB. We moved our screening and animal testing program
to the University of Illinois-Chicago ("UIC") which is directed by Dr.
Scott G. Franzblau, to develop new drugs to combat the common and MDR
strains of Mycobacterium TB. Dr. Franzblau is a leading expert in TB
treatment. Prior to running the TB program at UIC, Dr. Franzblau led the
NIH-funded anti-TB screening program at the National Hansen's Disease
Center at Louisiana State University. The in vitro screening program at
UIC identified seven new compounds which displated excellent activity
which have been selected for in vivo screening. The UIC laboratory is
evaluating these newly identified compounds and several from the NIH
screening program in acute and latent animal models of TB. We believe that
the final test results will assist us in selecting a compound this year
that will move into pre-clinical studies required prior to human trials.
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6. Pharmaceutical Cancer Program
We have provided under a confidentiality, material transfer
and testing agreement with CombinatoRx of Boston, Massachusetts certain of
our aromatic cationic compounds, including DB289 and DB075, to be tested
for activity against certain cancers. CombinatoRx previously tested
various combinations of drugs not normally associated with cancer
treatments for effectiveness against cancer and has had promising results.
Several of our aromatic dication compounds have similar medicinal
properties to those used by CombinatoRx in its earlier tests. Our
compounds, however, do not appear to have the adverse side-effects and
delivery difficulties generally associated with those other
pharmaceuticals tested by CombinatoRx. We and CombinatoRx believe that our
aromatic cationic compounds' broad-based activities and unique mechanism
of action will demonstrate, through CombinatoRx's studies, activity in
oncology. CombinatoRx's studies will include in vitro assays and in vivo
models and will test our compounds in combination with CombinatoRx's
proprietary anti-cancer technology.
C. Technology
1. Dications
Our pharmaceutical program focuses on the development and
commercialization of oral drugs to treat fungal, parasitic, bacterial and
viral diseases and certain neoplastic and metabolic disorders, including
cancer and diabetes. Aromatic dications are chemical structures that have
two positively charged ends that are held together by a linker; at the
atom level, they look like molecular barbells. In addition, a new class of
monocations have been made with excellent activity in specific target
diseases, these compounds have a single positive charge on one end and a
linker. The positive charges as one mechanism of action allow our
compounds to bind to negatively charged segments of deoxyribonucleic acid
("DNA"). Dication drugs bind in the minor groove of DNA and to certain
receptors, blocking the activity of enzymes needed for microbial growth.
The key site on an organism's DNA is an area where enzymes interact with
the organism's DNA as part of their normal life cycle. Structurally,
dications are chemical molecules that have two positively charged ends
held together by a chemical linker. The composition of the dications, with
positive charges on the ends and linkers of different length, shape and
binding curvature allows specific dication binding.
Pentamidine (a dicationic drug on the market) was the
prototype drug used by scientists at UNC to develop our proprietary
library of aromatic compounds. While having broad based activity against
many diseases including fungal infections and cancer, pentamidine can only
be administered intravenously, by intramuscular injection, or via
inhalation. Pentamidine is difficult and costly to administer outside of a
hospital setting due to its narrow therapeutic dosage margin of safety and
efficacy.
Scientists at UNC discovered that much of pentamidine's
toxicity was the result of bi-products formed when the drug breaks down
within the body. This discovery by the scientists led to the design of
new compounds which did not break down in the same way. Additional
modifications to the structures of these compounds improved on
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their binding activity and enhanced the applicability of this class as
antibiotics over other anti-infectious agents, while lowering toxicity and
increasing oral deliverability.
Scientific Consortium members have thus far designed and
synthesized over 2,200 well-defined aromatic cationic compounds. These
compounds have all been tested in a wide variety of assays and animal
models of various diseases. UNC and Georgia State continue to improve
methods for making cationic molecules in computer models that help to
develop medicinally efficacious compounds. One or more of the universities
comprising the Scientific Consortium have patents covering the molecular
structure of the compounds, as well as in some cases particular uses of a
compound for potential treatment of an infection or disease.
Members of the Scientific Consortium have laboratory testing
systems for screening dications for activity against specific
microorganisms (using both laboratory and animal models). Our scientists
have over 25 years of experience in making dication compounds and have
developed proprietary computer models which help our scientists rationally
design the next generation of compounds. Generally, patents for the
aromatic cation structures and uses are issued to the scientist who
invents or discovers the new compound and/or proves its unique
applicability for particular diseases. Then, pursuant to the scientist's
employment arrangements, the patents are assigned to the employing
university, and, through the License Agreement (see "The Scientific
Consortium - Consortium Agreement and License" below), to us through an
exclusive worldwide license to commercialize such compounds and uses.
a. DB289
-----
DB289 is an aromatic dication that utilizes prodrug oral
delivery technology to deliver the active drug into blood
circulation by swallowing a pill. In May 2001, we completed Phase I
safety trials of DB289 in human volunteers. The single and
multi-dose trials demonstrated that DB289 was well tolerated by the
volunteers.
The study was designed to evaluate the safety and
pharmacokinetics (pharmacokinetics is the study of a drug's effect
on the body from the time it is absorbed until it is eliminated) of
three dosage levels of DB289 administered twice a day over a period
of six days. In addition to the safety studies, the volunteers who
were given the active drug participated in a secondary study to
determine whether food affected absorption through the digestive
system. The studies showed that DB289 passed easily through the
digestive membrane and the drug was active (as designed) for several
hours in the bloodstream. In addition, volunteers tested at the
highest dosage levels in the multi-dose segment of the trial did not
display any specific side-effects, and the post-test EKGs, clinical
chemistry and hematology parameters of those volunteers were all
within normal ranges. The drug concentration levels in the blood
were similar to levels that showed positive activity in animal
models in malaria, PCP and African sleeping sickness.
-14-
b. Prodrug Formulation
-------------------
One of our most significant research developments was
the discovery of technology to make dication drugs orally
deliverable. This proprietary technology temporarily masks the
positive charges of the dication, enabling the active compound to
move easily across digestive membranes into blood circulation. Once
the drug is in blood circulation, the masking charges are removed by
naturally occurring enzymes thereby releasing the active drug. Until
now, the inability to deliver active compounds across the digestive
membrane into the bloodstream had reduced the attractiveness of
aromatic cations/dications as effective antibiotics. Our scientists
have patented four prodrug synthesis methods allowing for oral
delivery and making this entire class of compounds significantly
more attractive for commercial development.
On February 26, 2003, Scientific Consortium members were
granted a patent by the U.S. Patent Office entitled "Prodrugs for
Antimicrobial Amidines" for a new proprietary technology to
synthesize and manufacture dication and other compounds with prodrug
technology. This patent protects a substantially advanced process
for economically producing oral drugs designed to treat infectious
diseases and metabolic disorders such as fungal infections, malaria,
tuberculosis, diabetes, Pneumocystis carinii pneumonia and tropical
diseases, including African sleeping sickness (trypanosomiasis) and
leishmaniasis. Application of prodrug technology is not limited to
our products, and we are investigating the potential to sub-license
the prodrug process to other drug manufacturers for use on other
compounds designed to be ingested orally and then activated in the
blood stream.
2. The Scientific Consortium
The Scientific Consortium responsible for the invention and
development of dication technology includes scientists from UNC, Georgia
State, Duke University and Auburn University (collectively, the
"Scientific Consortium").
a. Consortium Agreement and License
--------------------------------
On January 15, 1997, we entered into a Consortium
Agreement with UNC and Pharm-Eco Laboratories, Inc. ("Pharm-Eco")
(to which each of Georgia State, Duke University and Auburn
University agreed shortly thereafter to become a party). The
Consortium Agreement provided that dications developed by the
Scientific Consortium-members were to be exclusively licensed to us
for global commercialization. As contemplated by the Consortium
Agreement, on January 28, 2002, we entered into a License Agreement
with the Scientific Consortium whereby we received the exclusive
license to commercialize all future technology and compounds
("future compounds") developed or invented by one or more of the
Scientific Consortium scientists after January 15, 1997, and which
also incorporated into such License Agreement our
-15-
license with the Scientific Consortium with regard to compounds
developed on or prior to January 15, 1997 ("current compounds").
Pursuant to the Consortium Agreement, Pharm-Eco agreed
to transfer to us the worldwide exclusive license to use,
manufacture, have manufactured, promote, sell, distribute or
otherwise dispose of any and all products based directly or
indirectly on dications developed by the Scientific Consortium on or
prior to January 15, 1997 and previously licensed (together with
related technology and patents) to Pharm-Eco. In March 2001,
Pharm-Eco assigned the license to us. The January 28, 2002, License
Agreement grants to us a similar worldwide exclusive license
covering products based on dicationic technology developed by the
Scientific Consortium after January 15, 1997 and incorporates the
exclusive license assigned to us by Pharm-Eco in March 2001. The
Consortium Agreement has provided us with rights to the Scientific
Consortium's library of over 2,000 well-defined aromatic cationic
compounds/dications and to all future technology to be designed by
the Scientific Consortium. The Scientific Consortium scientists are
considered to be among the world's leading experts in infectious
diseases, computer modeling of dicationic pharmaceutical drugs and
computer-generated drug designs.
The Consortium Agreement provides that we are required
to pay to UNC on behalf of the Scientific Consortium reimbursement
of patent and patent-related fees, certain milestone payments and
royalty payments based on revenue derived from the Scientific
Consortium's dication technology. Each month on behalf of the
inventor scientist or university, as the case may be, UNC submits to
us an invoice for payment of patent-related fees related to current
compounds or future compounds incurred prior to the invoice date.
For the fiscal year ended March 31, 2004, we reimbursed UNC $473,567
for such patent and patent-related costs, and in the past, we have
reimbursed to UNC approximately $1,413,000 in the aggregate in
patent and patent-related costs. We are also required to make
milestone payments in the form of issuance of 100,000 shares of our
common stock to the Consortium when we file our initial New Drug
Application ("NDA") or an Abbreviated New Drug Application ("ANDA")
based on Consortium technology and are required to pay to UNC on
behalf of the Scientific Consortium (other than Duke University) (i)
royalty payments of up to 5% of our net worldwide sales of "current
products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively)
and (ii) a percentage of any fees we receive under sublicensing
arrangements. With respect to products or licensing arrangements
emanating from Duke University technology, we are required to
negotiate in good faith with UNC (on behalf of Duke University)
royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
Under the License Agreement, we must also reimburse the
cost of obtaining patents and assume liability for future costs to
maintain and defend patents so long as we choose to retain the
license to such patents.
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D. Our Subsidiaries
1. Immtech Hong Kong Limited
On January 13, 2003, we entered into an agreement with an
investor who owned, through Lenton Fibre Optics Development Limited
("Lenton"), a Hong Kong company, a 1.6+ acre commercial real estate parcel
located in a "free-trade zone" called the Futian Free Trade Zone,
Shenzhen, in the People's Republic of China ("PRC"). Under the agreement,
we purchased an 80% interest in Lenton by issuing to the investor
1,200,000 unregistered shares of our common stock, $0.01 par value. We
subsequently resold to the investor our interest in Lenton and the parcel
of land in exchange for 100% ownership in the improved property described
below under Super Insight Limited and Immtech Life Science Limited. In
connection with the sale of Lenton, we acquired 100% ownership of Immtech
Hong Kong Limited ("Immtech HK"), including Immtech HK's interest in
Immtech Therapeutics Limited.
Subsequently, though a sublicense agreement, we transferred to
Immtech HK our rights to develop and license university technology in
certain Asian countries and to commercialize resulting products granted to
us under the Consortium Agreement. We intend to use Immtech HK as a
vehicle to further sublicense rights to develop specific indications to
indirect subsidiaries that will partner with investors who fund
development costs of those indications. Immtech HK is a Hong Kong company.
a. Immtech Therapeutics Limited
----------------------------
Immtech Therapeutics Limited ("Immtech Therapeutics")
provides assistance to healthcare companies seeking access to China
to conduct human clinical trials and to manufacture and/or
distribute pharmaceutical products in China.
Immtech Therapeutics is majority owned by Immtech HK and
its minority owners are Centralfield International Limited (a
British Virgin Island (BVI) company and wholly-owned subsidiary of
TechCap Holdings Limited) and Bingo Star Limited (BVI). TechCap has
assets and resources in China upon which Immtech Therapeutics may
draw. Bingo Star Limited has substantial financial and medical
expertise and resources located in Hong Kong and China. Immtech
Therapeutics is a Hong Kong company.
2. Super Insight Limited (BVI)
On November 28, 2003, we purchased (i) from an investor 100%
of Super Insight Limited ("Super Insight") and its wholly-owned
subsidiary, Immtech Life Science Limited ("Immtech Life Science") and (ii)
from Lenton Fiber Optics Development Limited, a 100% interest in Immtech
HK. As payment for the acquisition, we transferred to the investor our 80%
interest in Lenton and cash. Super Insight is a British Virgin Islands
company.
-17-
a. Immtech Life Science Limited
----------------------------
Immtech Life Science owns two floors of a
newly-constructed building (the "Property") located in the Futian
Free Trade Zone, Shenzhen, in the PRC in which Immtech intends to
house a pharmaceutical production facility for manufacture of its
products. The Property comprises Level One and Level Two of a
building named the Immtech Life Science Building. The duration of
the land use right associated with the building on which the
Property is located is 50 years which expires May 24, 2051.
Under current law, we will enjoy reduced tax on the
business located on the Property because the local government has
granted incentives to business in high technology industrial sectors
locating in the Futian Free Trade Zone. Our intended pharmaceutical
manufacture use qualifies for the tax incentives. Immtech Life
Science is a Hong Kong company.
E. Manufacturing
1. The Scientific Consortium
Scientific Consortium members, specifically the combinatorial
chemistry laboratory at Georgia State and the synthetic chemistry
laboratory at UNC, have the capability to produce and inventory small
quantities of the aromatic cations under license to us. To date, Georgia
State and UNC have produced and supplied the dications requested in the
quantities required under various testing agreements with third parties.
We believe that Scientific Consortium members will continue to produce and
deliver small quantities of compounds as needed for testing and
commercialization purposes.
2. Third Party Sources
On October 23, 2003 we entered into an agreement with
Cardinal Health PTS, Inc. (Cardinal Health) to develop prototype
formulations of DB289 to improve oral bioavailability DB289. Once the
formulation is perfected by Cardinal Health we intend to engage Cardinal
Health to produce commercial quantities of good manufacturing practices
("GMP") grade with raw materials to be produced by another third party.
Cardinal Health is the second largest producer of pharmaceuticals and
other medical supplies in the United States.
In February 2004, we entered into an agreement with Cambrex
Charles City Inc. to improve the synthesis method for DB289, find methods
to reduce the cost of manufacturing DB289, and to prepare the drug for
production of commercial quantities of bulk GMP drug for clinical trials
and sale. Cambrex is a global, diversified life sciences company dedicated
to providing innovative products and services to accelerate drug
discovery, development, and the manufacture of human therapeutics.
3. Our China Facility
See disclosure above under the heading Immtech Life Science
Limited.
-18-
F. Strategy
Our strategy is to develop oral drugs that are effective
against infectious diseases and neoplastic and metabolic disorders by
utilizing the aromatic cation/dicationic platform technology. Infectious
diseases in the global population have increased significantly during the
past 20 years and are the most common cause of death worldwide according
to the WHO. Relatively few new drugs for treatment of infectious diseases
have been brought to market during this period. New antibiotics are needed
to overcome the problems of multi-drug resistance and the increasing
number of new pathogens that are causing diseases in the world. Neoplastic
(cancer) and metabolic (diabetes) disorders cause illness and death
worldwide. Scientists have struggled for decades to find effective
treatments for both cancer and diabetes. Our initial laboratory studies
have demonstrated that the dication platform may be effective in treating
these two devastating disorders. Scientists at the National Institutes of
Health ("NIH") concluded from cancer screens that over 47 dication
compounds showed evidence of efficacy in vitro to inhibit tumor growth in
cellular assays of cancer and studies at UNC using a series of dications
have shown that certain dications have a propensity to bind to imidazoline
receptors and cause the release of insulin from pancreas cells which is
believed could be helpful in the treatment of Type II diabetes.
We believe we have been successful in developing a drug with a
lower toxicity profile than pentamidine that is orally available using our
dication and prodrug technologies. We have leveraged our scientific
partners and foundation funding while advancing our technology and human
clinical trials in niche markets such as African sleeping sickness, as
well as, in larger markets like malaria. We have advanced our pipeline in
both antifungal and TB drugs, and established new programs in cancer,
diabetes and neurological disorders. We plan to generate our first revenue
by selling drugs into these niche markets with appropriate regulatory
approval.
We intend to proceed with the development and
commercialization of aromatic cations/dications for drug products pursuant
to our agreement with the Scientific Consortium as follows:
o Generate revenues by sales of human drug products to governments and
foundations expedited through the FDA's Accelerated Approval program
and/or other governments' similar programs;
o Conclude Phase IIb trials of DB289 for treatment of malaria and
prepare for Phase III pivotal trial;
o Utilize the FDA's Fast-Track designation of DB289 for treatment of
African sleeping sickness to potentially expedite licensing and
commercialization through Accelerated Approval of our NDA or
otherwise;
o Generate shareholder value by developing our pipeline of prodrugs
targeting fungal infections, cancer, diabetes and TB;
o Develop through our subsidiary Immtech HK a diabetes program with a
financial partner;
-19-
o Create business relationships with pharmaceutical and biotechnology
companies interested in developing oral products to treat diseases
such as fungal, cancer and diabetes;
o Develop business relationships to advance our compounds as agents
with animal health indications; and
o Co-develop a pharmaceutical cancer program with a financial or
pharmaceutical partner.
Our strategy is to commercialize aromatic cations/dications
and our prodrug technology and generate revenues first in niche markets by
selling drugs for serious or life-threatening diseases where dications
provide meaningful therapeutic benefits over existing therapies. We intend
when feasible to apply for and utilize FDA Fast-track and Accelerated
Approval or corollary foreign accelerated approval programs. We will
continue to work with academic institutions and foundations to support our
drug development programs. We seek to simultaneously develop treatments
for infectious diseases, such as TB and fungal infections, and neoplastic
and metabolic disorders like cancer and diabetes with substantial markets
that afflict large populations of people. We believe our first product
candidates demonstrate the power and versatility of the dication and
prodrug platform technologies. We believe our experience with these
compounds in human clinical trials will help us expedite acceptance and
obtain regulatory approval of our product candidates in other markets. We
will continue to manage and oversee the programs and the results of
research performed by members of the Scientific Consortium and to use
business-sponsored research programs, government and foundation grants,
strategic joint ventures and other forms of collaborative programs to
advance product commercialization. We consider our current collaborative
relationships significant to the successful development of our business.
We believe that our collaborations and use of grant funds minimize
shareholder dilution while advancing drugs rapidly toward
commercialization. We plan to enter into additional arrangements in the
future to develop, manufacture and market not only the product candidates
on which we are currently focused, but also those dications which the
Scientific Consortium members are developing for other indications.
G. Research and Development
Our current and future success will depend in large part on
our ability to commercialize products based upon the platform technology
for developing dications currently licensed to Immtech through the
Consortium Agreement and future dications for which we have the exclusive
worldwide rights to license from the Scientific Consortium.
During the past three fiscal years, we estimate that we have
spent approximately $581,000, $1,111,000 and $893,000, respectively, in
fiscal years ended March 31, 2002, 2003 and 2004, on Company sponsored
research and development and approximately $3,377,000, $1,459,000 and
$2,400,000, respectively, in fiscal years ended March 31, 2002, 2003 and
2004, on research and development sponsored by others. All research and
development activity for
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fiscal years ended March 31, 2002, 2003 and 2004 has been in support of
our pharmaceutical commercialization effort.
H. Patents and Licenses
Our pharmaceutical compounds, including DB289 and DB075, are
protected by multiple patents secured by members of the Scientific
Consortium. We consider the protection of our proprietary technologies and
products to be important to the success of our business and rely on a
combination of patents, licenses, copyrights and trademarks to protect
these technologies and products. To date, we have obtained exclusive
licensing rights to 217 dication patents and patent applications, 138 of
which have been issued in the United States and in various global markets
as of July 2004. In addition to the 217 dication patents and patent
applications previously mentioned we own seven additional patents.
Generally, U.S. patents have a term of 17 years from the date of issue for
patents issued from applications submitted prior to June 8, 1995, and 20
years from the date of filing of the application in the case of patents
issued from applications submitted on or after June 8, 1995. Patents in
most other countries have a term of 20 years from the date of filing the
patent application. 143 of our licensed patents and patent applications,
which includes 42 licensed U.S. patents and patent applications, were
submitted after June 8, 1995, including patents covering DB289, DB075 and
our latest prodrug formulation processes.
Our policy is to file patent applications and defend the
patents licensed to us covering the technology we consider important to
our business in all countries where such protection is available and
feasible. We intend to continue to file and defend patent applications we
license or develop. Although we pursue and encourage patent protection and
defend our patents and those licensed to us, obtaining patents for
pharmaceutical drugs and their specific uses involves complex legal and
factual questions and consequently involves a high degree of uncertainty.
In addition, others may independently develop similar products, duplicate
our potential products or design around the claims of any of our potential
products. Because of the time delay in patent approval and the secrecy
afforded the U.S. patent applications, we do not know if other
applications, which might have priority over our applications, have been
filed. We also rely on trade secrets, unpatented know-how and continuing
technological innovation to develop and maintain our competitive position.
Publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries by at least several
months. As a result, there can be no assurance that patents will be issued
from any of our patent applications or from applications licensed to us.
The scope of any of our issued patents may not be sufficiently broad to
offer meaningful protection. In addition, our issued patents or patents
licensed to us could be successfully challenged, invalidated or
circumvented so that our patent rights would not create an effective
competitive barrier. We also rely in part on trade secret, copyright and
trademark protection of our intellectual property. We protect our trade
secrets by entering into confidentiality agreements with third parties,
employees and consultants. Employees and consultants sign agreements to
assign to us their interests in patents and copyrights arising from their
work for us. Key employees also agree not to engage in unfair competition
with us after their employment by using our confidential information. We
have additional secrecy measures as well. However, these agreements can be
breached and, if they were, there might not be an adequate remedy
-21-
available to us. Also, a third party could learn our trade secrets through
means other than by breach of our confidentiality agreements, or our trade
secrets could be independently developed by our competitors.
1. Patents
Patents and patent applications for the chemical substance and
use of pharmaceutical compounds to treat infections caused by PCP, TB,
Cryptosporidium parvum, Giardia lamblia, Leishmania mexicana amazonesis,
Trypanosoma brucei rhodesienes, various fungi, Plasmodium falciparum, HCV,
BVDV and HIV have been filed by the scientists of the Scientific
Consortium members. We have exclusively licensed, or have the right to
exclusively license, any of such patents for commercialization. We are
obligated to reimburse or pay for patent protection of any such drugs that
we license for commercialization. Patents and patent applications also
protect certain processes for making prodrugs and the uses of compounds to
detect and treat specific diseases as well as a patent for a new method
for making chemical compounds that form dimers when they are bound to DNA.
Dimers are two identical chemical molecules that attach to a DNA's key
site in series to cover a larger section (double) of a DNA's key site.
On February 26, 2003, Scientific Consortium members were
granted a patent by the U.S. Patent Office entitled "Prodrugs for
Antimicrobial Amidines" for a proprietary technology to synthesize and
manufacture prodrugs. The patent protects a substantially advanced process
for economically producing orally deliverable drugs. This newly patented
process, licensed to Immtech under the Consortium Agreement, reduces the
number of steps required to make dications orally available and thereby
reduces the cost to manufacture prodrug enhanced drugs. We are
investigating the potential to sub-license this new prodrug process to
other drug manufacturers for use with their compounds designed to be taken
orally and then activated in the blood stream.
a. Patent Licenses
---------------
Pursuant to the Consortium Agreement, licenses and
options to license patents for the dications developed by the
Scientific Consortium prior to January 15, 1997, which were
previously licensed or optioned to Pharm-Eco, were transferred to us
by Pharm-Eco as of March 2001. In accordance with the terms of the
Consortium Agreement, we have obtained license rights to the patents
covering the technology platform for making dicationic
pharmaceutical drugs and to treat certain microbial infections with
such products. To date, we have exclusively licensed 217 patents and
patent applications, which includes 69 U.S. patents and patent
applications. All of the patents on our dicationic product
candidates have been filed by UNC jointly with the other academic
institutions of the Scientific Consortium.
-22-
b. Patent Rights
-------------
Since January 1997, as required under the Consortium
Agreement, we have filed, together with Scientific Consortium
members, approximately 110 patent applications, of which
approximately 51 have been granted. The Consortium Agreement
grants us the right to license for commercialization product
candidates underlying the patents and patent applications for
dications produced by the Scientific Consortium.
I. Governmental Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements
upon the clinical development, manufacture, marketing and distribution of
drug products. These agencies and other federal, state and local entities
regulate research and development activities and the testing, manufacture,
quality control, safety, effectiveness, labeling, storage, record keeping,
approval, advertising and promotion of our product candidates.
We believe our first commercial drug products will be marketed
outside of the United States and likely in sub-Sahara African nations. Our
ability to market our drug products will depend on receiving marketing
authorizations from the appropriate regulatory authorities. The foreign
regulatory approval process generally includes all of the risks associated
with FDA approval; however, the requirements governing the conduct of
clinical trials and marketing authorization vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Community, or EC,
registration procedures are available to companies wishing to market a
product to more than one EC member state. If the regulatory authority is
satisfied that adequate evidence of safety, quality and efficacy has been
presented, a marketing authorization typically will be granted.
Once regulatory approval is obtained for an indication, we
intend to apply to the WHO to have the approved drug listed for such
indication on the WHO's Essential Medicines List. The WHO generally
accepts NDA approvals for the Essential Medicines List from drug
regulatory agencies in the United States, UK, European Union and Japan as
well as other countries with established regulatory agencies. In most
cases, inclusion on the list is the primary requirement to selling drugs
in the countries where we intend to sell DB289 to treat African sleeping
sickness and other tropical diseases. We believe we will then be able to
sell our products while continuing to perform post-approval studies as and
if required.
In the United States, the FDA regulates drug products under
the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing
regulations. The process required by the FDA before our product candidates
may be marketed in the United States generally involves the following:
o completion of extensive preclinical laboratory tests, preclinical
animal studies and formulation studies, all performed in accordance
with FDA's good laboratory practice, or GLP, regulations;
-23-
o submission to the FDA of an investigational new drug, or IND,
application which, must become effective before human clinical
trials may begin;
o performance of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug candidate for each
proposed indication;
o submission to the FDA of a new drug application, or NDA;
o satisfactory completion of an FDA preapproval inspection of the
manufacturing facilities at which the drug is produced to assess
compliance with current Good Manufacturing Practice, or cGMP,
regulations; and
o FDA review and approval of the NDA prior to any commercial
marketing, sale or shipment of the drug.
The testing and approval process requires substantial time,
effort and financial resources, and we cannot be certain that any
approvals for our drug candidates will be granted on a timely basis, or at
all.
Preclinical tests include laboratory evaluation of product
chemistry, formulation and stability, as well as studies to evaluate
toxicity in animals. The results of preclinical tests, together with
manufacturing information and analytical data, are submitted as part of an
IND application to the FDA. The IND automatically becomes effective 30
days after receipt by the FDA, unless the FDA, within the 30 day time
period, raises concerns or questions about the conduct of the clinical
trial, including concerns that human research subjects will be exposed to
unreasonable health risks. In such a case, the IND sponsor and the FDA
must resolve any outstanding concerns before the clinical trial can begin.
Our submission of an IND may not result in FDA authorization to commence a
clinical trial. A separate submission to an existing IND must also be made
for each successive clinical trial conducted during drug development, and
the FDA must grant permission before each clinical trial can begin.
Further, an independent institutional review board, or IRB, for each
medical center proposing to conduct the clinical trial must review and
approve the plan for any clinical trial before it commences at that
center, and the IRB must monitor the study until completed. The FDA, the
IRB, or the sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk. Clinical testing also must satisfy
extensive Good Clinical Practice, or GCP, regulations, including
regulations governing informed consent.
Clinical Trials. For purposes of NDA submission and approval,
human clinical trials are typically conducted in three sequential phases,
which may overlap:
o Phase I: Studies are initially conducted in a limited population to
test the drug candidate for safety, dose tolerance, absorption,
metabolism, distribution and excretion in healthy humans or, on
occasion, in patients, such as AIDS or cancer patients.
o Phase II: Studies are generally conducted in a limited patient
population to identify possible adverse effects and safety risks, to
determine the potential efficacy of the drug for specific targeted
indications and to determine dose tolerance and optimal dosage.
-24-
Multiple Phase II clinical trials may be conducted by the sponsor to
obtain information prior to beginning larger and more expensive
Phase III clinical trials. In some cases, a sponsor may decide to
run what is referred to as a "Phase IIb" evaluation, which is a
second, confirmatory Phase II trial that could, if positive and
accepted by the FDA, serve as a pivotal trial in the approval of a
drug candidate.
o Phase III: These are commonly referred to as pivotal studies
(however, as noted above in certain circumstances, Phase II trials
can serve as pivotal). When Phase II evaluations demonstrate that a
dose range of the drug has a therapeutic effect and an acceptable
safety profile, Phase III trials are undertaken in large patient
populations to further evaluate dosage, to provide substantial
evidence of clinical efficacy and to further test for safety in an
expanded and diverse patient population at multiple,
geographically-dispersed clinical trial sites.
o Phase IV: In some cases, FDA may condition approval of an NDA for a
drug candidate on the sponsor's agreement to conduct additional
clinical trials to further assess the drug's safety and
effectiveness after NDA approval. Such post approval trials are
typically referred to as Phase IV studies.
New Drug Application. The results of drug development,
preclinical studies and clinical trials are submitted to the FDA as part
of an NDA. The NDA also must contain extensive manufacturing information.
Once the submission has been accepted for filing, by law the FDA has 180
days to review the application and respond to the applicant. The review
process is often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the NDA to an advisory
committee for review, evaluation and recommendation as to whether the
application should be approved. The FDA is not bound by the
recommendations of an advisory committee, but it generally follows them.
The FDA may deny approval of an NDA if the applicable regulatory criteria
are not satisfied, or it may require additional clinical data and/or an
additional pivotal Phase III clinical trial. Even if such data are
submitted, the FDA may ultimately decide that the NDA does not satisfy the
criteria for approval. Data from clinical trials are not always conclusive
and FDA may interpret data differently than we or our collaborators
interpret the data. Once issued, the FDA may withdraw product approval if
ongoing regulatory requirements are not met or if safety problems occur
after the drug reaches the market. In addition, the FDA may require
testing, including Phase IV studies, and surveillance programs to monitor
the effect of approved products which have been commercialized, and the
FDA has the power to prevent or limit further marketing of a drug based on
the results of these postmarketing programs. Drugs may be marketed only
for the approved indications and in accordance with the provisions of the
approved label. Further, if there are any modifications to the drug,
including changes in indications, labeling, or manufacturing processes or
facilities, we may be required to submit and obtain FDA approval of a new
NDA or NDA supplement, which may require us to develop additional data or
conduct additional preclinical studies and clinical trials.
Fast-track Designation. FDA's fast-track program is intended
to facilitate the development and to expedite the review of drugs that are
intended for the treatment of a serious or life-threatening condition
which demonstrate the potential to address unmet medical needs for the
condition. Under the fast-track program, the sponsor of a new drug may
request the FDA to
-25-
designate the drug for a specific indication as a fast-track drug
concurrent with or after the IND is filed for the product candidate. The
FDA must determine if the drug qualifies for fast-track designation within
60 days of receipt of the sponsor's request.
If fast-track designation is obtained, the FDA may initiate
review of sections of an NDA before the application is complete. This
rolling review is available if the applicant provides, and the FDA
approves, a schedule for the submission of the remaining information and
the applicant pays applicable user fees. However, the time period
specified in the Prescription Drug User Fees Act, which governs the time
period goals the FDA has committed to reviewing an application, does not
begin until the complete application is submitted. Additionally, the
fast-track designation may be withdrawn by the FDA if the FDA believes
that the designation is no longer supported by data emerging in the
clinical trial process.
In some cases, a fast-track designated drug may also qualify
for one or more of the following programs:
o Priority Review. Under FDA policies, a drug is eligible for priority
review, or review within a sixth month time frame from the time a
complete NDA is accepted for filing, if the product provides a
significant improvement compared to marketed products in the
treatment, diagnosis, or prevention of a disease. A fast-track
designated drug would ordinarily meet the FDA's criteria for
priority review. We cannot guarantee any of our products will
receive a priority review designation, or if a priority designation
is received, that review or approval will be faster than
conventional FDA procedures, or that FDA will ultimately grant
product approval.
o Accelerated Approval. Under the FDA's accelerated approval
regulations, the FDA is authorized to approve drugs that have been
studied for their safety and effectiveness in treating serious or
life-threatening illnesses and that provide meaningful therapeutic
benefit to patients over existing treatments based upon either a
surrogate endpoint that is reasonably likely to predict clinical
benefit, or on the basis of an effect on a clinical endpoint other
than patient survival. In clinical trials, surrogate endpoints are
alternative measurements of the symptoms of a disease or condition
that are substituted for measurements of observable clinical
symptoms. A drug approved on this basis is generally subject to
rigorous postmarket compliance requirements, including the
completion of Phase IV or post-approval studies to validate the
surrogate endpoint or to confirm the effect on the clinical
endpoint. Failure to conduct required post-approval studies, or to
validate a surrogate endpoint or confirm a clinical benefit during
post-marketing studies, will allow the FDA to withdraw the drug from
the market on an expedited basis. All promotional materials for
drugs approved under accelerated regulations are subject to prior
review by the FDA.
When appropriate, we and our collaborators intend to seek
fast-track designation and/or accelerated approval for our drug
candidates, including DB289. On April 23, 2004, the FDA designated DB289
for the treatment of African sleeping sickness as a fast-track product. We
cannot predict whether any of our other drug candidates or proposed
indications will obtain a fast-track and/or accelerated approval
designation, or, if obtained, the ultimate impact, if any, of
-26-
the fast-track or the accelerated approval process on the timing or
likelihood of FDA approval of any of our proposed products.
Satisfaction of FDA regulations and requirements or similar
requirements of state, local and foreign regulatory agencies typically
takes several years and the actual time required may vary substantially
based upon the type, complexity and novelty of the drug or disease.
Government regulation may delay or prevent marketing of drug candidates
for a considerable period of time and impose costly procedures upon our
activities. The FDA or any other regulatory agency may not grant approvals
for new indications for our drug candidates on a timely basis, if at all.
Even if a drug candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient populations and
dosages. Further, even after regulatory approval is obtained, later
discovery of previously unknown problems with a drug may result in
restrictions on the drug or even complete withdrawal of the drug from the
market. Delays in obtaining, or failures to obtain, regulatory approvals
for any of our drug candidates would harm our business. In addition, we
cannot predict what adverse governmental regulations may arise from future
U.S. or foreign governmental action.
Other Regulatory Requirements. Any drugs manufactured or
distributed by us or our collaborators pursuant to FDA approvals are
subject to continuing regulation by the FDA, including recordkeeping
requirements and reporting of adverse experiences associated with the
drug. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies, and are
subject to periodic unannounced inspections by the FDA and certain state
agencies for compliance with ongoing regulatory requirements, including
cGMPs, which impose certain procedural and documentation requirements upon
us and our third-party manufacturers. Failure to comply with the statutory
and regulatory requirements can subject a manufacturer to legal or
regulatory action, such as Warning Letters, suspension of manufacturing,
seizure of drug, injunctive action or possible civil penalties. We cannot
be certain that we or our present or future third-party manufacturers or
suppliers will be able to comply with the cGMP regulations and other
ongoing FDA regulatory requirements. If our present or future third party
manufacturers or suppliers are not able to comply with these requirements,
the FDA may halt our clinical trials, require us to recall a drug from
distribution, or withdraw approval of the NDA for that drug.
The FDA closely regulates the post-approval marketing and
promotion of drugs, including standards and regulations for
direct-to-consumer advertising, off-label promotion, industry-sponsored
scientific and educational activities and promotional activities involving
the Internet. A company can make only those claims relating to safety and
efficacy that are approved by the FDA. Failure to comply with these
requirements can result in adverse publicity, Warning Letters, corrective
advertising and potential civil and criminal penalties. Physicians may
prescribe legally available drugs for uses that are not described in the
drug's labeling and that differ from those tested by us and approved by
the FDA. Such off-label uses are common across medical specialties.
Physicians may believe that such off-label uses are the best treatment for
many patients in varied circumstances. The FDA does not regulate the
behavior of physicians in their choice of treatments. The FDA does,
however, impose stringent restrictions on manufacturers' communications
regarding off-label use.
-27-
Exports From the United States. The FDA regulates the export
of unapproved drug products for use outside of the United States under the
FFDCA and its implementing regulations. The level of regulatory scrutiny
the FDA applies to exports of unapproved drugs depends on a number of
factors, including, among others, the country to which the investigational
drug product is exported, whether that country has approved the drug for
commercial sale within that jurisdiction, whether the exported drug is
intended for use in a clinical trial or is intended to be sold
commercially, and, if the drug is to be used in clinical testing, whether
the manufacturer has obtained an IND from the FDA to conduct the clinical
trial. Depending on the applicability of these factors, a manufacturer may
be required to request and obtain authorization from the FDA prior to
exporting an unapproved drug. We have requested and obtained several
authorizations from FDA to export quantities of DB289 candidate for use in
clinical trials abroad.
J. Competition
Competition in the pharmaceutical and biotechnology industries
is intense. Factors such as scientific and technological developments, the
procurement of patents, timely governmental approval for testing,
manufacturing and marketing, availability of funds, the ability to
commercialize product candidates in an expedient fashion and the ability
to obtain governmental approval for testing, manufacturing and marketing
play a significant role in determining our ability to effectively compete.
Furthermore, our industry is subject to rapidly evolving technology that
could result in the obsolescence of any product candidates prior to
profitability.
Our competitors may have substantially greater financial,
technical and human resources than we have and may be better equipped to
develop, manufacture and market products. Many of our competitors have
concentrated their efforts in the development of human therapeutics and
developed or acquired internal biotechnology capabilities. We have
utilized the Scientific Consortium as our research and development arm. In
addition, many of these companies have extensive experience in
pre-clinical testing and human clinical trials and in obtaining regulatory
approvals. Our competitors may succeed in obtaining approval for products
more rapidly than us and in developing and commercializing products that
are safer and more effective than those that we propose to develop.
Competitors, as well as academic institutions, governmental agencies and
private research organizations, also compete with us in acquiring rights
to products or technologies from universities, and recruiting and
retaining highly qualified scientific personnel and consultants. The
timing of market introduction of our potential products or of competitors'
products will be an important competitive factor. Accordingly, the
relative speed with which we can develop products, complete pre-clinical
testing, human clinical trials and regulatory approval processes and
supply commercial quantities to market will influence our ability to bring
a product to market.
Our competition will be determined in part by the potential
indications for which our products are developed and ultimately approved
by regulatory authorities. We rely on our collaborations with the
Scientific Consortium members and other joint venture partners to enhance
our competitive edge by providing manufacturing, testing and
commercialization support. Currently, DB289 is in clinical trials to treat
African sleeping sickness, PCP, and malaria. Other drugs moving forward in
our pipeline address markets for new drugs for use in
-28-
treating fungal, TB, and diabetic diseases. The following table lists
major competitors and their drugs by disease:
------------------------------------------------------------------------------------------------------------------------------
African
sleeping
Malaria PCP sickness Antifungals TB
------------------------------------------------------------------------------------------------------------------------------
o Quinine o Bactrim o Pentamidine o Fluconazole Rifampin
(Watson (Hoffman (Aventis) (Pfizer) (Aventis,
Pharma.) LaRoche) Ciba Geneva)
------------------------------------------------------------------------------------------------------------------------------
o Chloroquine o Pentamidine o Melarsoprol o Itraconazole o Isoniazid
(Sanofi-Synthelabo (Aventis) (Aventis) o Ketoconazole (Lannett Co.
Inc.) o Miconazole Inc.,
(Johnson & Bristol-Meyers
Johnson) Squibb, Hoffman
LaRoche)
------------------------------------------------------------------------------------------------------------------------------
o Mefloquine o Eflornithine o Terbinafine o Pyrazinamide
(Hoffman (Aventis) (Novartis) (Lederle
LaRoche) Laboratories, ICN Canada
Pharmaceuticals,
Pharmascience Inc.)
------------------------------------------------------------------------------------------------------------------------------
o Amodiaquine o Suramin o Caspofungin o Ethambutol
(Pfizer) (Bayer) (Merck) (Lederle
Laboratories, ICN Canada
Pharmaceuticals)
------------------------------------------------------------------------------------------------------------------------------
o Amphotericin
B lipid complex
(Fujisawa)
------------------------------------------------------------------------------------------------------------------------------
We are developing products to treat infectious diseases and
metabolic disorders. Our drug development program closest to commercialization,
a treatment for African sleeping sickness, has been funded in large part by a
grant to a scientific consortium lead by UNC from The Gates Foundation. The
Gates Foundation has chosen to support the African sleeping sickness program
because there currently exists no effective treatment for the disease. We
believe The Gates Foundation has financed this project because the likelihood
that a major pharmaceutical company would develop a treatment for the disease is
small because treatments for diseases that affect economically-challenged
populations, without charitable assistance, are less profitable than treatments
for diseases that affect more developed nations. Our efforts to develop aromatic
dicationic prodrugs for treatment of African sleeping sickness contributes
greatly to validating and advancing our technology platform and establishing
pharmacological safety and dosage criteria for future compounds aimed at more
mainstream markets.
We have listed in the table above, where applicable, current
treatments and the names of the manufacturers of those products used to treat
disease for which we are developing product candidates, however, each of the
products listed has limitations in terms of effectiveness to treat the disease,
toxicity, severity of side-effects, and/or difficulty of delivery (for example,
-29-
pentamidine must be administered either intravenously or by inhalation. We
therefore believe that competition for our product candidates for certain
indications has yet to be developed or approved.
EMPLOYEES
We currently have 13 employees, five of whom hold advanced degrees.
Six work in support of clinical trials, research and development and regulatory
compliance and the other seven work in general and administrative capacities
which includes business development, investor relations, finance, legal and
administration. Through our agreement with the Scientific Consortium,
approximately 55 scientists are engaged in the research and development of the
dications. We expect to add new employees in our regulatory and clinical
development departments as our programs advance.
RISK FACTORS
There is no assurance that we will successfully develop a commercially viable
product; our most advanced product candidate is in Phase II human clinical
trials.
We are at an early stage of human clinical trials, and in some cases
pre-clinical, development activities required for drug approval and
commercialization. Since our formation in October 1984, we have engaged in
research and development programs, expanding our network of scientists and
scientific advisors, licensing technology agreements and advancing the
commercialization of the dication technology platform. We have generated no
revenue from product sales, do not have any products currently available for
sale, and none are expected to be commercially available for sale until after
March 31, 2005, if at all. There can be no assurance that the research we fund
and manage will lead to commercially viable products. Our most advanced programs
are in the Phase II human clinical testing stage using our first compound DB289
for several indications including trypanosomiasis (African sleeping sickness),
PCP pneumonia, and malaria and must undergo substantial additional regulatory
review prior to commercialization.
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, clinical trial and commercialization efforts. As of March 31, 2004,
we had an accumulated deficit of approximately $58,539,000. Losses from
operations were approximately $4,693,000 and $12,866,000, for the fiscal years
ended March 31, 2003 and March 31, 2004, respectively.
We will need substantial additional funds in future years to continue our
research and development; if financing is not available, we may be required to
reduce spending for our research programs, cease operations or pursue other
financing alternatives.
Our operations to date have consumed substantial amounts of cash.
Negative cash flow from operations is expected to continue in the foreseeable
future. Without substantial additional financing, we may be required to reduce
some or all of our research programs or cease
-30-
operations. 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, delays in the enrollment and completion of our clinical trials,
competitive and technological advances, the FDA and foreign regulatory approval
processes and other factors. In any of these circumstances, we may require
substantially more funds than we currently have available or currently intend to
raise to continue our business. We may seek to satisfy future funding
requirements through public or private offerings of equity securities, by
collaborative or other arrangements with pharmaceutical or biotechnology
companies, issuance of debt or from other sources. Additional financing may not
be available when needed or may not be available on acceptable terms. If
adequate financing is not available, we may not be able to continue as a going
concern or may be required to delay, scale back or eliminate certain research
and development programs, relinquish rights to certain technologies or 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.
We receive funding primarily from technology licensing, grants,
research and development programs and from sales of our equity securities. To
date we have directed most of such funds not used for general and administrative
overhead toward our research and development and commercialization programs
(including preparation of submissions to regulatory agencies for product
licensing). Until one or more of our product candidates is approved for sale,
our funding is limited to funds received from testing and research agreements,
licensing of our technology and potential fees associated with interim leasing
of our properties while we develop them for product manufacture.
We do not have employment contracts with any employees other than our CEO, T.
Stephen Thompson.
We have an employment agreement with our CEO, T. Stephen Thompson
that renews annually in April of each year unless 30 day prior notice of
non-renewal is given by either party to the other. Mr. Thompson renewed his
employment with us this year and has not expressed any indication that he
desires to leave our employ or retire. All of our other employees are "at will"
and may leave at any time, however, none have as of this date, expressed any
intention to do so. We do not have "key-man" life insurance policies on any of
our executives, including Mr. Thompson.
Most of our business' financial aspects, including investor
relations, intellectual property control and corporate governance, are under the
direct supervision of Cecilia Chan and Gary Parks. Together with Mr. Thompson,
Ms. Chan and Mr. Parks hold institutional knowledge and business savvy that they
utilize to assist us to forge new relationships and exploit new business
opportunities without diminishing or undermining existing programs and
obligations. Neither Ms. Chan nor Mr. Parks have employment contracts with us,
however, neither has indicated any intention to retire or leave our employ.
-31-
Some of our proprietary intellectual property is developed by scientists that
are not employed by us.
Our business depends to a significant degree on the continuing
contributions of our key management, scientific and technical personnel, as well
as on the continued discoveries of scientists, researchers and specialists at
The University of North Carolina at Chapel Hill, Georgia State, Duke University
and Auburn University (collectively, the "Scientific Consortium") and other
research groups that assist in the development of our product candidates.
Substantial amounts of our proprietary intellectual property is developed by
scientists who are employed by the universities that comprise the Scientific
Consortium and other research groups. We do not have control over, knowledge of,
or access to those employment arrangements. We have not been advised by any of
the key members of our company, the scientific research groups or of the
Scientific Consortium of their intention to leave their employ or the program.
There can be no assurance that the loss of certain members of
management or the scientists, researchers and technicians from the Scientific
Consortium universities would not materially adversely affect our business.
Additional research grants needed to fund our operations may not be available
or, if available, not on terms acceptable to us.
We have funded our product development and operations as of March
31, 2004 through a combination of sales of equity instruments and revenue
generated from research agreements and grants. As of March 31, 2004, our
accumulated deficit was approximately $58,539,000 of which approximately
$11,259,000 was funded either directly or indirectly with grant funds and
payments from research and testing agreements.
In March 2001 we entered into a clinical research subcontract with
UNC, funded by a $15.1 million grant from The Gates Foundation to UNC for the
study of African sleeping sickness and leishmaniasis, under which UNC is to pay
to us $9.8 million in installments over a period not to exceed five years
subject to our achieving certain milestones. We entered into a second
subcontract with UNC under which we are to receive over $2.4 million based on a
separate $2.7 million grant from the Gates Foundation to UNC to accelerate the
African sleeping sickness study.
In November 2003, we entered into a Testing Agreement with Medicines
For Malaria Venture, a foundation established in Switzerland ("MMV") and UNC,
pursuant to which we, with the support of MMV and UNC, are conducting a proof of
concept study of DB289, including Phase II and Phase III human clinical trials,
and will pursue drug development activities of DB289 alone, or in combination
with other anti-malarial drugs, with the goal of obtaining marketing approval of
a product for the treatment of malaria. Under the terms of the agreement, MMV
has advanced to us $668,000 for human clinical trials and has committed to fund
additional budgeted amounts, subject to attainment of certain milestones, for
additional clinical trials and regulatory preparation and filing costs for the
approval to market DB289 for treatment of malaria by at least one
internationally accepted regulatory body and one malaria endemic country. We
forecast such costs to be approximately $8.2 million over the next three years.
-32-
We will continue to apply for new grants to support continuing
research and development of our dication platform technology and other product
candidates. The process of obtaining grants is extremely competitive and there
can be no assurance that any of our grant applications will be acted upon
favorably. Some charitable organizations may request licenses to our proprietary
information or may impose price restrictions on the products we develop with
grant funds. We may not be able to negotiate terms that are acceptable to us
with such organizations. In the event we are unable to raise sufficient funds to
advance our product developments with grant funds we may seek to raise
additional capital with the issuance of debt or equity securities. There can be
no assurance that we will be able to place or sell debt or equity securities on
terms acceptable to us and, if we sell equity, existing stockholders will suffer
dilution (see Risk Factors, this section, entitled "Shares eligible for future
sale may adversely affect our ability to sell equity securities," and "Our
outstanding options and warrants may adversely affect our ability to consummate
future equity financings due to the dilution potential to future investors").
None of our product candidates have been approved for sale by any regulatory
agency; approval is required before we can sell drug products commercially.
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
approved by regulatory authorities, 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. If we are unable to commercialize our product candidates in a timely
manner we may be required to seek additional funding, reduce or cancel some or
all of our development programs, sell or license some of our proprietary
information or cease operations.
There are substantial uncertainties related to clinical trials that may result
in the extension, modification or termination of one or more of our programs.
In order to obtain required regulatory approvals for the commercial
sale of our product candidates, we must demonstrate through human clinical
trials that our product candidates are safe and effective for their intended
uses. Prior to conducting human clinical trials we must obtain governmental
approvals from the host nation, approval from the U.S. to export our product
candidate to the test site and qualify a sufficient number of volunteer patients
that meet our trial criteria. If we do not obtain required governmental consents
or if we do not enroll a sufficient number of patients in a timely manner or at
all, our trial expenses could increase, results may be delayed or the trial may
be cancelled.
We may find, at any stage of our research and development, that
product candidates that appeared promising in earlier clinical trials do not
demonstrate safety or effectiveness in later clinical trials and therefore do
not receive regulatory approvals. Despite the positive results of our
pre-clinical testing and human clinical trials those results may not be
predictive of the results of later clinical trials and large-scale testing.
Companies in the
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pharmaceutical and biotechnology industries have suffered significant setbacks
in various stages of clinical trials, even after promising results had been
obtained in early-stage human clinical trials.
Completion of human clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, participant retention and
follow up, difficulty in securing sufficient supplies of clinical trial
materials or other adverse events occurring during clinical trials. For
instance, once we obtain permission to run a human trial, there are strict
criteria regulating who we can test. In the case of African sleeping sickness,
we are subject to civil unrest in sub-Sahara Africa where local rebels could
close clinics and dramatically reduce enrollment rates, and make it difficult to
conduct trials. Political instability and the minimal infrastructure in the
African countries where we conduct our trials may cause delays in enrollment and
difficulty in the completion of trials. In another case, our PCP-trial could
encounter difficulties in finding potential patients because our initial regimen
requires patients to first fail other treatment programs in order to be eligible
for our treatment.
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 ("IND") application
filed with the FDA (or any foreign equivalent filed with the appropriate foreign
authorities) will become effective, that additional clinical trials will be
allowed by the FDA or other regulatory authorities, or that clinical trials will
commence as planned. There have been delays in our testing and development
schedules due to the aforementioned conditions and funding and patient
enrollment difficulties and there can be no assurance that our future testing
and development schedules will be met.
We do not currently have pharmaceutical manufacturing capability, which could
impair our ability to develop commercially viable products at reasonable costs.
Our ability to commercialize product candidates will depend in part
upon our ability to have manufactured or develop manufacturing capability to
manufacture our 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 have acquired a facility in which we intend to commence
construction of a pharmaceutical manufacturing plant in the PRC with our
subsidiary Immtech Hong Kong Limited. Operation of such a facility is subject to
various governmental approvals, which may be difficult or impossible to obtain.
There can be no guarantee that products manufactured at this facility will be
accepted in all countries where we desire to sell our future products.
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We are dependent on third-party relationships for critical aspects of our
business; problems that develop in these relationships may increase costs and/or
diminish our ability to develop our product candidates.
We use the expertise and resources of strategic partners and third
parties in a number of key areas, including (i) research and development, (ii)
pre-clinical and human clinical trials and (iii) manufacture of pharmaceutical
drugs. We have licensing and exclusive commercialization rights to a dicationic
pharmaceutical platform and are developing drugs intended for commercial use
based on that platform. This strategy creates risks by placing critical aspects
of our business in the hands of third parties, whom we may not be able to
control. If these third parties do not perform in a timely and satisfactory
manner, we may incur costs and delays as we seek alternate sources of such
products and services, if available. Such costs and delays may have a material
adverse effect on our business if the delays jeopardize our licensing
arrangements by causing us to become non-compliant with certain license
agreements.
We may seek additional third-party relationships in certain areas,
particularly in clinical testing, marketing, manufacturing and other areas where
pharmaceutical and biotechnology company collaborators will enable us to develop
particular products or geographic markets that are otherwise beyond our current
resources and/or capabilities. There is no assurance that we will be able to
obtain any such collaboration or any other research and development,
manufacturing or clinical trial arrangements. Our inability to obtain and
maintain satisfactory relationships with third parties may have a material
adverse effect on our business by slowing our ability to develop new products,
requiring us to expand our internal capabilities, increasing our overhead and
expenses, hampering future growth opportunities or causing us to delay or
terminate affected programs.
We are uncertain about the ability to protect or obtain necessary patents and
protect our proprietary information; our ability to develop and commercialize
our product candidates would be compromised without adequate intellectual
property protection.
We have spent and continue to spend considerable funds to develop
our product candidates and we are relying on the potential to exploit
commercially without competition the results of our product development. Much of
our intellectual property is licensed to us under various agreements including
the Consortium Agreement. It is the primary responsibility of the discoverer to
develop his, her or its invention confidentially, insure that the invention is
unique, and to obtain patent protection. In most cases, our role is to reimburse
patent related costs after we decide to develop any such invention. We therefore
rely on the inventors to insure that technology licensed to us is adequately
protected. Without adequate protection for our intellectual property we believe
our ability to realize profits on our future commercialized product would be
diminished. Without protection, competitors might be able to copy our work and
compete with our products without having invested in the development.
There can be no assurance that any particular patent will be granted
or that issued patents 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
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be required to develop or commercialize one or more of our product candidates
may have a material adverse effect on our business including the need for
additional capital to develop alternate technology, the potential that
competitors may gain unfair advantage and lessen our expectation of potential
future revenues.
The pharmaceutical and biotechnology fields are characterized by a
large number of patent filings, and a substantial number of patents have already
been issued to other pharmaceutical and biotechnology companies. Third parties
may have filed applications for, or may have been issued, certain patents and
may obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those that we are attempting to develop
and commercialize. We may not be aware of all of the patents potentially adverse
to our interests that may have been issued to others. No assurance can be given
that patents do not exist, have not been filed or could not be filed or issued,
which contain claims relating to or competitive with our technology, product
candidates, product uses or processes. If patents have been or are issued to
others containing preclusive or conflicting claims, then we may be required to
obtain licenses to one or more of such patents or to develop or obtain
alternative technology. There can be no assurance that the licenses or
alternative technology that might be required for such alternative processes or
products would be available on commercially acceptable terms, or at all.
Because of the substantial length of time and expense associated
with bringing new drug products to market through the development and regulatory
approval process, the pharmaceutical and biotechnology industries place
considerable importance on patent and trade secret protection for new
technologies, products and processes. Since patent applications 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.
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We rely on technology developed by others and shared with collaborators to
develop our product candidates which puts our proprietary information at risk of
unauthorized disclosure.
We rely on trade secrets, know-how and technological advancement to
maintain our competitive position. Although we use confidentiality agreements
and employee proprietary information and invention assignment agreements to
protect our trade secrets and other unpatented know-how, these agreements may be
breached by the other party thereto or may otherwise be of limited effectiveness
or enforceability.
We are licensed to commercialize technology from a dication platform
developed by a Scientific Consortium, comprised primarily of scientists employed
by universities in an academic setting. The academic world is improved by the
sharing of information. As a business, however, the sharing of information
whether through publication of research, academic lectures or general
intellectual discourse among contemporaries is not conducive to protection of
proprietary information. Our proprietary information may fall into the
possession of unintended parties without our knowledge through customary
academic information sharing.
At times we may enter into confidentiality agreements with other
companies, allowing them to test our technology for potential future licensing,
in return for milestone and royalty payments should any discoveries result from
the use of our proprietary information. We cannot be assured that such parties
will honor these confidentiality agreements subjecting our intellectual property
to unintended disclosure.
The pharmaceutical and biotechnology industries have experienced
extensive litigation regarding patent and other intellectual property rights. We
could incur substantial costs in defending suits that may be brought against us
(or our licensors) claiming infringement of the rights of others or in asserting
our (or our licensors') patent rights in a suit against another party. We may
also be required to participate in interference proceedings declared by the U.S.
Patent and Trademark Office or similar foreign agency for the purpose of
determining the priority of inventions in connection with our (or our
licensors') patent applications.
Adverse determinations in litigation or interference proceedings
could require us to seek licenses (which may not be available on commercially
reasonable terms) or subject us to significant liabilities to third parties, and
could therefore have a material adverse effect on our business by increasing our
expenses and having an 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, would be required.
Confidentiality agreements may not adequately protect our intellectual property
which could result in unauthorized disclosure or use of our proprietary
information.
We require our employees, consultants and third-parties with whom we
share proprietary information to execute confidentiality agreements upon the
commencement of their relationship with us. The agreements generally provide
that trade secrets and all inventions conceived by the individual and all
confidential information developed or made known to the individual during the
term of the relationship will be our exclusive property and will be kept
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confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for our proprietary information in the event of
unauthorized use or disclosure of such information. If our unpatented
proprietary information is publicly disclosed before we have been granted patent
protection, our competitors could be unjustly enriched and we could lose the
ability to profitably develop products from such information.
Our industry has significant competition; our product candidates may become
obsolete prior to commercialization due to alternative technologies thereby
rendering our development efforts obsolete or non-competitive.
The pharmaceutical and biotechnology fields are characterized by
extensive research efforts and rapid technological progress. Competition from
other pharmaceutical and biotechnology companies and research and academic
institutions is intense and other companies are engaged in research and product
development for treatment of the same diseases that we target. New developments
in pharmaceutical and biotechnology fields are expected to continue at a rapid
pace in both industry and academia. There can be no assurance that research and
discoveries by others will not render some or all of our programs or products
non-competitive or obsolete.
We are aware of other companies and institutions dedicated to the
development of therapeutics similar to those we are developing, including
Aventis Pharmaceuticals, Inc., Hoffman-LaRoche Ltd., Sanofi-Synthelabo Inc.,
Pfizer Inc., and Bayer Corporation. Many of our existing or potential
competitors have substantially greater financial and technical resources than we
do and therefore may be in a better position to develop, manufacture and market
pharmaceutical products. Many of these competitors are also more experienced
performing pre-clinical testing and human clinical trials and obtaining
regulatory approvals. The current or future existence of competitive products
may also adversely affect the marketability of our product candidates.
In the event some or all of our programs are rendered
non-competitive or obsolete, we do not currently have alternative strategies to
develop new product lines or financial resources to pursue such a course of
action.
There is no assurance that we will receive FDA or corollary foreign approval for
any of our product candidates for any indication; we are subject to government
regulation for the commercialization of our product candidates.
We have not made application to the FDA or any other regulatory
agency to sell commercially or label any of our product candidates. We or our
test collaborators have received licenses from the FDA to export DB289 for
testing purposes and have been approved to conduct human clinical trials for
various indications in each of the Democratic Republic of Congo, Angola,
Thailand and Peru.
All new pharmaceutical drugs, including our product candidates, are
subject to extensive and rigorous regulation by the federal government,
principally the FDA under the Federal Food, Drug and Cosmetic Act ("FDCA") and
other laws and by state, local and foreign
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governments. Such regulations govern, among other things, the development,
testing, manufacture, labeling, storage, pre-market clearance or approval,
advertising, promotion, sale and distribution of pharmaceutical drugs. If drug
products are marketed abroad, they are subject to extensive regulation by
foreign governments. Failure to comply with applicable regulatory requirements
may subject us to administrative or judicially imposed sanctions such as civil
penalties, criminal prosecution, injunctions, product seizure or detention,
product recalls, total or partial suspension of production and FDA refusal to
approve pending applications.
Each of our product candidates must be approved for each indication
for which we believe it to be viable. We have not yet determined from which
regulatory bodies we will seek approval for our product candidates or
indications for which approval will be sought. Once determined, the approval
process is subject to those agencies' policies and acceptance of those agencies'
approvals, if obtained, in the countries where we intend to market our product
candidates.
We have not received regulatory approval in the United States or any foreign
jurisdiction for the commercial sale of any of our product candidates.
On April 23, 2004 the FDA granted fast-track designation for DB289,
our first oral drug, for treatment of African sleeping sickness
(trypanosomiasis). Fast-track designation means, among other things, that the
FDA may accept initial late-stage data from us rather than waiting for the
entire Phase III clinical trial data to be submitted together for consideration
of approval to market the drug, however, there is no guarantee that fast-track
designation will result in faster product development or licensing approval or
that our product candidates will be approved at all.
The process of obtaining FDA or 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 approved for commercial sale in the United States by the FDA or
regulatory agencies in foreign countries. The regulatory review process can take
many years and we will need to raise additional funds to complete the regulatory
review process for our current product candidates. The failure to receive FDA or
other governmental approval would have a material adverse effect on our business
by precluding us from marketing and selling such products and negatively
impacting our ability to generate future revenues. Even if regulatory approval
of a product is granted, there can be no assurance that we will be able to
obtain the labeling claims (a labeling claim is a product's description and its
FDA permitted uses) necessary or desirable for the promotion of such product.
FDA regulations prohibit the marketing or promotion of a drug for unapproved
indications. Furthermore, regulatory marketing approval may entail ongoing
requirements for post-marketing studies if regulatory approval is obtained; we
will also be subject to ongoing FDA obligations and continued regulatory review.
In particular, we, or our third party manufacturers, will be required to adhere
to Good Manufacturing Practices ("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. Further, we
(or our third party manufacturers) must pass a manufacturing facilities
pre-approval inspection by the FDA or corollary agency before
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obtaining marketing approval. Failure to comply with applicable regulatory
requirements may result in penalties, such as restrictions on a product's
marketing or withdrawal of the product from the market. In addition,
identification of certain side-effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional pre-clinical testing or clinical
trials and changes in labeling of the product.
Prior to the submission of an application for FDA approval, our
pharmaceutical drugs 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 in the United States, we
must submit to the FDA and receive clearance of an IND. There can be no
assurance that submission of an IND for future clinical testing of any of our
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.
Our most advanced programs are developing products intended for sale in
countries that may not have established pharmaceutical regulatory agencies.
Some of the intended markets for our treatment of African sleeping
sickness and malaria are in countries without developed pharmaceutical
regulatory agencies. We plan in such cases to try first to obtain regulatory
approval from a recognized pharmaceutical regulatory agency such as the FDA
or one or more European agencies and then to apply to the targeted country for
recognition of the foreign approval. Because the countries where we intend to
market treatments for African sleeping sickness and malaria are not obligated to
accept foreign regulatory approvals and because those countries do not have
standards of their own for us to rely upon, we may be required to provide
additional documentation or complete additional testing prior to distributing
our products in those countries.
There is uncertainty regarding the availability of health care reimbursement 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, charities and others. Many
of our product candidates, including treatments for trypanosomiasis, malaria and
tuberculosis, would be in the greatest demand in developing nations, many of
which do not maintain comprehensive health care systems with the financial
resources to pay for such drugs. We do not know to what extent governments,
private charities, international organizations and others would contribute
toward bringing newly developed drugs to developing nations. Even among drugs
sold in developed countries, significant uncertainty exists as to the
reimbursement status of newly approved health care products. There can be no
assurance of the availability of
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third-party insurance reimbursement coverage enabling us to establish and
maintain price levels sufficient for realization of a profit on our investment
in developing pharmaceutical drugs and biologics. Government and other
third-party payers are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new drug or biologic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage for uses of approved products for disease indications for
which the FDA has not granted marketing approval. If adequate coverage and
reimbursement levels are not provided by government and third-party payers for
uses of our anticipated products, the market acceptance of these products would
be adversely affected.
Health care reform proposals are continually introduced in the
United States Congress and in various state legislatures and there is no
guarantee that such proposals will not be introduced in the future. We cannot
predict when any proposed reforms will be implemented, if ever, or the effect of
any implemented reforms on our business. Implemented reforms may have a material
adverse effect on our business by reducing or eliminating the availability of
third-party reimbursement for our anticipated products or by limiting price
levels at which we are able to sell such products. If reimbursement is not
available for our products, health care providers may prescribe alternative
remedies if available. Patients, if they cannot afford our products, may do
without. In addition, if we are able to commercialize products in overseas
markets, then our ability to achieve success in such markets may depend, in
part, on the health care financing and reimbursement policies of such countries.
We cannot predict changes in health care systems in foreign countries, and
therefore, do not know the effects on our business of possible changes.
Shares eligible for future sale may adversely affect our ability to sell equity
securities.
Sales of our common stock (including the issuance of shares upon
conversion of preferred stock) in the public market could materially and
adversely affect the market price of shares because prior sales have been
executed at or below our current market price. We have outstanding four series
of preferred stock that convert to common stock at prices equivalent to $4.42,
$4.00, $4.42 and $9.00, respectively, for our series A, series B, series C and
series D convertible preferred stock. Our obligation to convert the preferred
stock upon demand by the holders may depress the price of our common stock and
also make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that we deem appropriate.
As of June 4, 2004, we had 9,905,324 shares of common stock
outstanding, plus (1) 80,400 shares of series A convertible preferred stock,
convertible into approximately 454,750 shares of common stock at the conversion
rate of 1:5.656, (2) 19,925 shares of series B Convertible Preferred stock
convertible into approximately 124,531 shares of common stock at the conversion
rate of 1:6.25, (3) 67,252 shares of series C convertible preferred stock
convertible into approximately 380,384 shares of common stock at the conversion
rate of 1:5.656, (4) 200,000 shares of series D convertible preferred stock
convertible into approximately 555,540 shares of common stock at the conversion
rate of 1:2.778, (5) 964,057 options to purchase shares of common stock with a
weighted-average exercise price of $8.91 per share and (6) 2,885,312 warrants to
purchase shares of common stock with a weighted-average exercise price of $7.42
Of the shares outstanding, 7,297,511 shares of common stock are freely
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tradable without restriction. All of the remaining 2,607,813 shares are
restricted from resale, except pursuant to certain exceptions under the
Securities Act of 1933, as amended (the "Securities Act").
Our outstanding options and warrants may adversely affect our ability to
consummate future equity financings due to the dilution potential to future
investors.
We have outstanding options and warrants for the purchase of shares
of our common stock with exercise prices currently below market which may
adversely affect our ability to consummate future equity financings. The holders
of such warrants and options may exercise them at a time when we would otherwise
be able to obtain additional equity capital on more favorable terms. To the
extent any such options and warrants are exercised, the value of our outstanding
shares of our common stock will be diluted.
As of June 4, 2004, we have outstanding vested options to purchase
654,508 shares of common stock at a weighted-average exercise price of $7.24 and
vested warrants to purchase 2,875,312 shares of common stock with a
weighted-average price of $7.44.
Due to the number of shares of common stock we are obligated to sell
pursuant to outstanding options and warrants described above, potential
investors may not purchase our future equity offerings at market price because
of the potential dilution such investors may suffer as a result of the exercise
of the outstanding options and warrants.
The market price of our common stock has experienced significant volatility.
The securities markets from time to time experience significant
price and volume fluctuations unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have been and can be
expected to be especially volatile. Our common stock price in the 52-week period
ended June 10, 2004 had a low of $5.35 and high of $32.51. Announcements of
technological innovations or new products by us or our competitors, developments
or disputes concerning patents or proprietary rights, publicity regarding actual
or potential clinical trial results relating to products under development by us
or our competitors, regulatory developments in both the United States and
foreign countries, delays in our testing and development schedules, public
concern as to the safety of pharmaceutical drugs 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 routinely pay vendors in stock as consideration for their services; this may
result in shareholder dilution, additional costs and difficulty retaining
certain vendors.
In order for us to preserve our cash resources, we often pay vendors
in shares, warrants or options to purchase shares of our common stock rather
than cash. Payments for services in stock may materially and adversely affect
our shareholders by diluting the value of outstanding shares of our common
stock. In addition, in situations where we have agreed to register the shares
issued to a vendor, this will generally cause us to incur additional expenses
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associated with such registration. Paying vendors in shares, warrants or options
to purchase shares of common stock may also limit our ability to contract with
the vendor of our choice should that vendor decline payment in stock.
We do not intend to pay dividends on our common stock. Until such time as we pay
cash dividends our stockholders must rely on increases in our stock price for
appreciation.
We have never declared or paid dividends on our common stock. We
intend to retain future earnings to develop and commercialize our products and
therefor we do not intend to pay cash dividends in the foreseeable future. Until
such time as we determine to pay cash dividends on our common stock, our
stockholders must rely on increases in our common stock's market price for
appreciation.
If we do not effectively manage our growth, our resources, systems and controls
may be strained and our operating results may suffer.
We have recently added to our workforce and we plan to continue to
increase the size of our workforce and scope of our operations as we continue
our drug development programs and clinical trials, develop our manufacturing
facility in the PRC, and move towards commercialization of our products. This
growth of our operations will place a significant strain on our management
personnel, systems and resources. We may need to implement new and upgraded
operational and financial systems, procedures and controls, including the
improvement of our accounting and other internal management systems. These
endeavors will require substantial management effort and skill, and we may
require additional personnel and internal processes to manage these efforts. If
we are unable to effectively manage our expanding operations, our revenue and
operating results could be materially and adversely affected.
Our continuing obligations as a public company under the changing laws,
regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related regulations,
will increase our expenses and administrative burden.
As a public company, we incur significant legal, accounting and
other expenses. Changing laws, regulations and standards relating to corporate
governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and
related regulations implemented by the Securities and Exchange Commission and
the National Association of Securities Dealers, are creating uncertainty for
public companies, increasing legal and financial compliance costs and making
some activities more time consuming. These laws, regulations and standards are
subject to varying interpretations, in many cases due to their lack of
specificity, and, as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing bodies. This could
result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We
intend to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and
administrative expenses and a diversion of management's time and attention from
revenue-generating activities to compliance activities. If our efforts to comply
with new laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice,
regulatory authorities may initiate legal proceedings against us and our
business may be harmed.
There are limitations on the liability of our directors, and we may have to
indemnify our officers and directors in certain instances.
Our certificate of incorporation limits, to the maximum extent
permitted under Delaware law, the personal liability of our directors for
monetary damages for breach of their fiduciary duties as directors. Our bylaws
provide that we will indemnify our officers and directors and may indemnify our
employees and other agents to the fullest extent permitted by law. We have
entered into indemnification agreements with our officers and directors
containing provisions that are in some respects broader than the specific
indemnification provisions under Delaware law. The indemnification agreements
may require us, among other things, to indemnify such officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified and to obtain
directors' and officers' insurance. Section 145 of the Delaware General
Corporation Law provides that a corporation may indemnify a director, officer,
employee or agent made or threatened to be made a party to an action by reason
of the fact that he or she was a director, officer, employee or agent of the
corporation or was serving at the request of the corporation, against expenses
actually and reasonably incurred in connection with such action if he or she
acted in good faith and in a manner he or she reasonably believed to be in, or
not opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. Delaware law does not permit a corporation to eliminate a
director's duty of care and the provisions of our certificate of incorporation
have no effect on the availability of equitable remedies, such as injunction or
rescission, for a director's breach of the duty of care.
We believe that our limitation of director liability assists us to
attract and retain qualified directors. However, in the event a director or the
board commits an act that may legally be indemnified under Delaware law, we will
be responsible to pay for such director(s) legal defense and potentially any
damages resulting therefrom. Furthermore, the limitation on director liability
may reduce the likelihood of derivative litigation against directors, and may
discourage or deter stockholders from instituting litigation against directors
for breach of their fiduciary duties, even though such an action, if successful,
might benefit us and our stockholders. Given the difficult environment and
potential for incurring liabilities currently facing directors of publicly-held
corporations, we believe that director indemnification is in our and our
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stockholders best interests because it enhances our ability to retain highly
qualified directors and reduce a possible deterrent to entrepreneurial
decision-making.
Nevertheless, limitations of director liability may be viewed as
limiting the rights of stockholders, and the broad scope of the indemnification
provisions contained in our certificate of incorporation and bylaws could result
in increased expenses. Our board of directors believes, however, that these
provisions will provide a better balancing of the legal obligations of, and
protections for, directors and will contribute positively to the quality and
stability of our corporate governance. Our board of directors has concluded that
the benefit to stockholders of improved corporate governance outweighs any
possible adverse effects on stockholders of reducing the exposure of directors
to liability and broadened indemnification rights.
Product liability exposure may expose us to significant liability.
We do not have pharmaceutical products for sale and we therefor do
not carry product liability insurance. However, if we do commercialize drug
products we will face risk of exposure to product liability and other claims and
lawsuits in the event that the development or use of our technology or
prospective products is alleged to have resulted in adverse effects. We may not
be able to avoid significant liability exposure. We may not have sufficient
insurance coverage and we may not be able to obtain sufficient coverage at a
reasonable cost. An inability to obtain product liability insurance at
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of our products. A product
liability claim could hurt our financial performance. Even if we avoid liability
exposure, significant costs could be incurred, potentially damaging our
financial performance. We do carry commercial general liability insurance and
clinical trials insurance which covers our human clinical trial activities.
ITEM 2. PROPERTIES
Our administrative offices and research laboratories are located at
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061. We occupy
approximately 9,750 square feet of space under a lease that expires on March 14,
2005. We are in the process of negotiating an extension on the current lease.
Our rent for the Vernon Hills facility is $12,800 per month through March 2005.
We are also charged by the landlord a portion of the real estate taxes and
common area operating expenses. Our New York offices are located at One North
End Avenue, New York, New York 10282. We pay rent of approximately $10,100 per
month, on a month-to-month basis, for approximately 2,500 square feet of space
for our New York office. (See Item 13. "Certain Relationships and Related
Transactions.") We believe our current facilities are adequate for our needs for
the foreseeable future and, in the opinion of our management, the facilities are
adequately insured.
Our indirectly wholly-owned subsidiary, Immtech Life Science, owns
two floors of a newly-constructed building located in the Futian Free Trade
Zone, Shenzhen, in the PRC in which we intend to construct a pharmaceutical
production facility for manufacture of our products. The property comprises the
first two floors of an industrial building named the
-44-
Immtech Life Science Building. The duration of the land use right associated
with the building on which the property is located is 50 years which expires May
24, 2051.
ITEM 3. LEGAL PROCEEDINGS
We are parties to the following legal proceedings:
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"). The Company filed two motions
to dismiss, both of which were successful. Thereafter, the plaintiff amended his
complaint for a third time. After engaging in preliminary discovery, plaintiff
agreed to voluntarily dismiss his action. On February 10, 2004, the Court
entered an Order granting plaintiff's motion to voluntarily dismiss the action
without prejudice.
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
--------------------------------------------------------------
On August 12, 2003, the Company filed a lawsuit in Federal District
Court in New York against Neurochem, Inc. On January 23, 2004, the Company
amended the complaint and added two additional plaintiffs, UNC and Georgia
State, and an additional defendant, Neurochem (International) Limited. The
Company's amended complaint alleges that Neurochem misappropriated the Company's
intellectual property by filing a series of patent applications relating to
compounds synthesized and developed by the Consortium, with whom Immtech has an
exclusive license agreement. The misappropriated intellectual property was
provided to Neurochem pursuant to a testing agreement under which Neurochem
agreed to test the compounds to determine if they could be successfully used to
treat Alzheimer's disease. Pursuant to the terms of the agreement, Neurochem
agreed to keep all information confidential, not to disclose or exploit the
information without Immtech's prior written consent, to advise Immtech before
filing any patent applications and to provide the Company with all testing and
evaluation data. The amended complaint alleges that Neurochem fraudulently
induced the Company into signing the testing agreement, misappropriated valuable
intellectual property, filed a series of fraudulent patent applications,
breached numerous provisions of the testing agreement, fraudulently transferred
all its rights in the patent applications to an offshore affiliate - Neurochem
(International) Limited, blocking the development of the Consortium's compounds
for the treatment of Alzheimer's disease. By engaging in these acts, plaintiffs
allege that defendants have prevented the public from obtaining the potential
benefit of new drugs for the treatment of Alzheimer's disease, which would be in
competition to Neurochem's Alzhemed drug. The plaintiffs seek injunctive relief
and monetary and punitive damages.
The defendants recently filed a motion with the court to compel
arbitration, or in the alternative, to dismiss the amended complaint. After
receiving legal memorandum from the parties and having heard oral argument, on
April 8, 2004, the court ruled that an arbitrator, not the court, should decide
the issue of whether the Company's claims against the defendants should be heard
by the court or an arbitrator.
-45-
The Company intends to file a motion with the arbitration panel arguing
that language in the testing agreement specifically allows the Company the
option to litigate its claims against Neurochem in court rather than through
arbitration.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
------------------------------------------------------------------
On October 20, 2003, plaintiffs filed a complaint in the United
States District Court for the Northern District of Illinois against the Company
and certain officers and directors. On April 19, 2004, the Company and its
officers and directors filed a motion with the court to dismiss the complaint.
On May 17, 2004, plaintiffs filed opposition papers. Defendants have filed a
reply brief and the motion is currently before the court. The Company believes
that plaintiffs' claims are meritless and intends to vigorously defend this
action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Matters submitted to a vote of the security holders at our Annual
Meeting on January 7, 2004 at the American Stock Exchange in New York City have
been disclosed in our quarterly report on Form 10-Q for the quarter ended
December 31, 2003, filed with the SEC on February 17, 2004.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
------------------
Our common stock has been quoted on the American Stock Exchange
under the symbol "IMM" since August, 11, 2003 (our common stock was quoted under
the Symbol "IMMT" on the NASDAQ SmallCap Market from April 26, 1999 to March 29,
2000, on the NASDAQ National Market System from March 30, 2000 to March 8, 2002,
on the NASDAQ SmallCap Market from March 9, 2002 to December 2, 2002, and on the
NASDAQ OTC Bulletin Board from December 2, 2002 to August 11, 2003). Following
are the reported high and low share trade prices as reported by IDD Information
Services, NASDAQ Online and Lexis/Nexis for each of the quarters set forth below
since the fiscal quarter ended March 31, 2002.
High Low
------- -------
2002
Quarter ended March 31, 2002 $ 7.400 $ 4.000
Quarter ended June 30, 2002 $ 5.990 $ 2.800
Quarter ended September 30, 2002 $ 5.150 $ 2.390
Quarter ended December 31, 2002 $ 3.800 $ 2.120
2003
Quarter ended March 31, 2003 $ 4.850 $ 1.580
-46-
High Low
------- -------
Quarter ended June 30, 2003 $ 7.000 $ 4.150
Quarter ended September 30, 2003 $18.820 $ 5.700
Quarter ended December 31, 2004 $32.510 $ 9.000
2004
Quarter ended March 31, 2004 $19.500 $10.110
Shareholders
------------
As of June 4, 2004, there were approximately 232 shareholders of
record of our common stock and the number of beneficial owners of shares of
common stock as of such date was approximately 2,854. As of June 4, 2004, there
were approximately 9,905,324 shares of common stock issued and outstanding.
Dividends
---------
We have never declared or paid dividends on our common stock and we
do not intend to pay any common stock dividends in the foreseeable future. Our
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock and Series D Convertible Preferred Stock
earn dividends of 6%, 8%, 8% and 6% per annum, respectively, each payable
semi-annually on each April 15 and October 15 while outstanding, and which, at
our option, may be paid in cash or in shares of our common stock. On April 15,
2003, October 15, 2003 and April 15, 2004 we paid dividends to the holders of
our Series A Convertible Preferred Stock and Series B Convertible Preferred
Stock on October 15, 2003 and April 15, 2004 with paid dividends to the holders
of our Series C Convertible Preferred Stock, and on April 15, 2004 we paid
dividends to the holders of our Series D Convertible Preferred Stock, in each
case in shares of common stock, with fractional shares paid in cash.
Recent Sales of Unregistered Securities
---------------------------------------
We issued unregistered securities in the following transactions
during the fiscal quarter ended March 31, 2004:
o On January 22, 2004 we issued (i) 24,600 shares of our Series D
Stock and related warrants to purchase 24,600 shares of our common
stock pursuant to an exemption from registration under Regulation D
of the Securities Act for $615,000 in the aggregate and (ii) 175,400
shares of our Series D Stock and related warrants to purchase
175,400 shares of our common stock pursuant to an exemption from
registration under Regulation S of the Securities Act for $4,385,000
in the aggregate. A complete description of the designations,
preferences, voting powers, qualifications, special or relative
rights and privileges of the Series D Stock is contained in our
Series D Convertible Preferred Stock Certificate of Designation and
a complete description of the terms of the warrants
-47-
are contained in our form of Common Stock Warrant, both filed as
exhibits to our current report on Form 8-K dated January 22, 2004.
o On February 24, 2004 we issued 13,550 shares of common stock from
the exercise of options by Craig B. Thompson, having received $6,328
for their exercise.
o On March 30, 2004 we issued 300 shares of common stock from the
exercise of options by Regina Durlak, having received $765 for their
exercise.
Securities Authorized for Issuance under Equity Compensation Plans
------------------------------------------------------------------
The following table provides information as of March 31, 2004,
regarding compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance.
Number of
securities
remaining
available
for future
issuance
Number of under equity
securities to Weighted average compensation
be issued upon exercise price of plans
exercise of outstanding (excluding
outstanding options, securities
options, warrants and reflected in
Plan category (in warrants and rights rights(1) column(a))
thousands) (a) (b) (c)
----------------------- ------------------- ------------------ ---------------
Equity compensation 962,574 $ 8.63 340,250
plans approved by
security holders(2)
Equity compensation 2,987,710 $ 7.70
plans not approved by
security holders(3)
-------------------------------------------------------
Total 3,950,284 $ 7.93 340,250
--------------------------------------------------------------------------------
------------
(1) As adjusted for reverse stock splits that occurred on each of July 24, 1998
and January 25, 1999.
(2) This category consists solely of options.
(3) This category consists solely of warrants.
Series C Convertible Preferred Stock Private Placements -
On June 6, 2003, we filed a Series C Convertible Preferred Stock
Certificate of Designation ("Series C Certificate of Designation") with the
Secretary of State of the State of Delaware, designating 160,000 shares of our
5,000,000 authorized shares of preferred stock as Series C Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share ("Series C
Preferred Stock"). Dividends on the Series C Preferred Stock accrue at a rate of
8% on the $25.00 stated value per share and are payable semi-annually on April
15 and October 15 of each year while the shares are outstanding. We have the
option to pay the dividend either in cash or in equivalent shares of common
stock. If common stock is to be used to pay the dividend, such common stock is
to be valued at the 10-day volume-weighted average price immediately prior to
the date of payment.
-48-
Each share of Series C Preferred Stock is convertible by the holder
at any time into shares of our common stock at a conversion rate determined by
dividing the $25.00 stated value, plus any accrued and unpaid dividends (the
"Liquidation Price"), by a $4.42 conversion price (the "Conversion Price"),
subject to antidilution adjustment. We may at any time after the first
anniversary of the date of issuance require that any or all outstanding shares
of Series C Preferred Stock be converted into shares of our common stock,
provided that the shares of common stock into which the Series C Preferred Stock
is convertible is registered pursuant to an effective registration statement.
The number of shares of common stock will be determined by (i) dividing the
Liquidation Price by the Conversion Price, provided that the closing bid price
for our common stock exceeds $9.00 for 20 consecutive trading days within 180
days prior to notice of conversion, or (ii) if the requirements of (i) above are
not met, the number of shares of common stock is determined by dividing 110% of
the Liquidation Price by the Conversion Price. The Conversion Price is subject
to antidilution adjustments, as set forth in the Series C Certificate of
Designation.
We may, upon 30 days' notice, redeem any or all outstanding shares
of the Series C Preferred Stock by payment of the Liquidation Price to the
holder of such shares, provided that the holder does not convert the Series C
Preferred Stock into shares of common stock during the 30-day period. The Series
C Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share of
Series C Preferred Stock is entitled to 5.6561 votes with respect to any and all
matters presented to our stockholders for their action or consideration. Except
as provided by law or by the provisions establishing any other series of
preferred stock, holders of our Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock vote together with the holders of our common stock as a single class.
From June 6, 2003 through June 9, 2003, we issued an aggregate of
125,352 shares of our Series C Preferred Stock in private placements to certain
accredited and non-U.S. investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act of 1933, as amended (the "Securities
Act"). The gross proceeds of the offering were $3,133,800 as of June 18, 2003.
The securities were sold pursuant to exemptions from registration under the
Securities Act and we intend to register the shares under the Securities Act.
Subject to adjustment for dilution, each share of Series C Preferred
Stock is convertible into 5.6561 shares of common stock.
Series D Convertible Preferred Stock Private Placements
-------------------------------------------------------
On January 15, 2004, we filed a Series D Convertible Preferred Stock
Certificate of Designation ("Series D Certificate of Designation") with the
Secretary of State of the State of Delaware, designating 200,000 shares of our
5,000,000 authorized shares of preferred stock as Series D Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share ("Series D
Preferred Stock"). Dividends on the Series D 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. We have 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
-49-
dividend, such common stock is to be valued at the 10-day volume-weighted
average price immediately prior to the date of payment.
Each share of Series D Preferred Stock is convertible by the holder
at any time into shares of our common stock at a conversion rate determined by
dividing the $25.00 stated value, plus any accrued and unpaid dividends (the
"Liquidation Price"), by a $9.00 conversion price (the "Conversion Price"),
subject to antidilution adjustment. We may at any time after January 1, 2005
require that any or all outstanding shares of Series D Preferred Stock be
converted into shares of our common stock, provided that the shares of common
stock into which the Series D Preferred Stock is convertible is registered
pursuant to an effective registration statement. The number of shares of common
stock will be determined by (i) dividing the Liquidation Price by the Conversion
Price, provided that the closing bid price for our common stock exceeds $18.00
for 20 consecutive trading days within 180 days prior to notice of conversion,
or (ii) if the requirements of (i) above are not met, the number of shares of
common stock is determined by dividing 110% of the Liquidation Price by the
Conversion Price. The Conversion Price is subject to antidilution adjustments,
as set forth in the Series D Certificate of Designation.
The Series D Preferred Stock has a preference in liquidation equal
to $25.00 per share, plus any accrued and unpaid dividends. Each issued and
outstanding share of Series D Preferred Stock is entitled to 2.7778 votes with
respect to any and all matters presented to our stockholders for their action or
consideration. Except as provided by law or by the provisions establishing any
other series of preferred stock, holders of our Series A Convertible Preferred
Stock, Series B Convertible Preferred Stock, Series C Convertible Preferred
Stock and Series D Convertible Preferred Stock vote together with the holders of
our common stock as a single class.
On January 15, 2004, we issued an aggregate of 200,000 shares of our
Series D Preferred Stock in a private placement to certain accredited and
non-U.S. investors in reliance on Regulation D and Regulation S, respectively,
under the Securities Act of 1933, as amended (the "Securities Act"). The gross
proceeds of the offering were $5,000,000. The securities were sold pursuant to
exemptions from registration under the Securities Act and we intend to register
the shares under the Securities Act.
Subject to adjustment for dilution, each share of Series D Preferred
Stock is convertible into 2.7778 shares of common stock.
In January 2004, in connection with the Series D Convertible
Preferred Stock private placement offering, we issued warrants to purchase
200,000 shares of our common stock at an exercise price of $16.00 per share of
common stock. The warrants expire on the fifth anniversary of their date of
issuance. The warrant exercise period commenced immediately upon issuance of the
warrant. At any time after the first anniversary of the date of issuance and if
our common stock closing price is above 200% of the exercise price for 20
consecutive trading days, we may, upon 20 days notice, redeem any unexercised
portion of any warrants for a redemption fee equal to $.10 per share of common
stock underlying the warrants. During the 20-day notice period, the warrant
holder may exercise all or a portion of the warrants by tendering the
appropriate exercise price.
-50-
Conversion of Preferred Stock to Common Stock.
----------------------------------------------
Series A. On May 10, 2004, holders of Series A Convertible Preferred Stock
("Series A Stock") converted 400 shares of Series A Stock and accrued dividends
into 2,264 shares of common stock, respectively.
Series C. On February 3, 2004, February 6, 2004, February 23, 2004, February 24,
2004, April 15, 2004, April 16, 2004, and May 10, 2004, holders of Series C
Convertible Preferred Stock ("Series C Stock") converted 5,200 shares, 2,800
shares, 1,768 shares, 1,000 shares, 3,768 shares, 884 shares and 400 shares of
Series C stock and accrued dividends into 29,627 shares, 15,953 shares, 10,095
shares, 5,711 shares, 21,311 shares, 5,000 shares, and 2,264 shares of common
stock, respectively.
Amendment to Restated Certificate of Incorporation
--------------------------------------------------
On November 4, 2003, our Board of Directors authorized an amendment
to our Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 30 million to 100 million. This amendment
was approved by our shareholders at the Company's annual meeting held on January
7, 2004. Additionally, the shareholders approved additional amendments to our
Restated Certificate of Incorporation which provide for indemnification of our
officers and directors to the maximum extent of Delaware law and to generally
update our Restated Certificate of Incorporation as permitted by Delaware law.
Our shareholders also authorized up to a two-for-one stock split of
our common stock that our Board of Directors has so far deferred to act upon.
The Board of Directors has determined that a stock split in not in our best
interest at this time but reserves the right to implement the stock split as
approved at such time as it deems prudent, if at all.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data that
was derived from our financial statements (dollars in thousands except per share
data):
-51-
Year ended March 31,
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Statement of Operations:
REVENUES $ 2,416 $ 1,609 $ 3,522 $ 1,355 $ 369
EXPENSES:
Research and development 3,293 2,570 (3)3,958 6,695 (1)10,255
General and administrative (6)11,989 (5)3,732 2,928 (2)4,719 1,732
Equity in loss of joint venture 135
----------- ----------- ----------- ----------- -----------
Total expenses 15,282 6,302 6,886 11,414 12,122
LOSS FROM OPERATIONS (12,866) (4,693) (3,364) (10,059) (11,753)
----------- ----------- ----------- ----------- -----------
OTHER INCOME(EXPENSE):
Interest income 20 14 41 199 319
Loss on sales of investment
securities - net
----------- ----------- ----------- ----------- -----------
Other income (expense) - net 20 14 41 196 319
----------- ----------- ----------- ----------- -----------
NET LOSS (12,866) (4,679) (3,323) (9,863) (11,434)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK DEEMED
DIVIDENDS(4) (3,526) (452) (938)(4)
REDEEMABLE PREFERRED STOCK
CONVERSION, PREMIUM AMORTIZATION
AND DIVIDENDS
----------- ----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS (16,372) $ (5,131) $ (4,261) $ (9,863) $ (11,434)
=========== =========== =========== =========== ===========
-52-
Year ended March 31,
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
----------- ----------- ----------- ----------- -----------
Net loss (1.43) (0.71) (0.55) (1.78) (2.27)
Convertible preferred stock
dividends and convertible
preferred stock premium deemed
dividends (0.39) (0.07) (0.16)
----------- ----------- ----------- ----------- -----------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (1.82) $ (0.78) $ (0.71) $ (1.78) $ (2.27)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED LOSS
PER SHARE 8,977,817 6,565,495 6,011,416 5,545,190 5,036,405
-53-
March 31,
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash and cash equivalents 6,745 112 2,038 2,098 4,596
Restricted funds on deposit 2,155 2,740 602 3,813
Investment securities available for
sale 1,361
Working capital (deficiency) 6,136 (115) 1,567 663 4,402
Total assets 12,586 6,610 2,876 6,168 6,224
Convertible preferred stock 9,522 5,138 4,032
Deficit accumulated during
development stage (58,539) (42,167) (37,036) (32,775) (22,912)
=========== =========== =========== =========== ===========
Stockholders' equity 9,748 3,192 1,736 859 4,620
-----------
(1) 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.
(2) 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.
(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, 2000.
(4) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(5) Includes $758 of costs related to the issuance of 150,000 shares of common
stock to Cheung Ming Tak to act as our non-exclusive agent to develop and
qualify potential strategic partners for the purpose of testing and/or the
commercialization of Company products in the PRC; $188 of costs related to
the issuance of 40,000 shares of common stock to The Gabriele Group, L.L.C.,
for assistance with respect to management consulting, strategic planning,
public relations and promotions and includes $89 of costs related to the
issuance of 8,333 shares of common stock and the vesting of 29,165 warrants
to Fulcrum Holdings of Australia, Inc. ("Fulcrum").
(6) Includes non-cash charges of (i) $2,744 of costs related to the issuance of
warrants to purchase 600,000 shares of common stock issued to China Harvest
International Ltd as payment for services to assist in obtaining regulatory
approval to conduct clinical trials in China, (ii) $63 for the issuance of
10,000 shares of common stock issued to Mr. David Tat Koon Shu for
consulting services in China, (iii) $1,400 for the issuance of 100,000
shares of common stock issued to Fulcrum for assisting with listing our
securities on a recognized stock exchange and for consulting services, (iv)
$2,780 for the vested portion of 91,667 shares of common stock and the
vested portion of warrants to purchase 320,835 shares of common stock issued
to Fulcrum during the fiscal year based on agreements signed March 21, 2003,
and (v) $247 for the attainment of certain milestones with respect to the
vesting of warrants to purchase 20,000 shares of common stock issued to
Pilot Capital Group, LLC (f/k/a The Gabriele Group, LLC) based upon
agreements signed July 31, 2002.
-54-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a pharmaceutical company focused on the development and
commercialization of oral drugs to treat infectious diseases and neoplastic and
metabolic disorders. We have development programs that include fungal
infections, malaria, tuberculosis, diabetes, Pneumocystis carinii pneumonia and
tropical diseases, including African sleeping sickness (trypanosomiasis) and
leishmaniasis. We hold worldwide patents, patent applications, and licenses to
worldwide patents, patent applications and technologies from a scientific
consortium and exclusive rights to commercialize products from patents and
licenses that are integral to our business.
We intend to continue to work with our scientific and foundation
partners to (i) validate our technology platform and (ii) demonstrate dications'
low toxicity, broad application and oral deliverability. We believe we will be
permitted to sell drugs in niche markets in certain African nations as we
further develop drugs to target multi-billion dollar markets such as antifungal,
TB, cancer and diabetes treatments. Because we demonstrated to the United States
Food and Drug Administration ("FDA") DB289's potential to provide improvement
over currently available alternative therapies for African sleeping sickness,
the FDA granted "fast-track" designation to DB289 for treatment of African
sleeping sickness. Fast-track designation may allow for accelerated FDA review
of DB289 for treatment of African sleeping sickness, however, there is no
guarantee that fast-track designation will result in faster product development
or increase the speed or likelihood of obtaining product approval.
Since our formation in October 1984, we have engaged in research and
development programs, expanding our network of scientists and scientific
advisors, licensing technology agreements and advancing the commercialization of
the dication technology platform. To minimize shareholders' dilution, we use
foundation and government grants, the expertise and resources of strategic
partners and third parties in a number of areas, including (i) laboratory
research, (ii) pre-clinical and human clinical trials and (iii) manufacture of
pharmaceutical drugs. We have licensing and exclusive commercialization rights
to a dicationic anti-infective pharmaceutical platform and are developing drugs
intended for commercial use based on that platform. Dication pharmaceutical
drugs (structural class defined by molecules with positive charges on each end
held together by a linker) work by blocking life-sustaining enzymes from binding
to the key sites in the "minor groove" of an organism's DNA, thereby killing the
infectious organisms that cause fungal, parasitic, bacterial and viral diseases.
The key site on an organism's DNA is an area where enzymes interact with the
infectious organism's DNA as part of their normal life cycle. Structurally,
dications are chemical molecules that have two positively charged ends held
together by a chemical linker. The composition of the dications, with positive
charges on both ends (shaped like molecular barbells) allows dications to bind
(similar to a band-aid) to the negatively charged key sites of an infectious
microorganism's DNA. The bound dications block the life-sustaining enzymes from
attaching to the DNA's key sites, thereby killing the infectious organism.
-55-
With the exception of certain research funding agreements and
certain grants, we have not generated any revenue from operations. For the
period from inception (October 15, 1984) to March 31, 2004, we incurred
cumulative net losses of approximately $55,993,000. We have incurred additional
losses since such date and we expect to incur additional operating losses for
the foreseeable future. We expect that our cash sources for at least the next
year will be limited to:
o payments from The University of North Carolina at Chapel Hill,
charitable foundations and other research collaborators under
arrangements that may be entered into in the future; and
o research grants, such as Small Business Technology Transfer Program
("STTR") grants and Small Business Innovation Research ("SBIR")
grants;
o borrowing funds or the issuance of securities.
The timing and amounts of grant and payment revenues, if any, will
likely fluctuate sharply and depend upon the achievement of specified
milestones, and results of operations for any period may be unrelated to the
results of operations for any other period.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the
Notes to the Consolidated Financial Statements. These financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
ongoing basis, we evaluate our estimates, including those related to the fair
value of our preferred and common stock and related options and warrants, the
recognition of revenues and costs related to our research contracts, and the
useful lives or impairment of our property and equipment. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis of
judgments regarding the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Grants to perform research are our primary source of revenue and are
generally granted to support research and development activities for specific
projects or drug candidates. Revenue related to grants to perform research and
development is recognized as earned based on the performance requirements of the
specific grant. Upfront cash payments from research and development grants are
reported as deferred revenue until such time as the research and development
activities covered by the grant are performed.
We use the intrinsic-value method of accounting for stock based
awards granted to employees in accordance with Accounting Principles Board
Opinion No. 25 and its related interpretations. We record stock based
compensation expense for non-employees at the fair value of the options or
warrants granted in accordance with Statement of Financial Accounting
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Standards No. 123 ("SFAS 123") and Emerging Issues Task Force No. 96-18 ("EITF
96-18"). The fair value of options granted to non-employees is estimated using a
Black-Scholes option valuation model. The model considers a number of factors,
including the market price and volatility of our common stock at the date of
measurement. We measure the compensation expense for options and warrants
granted to non-employees as the underlying options vest. The compensation
expense related to all grants is being amortized using the graded vesting
method, in accordance with SFAS 123, EITF 96-18 and FASB Interpretation No. 28,
over the vesting period of each respective stock option.
We believe that the accounting policies affecting these estimates
are our critical accounting policies.
Research and Development Expenses
All research and development costs are expensed as incurred.
Research and development expenses include, but are not limited to, payroll and
personnel expenses, lab supplies, preclinical studies, raw materials to
manufacture clinical trial drugs, manufacturing costs, sponsored research at
other labs, consulting, and research-related overhead. Accrued liabilities for
raw materials to manufacture clinical trial drugs, manufacturing costs, and
sponsored research reimbursement fees are included in accrued liabilities and
included in research and development expenses. Specific information pertaining
to each of our major research and development projects follows. This information
includes to the extent ascertainable project status, costs incurred for the
relevant fiscal years (including costs to date), nature, timing and estimated
costs of project completion, anticipated completion dates, and the period in
which material net cash inflows from projects is expected to commence, if at
all.
All of our research and development projects contain high levels of
risk. Even if development is completed on schedule, there is no guarantee that
any of our products will be licensed for sale. Human trials conducted in foreign
and developing countries have additional risks, including governmental and local
militia uprisings that may interrupt or displace our work. We are unable to
quantify the impact to our operations, financial position or liquidity if we are
unable to complete on schedule, or at all, any of our product commercialization
programs.
Malaria
We expensed research and development costs for our Malaria program
for the fiscal years ended March 31, 2002, March 31, 2003 and March 31, 2004 of
approximately $0, $45,000, and $250,000 respectively. Since our inception
through May 2004, approximately $318,000 has been expensed on research and
development for the malaria project.
Pneumocystis carinii pneumonia ("PCP")
We expensed research and development costs for the PCP program for
the fiscal years ended March 31, 2002, March 31, 2003, and March 31, 2004 of
approximately $30,000, $194,000 and $241,000, respectively. Since our inception
through May 2004, approximately $471,000 has been expensed on the PCP program.
Trypanosomiasis
Research and development costs expensed by the Company for our
trypanosomiasis program for the fiscal years ended March 31, 2002, March 31,
2003, and March 31, 2004 have been approximately $2,530,000, $1,228,000 and
$2,018,000, respectively. Since
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our inception through May 2004, approximately $6,637,000 has been expensed on
the trypanosomiasis program.
Antifungal Program & Tuberculosis ("TB")
Each of the antifungal and TB studies is estimated to cost between
$25-40 million dollars (including manufacturing and formulation of their
respective drugs). The Company is unable to calculate when initial drug sales
for the antifungal and TB treatments may commence because of the early stage of
development.
We expensed research and development costs for the antifungal
program for the fiscal years ended March 31, 2002, March 31, 2003, and March 31,
2004 of approximately $0, $1,000 and $32,000, respectively. Since our inception
through May 2004, approximately $367,000 has been expensed on the antifungal
program.
We expensed research and development costs for the TB program for
the fiscal years ended March 31, 2002, March 31, 2003 and March 31, 2004 of
approximately $50,000, $10,000 and $24,000 respectively. Since our inception
through May 2004, approximately $104,000 has been expensed.
Pharmaceutical Cancer Program
We expensed research and development costs for the pharmaceutical
cancer program for the fiscal years ended March 31, 2002, March 31, 2003, and
March 31, 2004 of approximately $0, $0 and $0, respectively. Since our inception
through May 2004, approximately $24,000 has been expensed on the pharmaceutical
cancer program.
Liquidity and Capital Resources
From our inception through March 31, 2004, we have financed our
operations with:
o proceeds from various private placements of debt and equity
securities, an initial public offering and other cash contributed
from stockholders, which in the aggregate raised approximately
$39,258,000;
o payments from research agreements, foundation grants and SBIR grants
and STTR program grants of approximately $11,259,000; and
o the use of stock, options and warrants in lieu of cash compensation.
On January 22, 2004, we sold in private placements pursuant to
Regulation D and Regulation S of the Securities Act of 1933, as amended
("Securities Act") (i) 200,000 shares of our Series D Convertible Preferred
Stock, $0.01 par value ("Series D Stock") at a stated value of $25.00 per share
and (ii) warrants to purchase 200,000 shares of our common stock with a $16.00
per share exercise price, for the aggregate consideration of $5,000,000 before
issuance cost. The net proceeds were approximately $4,571,000. Each share of
Series D Stock, among other things, (i) earns a 6% dividend payable, at our
discretion, in cash or common stock, (ii) has
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a $25.00 (plus accrued but unpaid dividends) liquidation preference pari passu
with our other outstanding preferred stock, (iii) is convertible into 2.7778
shares of common stock and (iv) may be converted to common stock by us any time
after January 1, 2005. The related warrants expire five years from the date of
grant.
From June 6, 2003 through June 9, 2003, we issued an aggregate of
125,352 shares of our Series C Preferred Stock in private placements to certain
accredited and non-U.S. investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act. The securities were sold pursuant to
exemptions from registration under the Securities Act and were subsequently
registered on Form S-3 (Registration Statement No. 333-108278). The gross
proceeds of the offering were $3,133,800 and the net proceeds were approximately
$2,845,000.
On September 25, 2002 and October 28, 2002, we issued an aggregate
of 76,725 shares of our Series B Convertible Preferred Stock and 191,812 related
warrants in private placements to certain accredited and non-U.S. investors in
reliance on Regulation D and Regulation S, respectively, under the Securities
Act. The warrants have an exercise period of five years from the date of
issuance and an exercise price of 6.125 per share. The securities were sold
pursuant to exemptions from registration under the Securities Act and were
subsequently registered on Form S-3 (Registration Statement No. 333-101197). The
gross proceeds of the offering were $1,918,125 and the net proceeds were
approximately $1,859,000.
On February 14, 2002 and February 22, 2002, we issued an aggregate
of 160,100 shares of our Series A Convertible Preferred Stock and 400,250
related warrants in private placements to certain accredited and non-U.S.
investors in reliance on Regulation D and Regulation S, respectively, under the
Securities Act. In connection with this offering, we issued in the aggregate
60,000 shares of common stock and 760,000 warrants to purchase shares of common
stock to consultants assisting in the private placements. The warrants have an
exercise period of five years from the date of issuance and exercise prices of
(i) $6.00 per share for 500,000 warrants, (ii) $9.00 per share for 130,000
warrants and (iii) $12.00 per share for 130,000 warrants. The $9.00 and $12.00
warrants will not vest, and therefore will not be exercisable, unless our common
stock meets or exceeds the respective exercise price for 20 consecutive trading
days prior to January 31, 2003. The gross proceeds of the offering were
$4,003,000 and the net proceeds were $3,849,000.
On December 8, 2000, we completed a private placement offering that
raised net proceeds of approximately $4,306,000 of additional net equity capital
through the issuance of 584,250 shares of common stock.
On April 26, 1999, we issued 1,150,000 shares of common stock
through 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 were due
to expire on April 25, 2004. All warrants other than warrants to purchase 21,400
shares expired. The warrant to purchase 21,400 shares was pursuant to an
agreement with the holder. We used $110,000 of the net proceeds of the IPO to
repay amounts due to the State of Illinois and Northwestern University.
Substantially all of the remaining net proceeds of the IPO were used to fund our
research and development efforts, including clinical and pre-clinical studies.
Any net proceeds not applied to our research and development efforts were used
for working capital and general corporate purposes, including hiring additional
employees.
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Our cash resources have been used to finance research and
development, including sponsored research, capital expenditures, expenses
associated with the efforts of the Scientific Consortium and general and
administrative expenses. Over the next several years, we expect to incur
substantial additional research and development costs, including costs related
to early-stage research in pre-clinical and clinical trials, increased
administrative expenses to support research and development operations and
increased capital expenditures for expanded research capacity, various equipment
needs and facility improvements or relocation.
As of March 31, 2004, we had federal net operating loss
carryforwards of approximately $42,840,000, which expire from 2006 through 2024.
We also had approximately $41,092,000 of stated net operating loss carryforwards
as of March 31, 2004, which expire from 2009 through 2024, available to offset
certain future taxable income for state (primarily Illinois) income tax
purposes. Because of "change of ownership" provisions of the Tax Reform Act of
1986, approximately $920,000 of our net operating loss carryforwards for federal
purposes are subject to an annual limitation regarding utilization against
taxable income in future periods. As of March 31, 2004, we had federal income
tax credit carryforwards of approximately $750,000, which expire from 2008
through 2024.
We believe our existing resources, but not including proceeds from
any grants we may receive, are sufficient to meet our planned expenditures
through June 2005, although there can be no assurance that we will not require
additional funds. In addition, we anticipate the receipt of approximately an
additional $3.2 million payment (restricted funds) under the Clinical Research
Subcontract with the University of North Carolina at Chapel Hill ("UNC") (funded
by The Gates Foundation) and approximately an additional $2.7 million under the
agreement with MMV in calendar year 2004. Our working capital requirements will
depend upon numerous factors, including the progress of our research and
development programs (which may vary as product candidates are added or
abandoned), pre-clinical testing and clinical trials, achievement of regulatory
milestones, our corporate partners fulfilling their obligations to us, the
timing and cost of seeking regulatory approvals, the level of resources that we
devote to the development of manufacturing, our ability to maintain existing,
and establish new, collaborative arrangements with other companies to provide
funding to us to support these activities and other factors. In any event, we
will require substantial funds in addition to our existing working capital to
develop our product candidates and otherwise to meet our business objectives.
We have, through our purchase of Super Insight Limited, obtained an
ownership interest in improved real property on which we intend to construct a
pharmaceutical manufacturing facility. We plan to purchase and install a
pharmaceutical production line for which we have received estimates of $8 to $12
million from several consultants for the initial equipment and installation
based on requirements for capacity and quality supplied by us. We are seeking
partners both in the PRC and domestically to fund part or all of the capital
cost of construction of the pharmaceutical production line.
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Payments Due under Contractual Obligations
We have future commitments at March 31, 2004 consisting of operating lease
obligations as follows:
Year Ending Lease Payments
March 31,
2005 $153,000
--------
Total $153,000
Results of Operations
Year Ended March 31, 2004 Compared with Year Ended March 31, 2003
Revenues under collaborative research and development agreements
were approximately $2,416,000 and $1,609,000 in the years ended March 31, 2004
and 2003, respectively. In 2004, we recognized revenues of approximately
$2,114,000 relating to the clinical research subcontract agreement between us
and UNC funded by a grant that UNC received from The Gates Foundation, and
approximately $302,000 relating to the testing agreement with MMV, while in
2003, there were revenues recognized of approximately $1,389,000 relating to the
clinical research subcontract agreement, grant revenues of approximately $70,000
from SBIR grants from the NIH and revenues of $150,000 relating to the
Confidentiality, Testing and Option Agreement with Neurochem Inc., a Canadian
company. Research and development expenses increased from approximately
$2,570,000 in 2003 to approximately $3,293,000 in 2004. Expenses relating to the
clinical research subcontract agreement with UNC increased from approximately
$1,294,000 in 2003 to approximately $2,099,000 in 2004. The initiation of the
MMV testing agreement in 2004 accounted for expenses of approximately $301,000.
Expenses relating to pre-clinical and clinical trial costs primarily for
Pneumocystis carinii pneumonia decreased from approximately $442,000 in 2003 to
approximately $198,000 in 2004. The decrease in expenses for Pneumocystis
carinii pneumonia was primarily due to the payment of start up costs to a
contract research organization in South Africa and Peru in 2003 which were not
incurred in 2004. Other research and development costs relating primarily to
SBIR's and obligations to UNC decreased from approximately $329,000 in 2003 to
approximately $190,000.
General and administrative expenses were approximately $11,990,000
in 2004, compared to approximately $3,732,000 in 2003. The increase in general
and administrative expenses was primarily due to non-cash expenses for common
stock, stock options and warrant issuance in 2004 of approximately $7,234,000 as
compared to approximately $1,035,000 in 2003. Non-cash expenses in 2004 included
(i) approximately $2,744,000 for the issuance of a warrant to purchase 600,000
shares of common stock issued to China Harvest International Ltd. as payment for
services to assist us in obtaining regulatory approval to conduct clinical
trials in China, (ii) approximately $63,000 for the issuance of 10,000 shares of
common stock issued to Mr. David Tat Koon Shu for consulting services in China,
(iii) approximately $1,400,000 for the issuance of 100,000 shares of common
stock issued to Fulcrum for assistance with listing our securities on a
recognized stock exchange and for consulting services, (iv) approximately
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$2,780,000 for the vested portion of 91,667 shares of common stock and the
vested portion of warrants to purchase 320,835 shares of common stock issued to
Fulcrum during the fiscal year based on agreements signed March 21, 2003 and (v)
approximately $247,000 for the reaching of certain milestones which resulted in
the vesting of a warrant to purchase 20,000 shares of common stock issued to
Pilot Capital Group, LLC (f/k/a The Gabriele Group, LLC) based upon agreements
signed July 31, 2002. Legal expenses for patents increased from approximately
$215,000 in 2003 to approximately $481,000 in 2004. Legal fees increased from
approximately $650,000 in 2003 to approximately $1,610,000 in 2004 primarily due
to increased litigation fees. Expenses relating to the start-up and
consolidation of Immtech Therapeutics and Immtech Hong Kong into Immtech
accounts were approximately $398,000. Accounting fees increased from
approximately $125,000 in 2003 to approximately $231,000 in 2004. Additionally,
the expensing of a retainer fee to Wyndham increased general and administrative
expenses in 2004 by $160,000.
We incurred a net loss of approximately $12,846,000 for the
year ended March 31, 2004, as compared to a net loss of approximately $4,679,000
for the year ended March 31, 2003.
In 2004, we also charged deficit accumulated during the development
stage of approximately $3,526,000 of non-cash convertible preferred stock
dividends and convertible preferred stock premium deemed dividends.
Year Ended March 31, 2003 Compared with Year Ended March 31, 2002
Revenues under collaborative research and development agreements
were approximately $1,609,000 and $3,522,000 in the years ended March 31, 2003
and 2002, respectively. In 2003, we recognized revenues of approximately
$1,389,000 relating to a clinical research subcontract agreement with UNC funded
by a grant that UNC received from The Gates Foundation, compared to
approximately $2,946,000 in 2002. We also recognized approximately $70,000 from
SBIR grants in 2003, while in 2002 there were grant revenues of approximately
$576,000 through STTR and SBIR programs from the NIH.
Research and development expenses decreased from approximately
$2,570,000 in 2002 to $3,958,000 in 2003. The decrease in research and
development costs is primarily attributable to the decrease in the revenues
relating to the clinical research subcontract agreement with UNC and the
decrease in the grant revenues from SBIR grants from the NIH.
General and administrative expenses were approximately $3,732,000 in
2003, compared to approximately $2,928,000 in 2002. In the year ended 2003,
there were general and administrative compensation expenses of approximately
$758,000 related to the issuance of 150,000 shares of common stock to Cheung
Ming Tak to act as our non-exclusive agent to develop and qualify potential
strategic partners for the purpose of testing and/or commercializing Company
products in the PRC.
We incurred a net loss of approximately $4,679,000 for the
year ended March 31, 2003, as compared to a net loss of approximately $3,323,000
for the year ended March 31, 2003.
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In 2002 and 2003, respectively, we also charged deficit accumulated
during the development stage of approximately $938,000 and $452,000 of non-cash
convertible preferred stock dividends.
Impact of Inflation
Although it is difficult to predict the impact of inflation on our
costs and revenues in connection with our operations, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when and if marketed.
Unaudited Selected Quarterly Information
The following table sets forth certain unaudited selected quarterly
information (amounts in thousands, except per share amounts):
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Fiscal Quarter Ended
-------------------------------------------------------------------------------------------------
------------------------------------------------- -------------------------------------------
December September December September
March 31, 31, 30, June 30, March 31, 31, 30, June 30,
2004 2003 2003 2003 2003 2002 2002 2002
--------- -------- --------- -------- -------- -------- -------- --------
Statements of Operations Data:
REVENUES ...................... $ 618 $ 654 $ 659 $ 485 $ 585 $ 234 $ 360 $ 430
EXPENSES:
Research and
development ................ 966 815 905 607 706 402 711 751
General and administrative .. 1,807(7) 2,580(6) 6,596(5) 1,007(4) 673 724 883(3) 1,452(2)
------- ------- ------- ------- ------- ------- ------- -------
Total expenses ......... 2,773 3,395 7,501 1,614 1,379 1,126 1,594 2,203
------- ------- ------- ------- ------- ------- ------- -------
LOSS FROM OPERATIONS .......... (2,155) (2,741) (6,842) (1,129) (794) (892) (1,234) (1,773)
OTHER INCOME(EXPENSE):
Interest income ............. 10 6 4 1 1 3 2 8
------- ------- ------- ------- ------- ------- ------- -------
NET LOSS ...................... (2,145) (2,735) (6,838) (1,128) (793) (889) (1,232) (1,765)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS AND
PREFERRED STOCK PREMIUM
DEEMED DIVIDENDS(1) ......... (2,107) (131) (93) (1,195) (89) (96) (207) (60)
------- ------- ------- ------- ------- ------- ------- -------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS ................ $(4,252) $(2,866) $(6,931) $(2,323) $ (882) $ (985) $(1,439) $(1,825)
======= ======= ======= ======= ======= ======= ======= =======
NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net loss ...................... $ (0.22) $ (0.30) $ (0.79) $ (0.14) $ (0.11) $ (0.14) $ (0.20) $ (0.29)
Convertible preferred stock
dividends and convertible
preferred stock premium
deemed dividends ............ $ (0.22) $ (0.01) $ (0.01) $ (0.15) $ (0.01) $ (0.02) (0.03) (0.01)
------- ------- ------- ------- ------- ------- ------- -------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS ................ $ (0.44) $ (0.31) $ (0.80) $ (0.29) $ (0.12) $ (0.16) $ (0.23) $ (0.30)
======= ======= ======= ======= ======= ======= ======= =======
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(1) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(2) Includes $758 of costs related to the issuance of 150,000 shares of common
stock to Cheung Ming Tak to act as our non-exclusive agent to develop and
qualify potential strategic partners for the purpose of testing and/or the
commercialization of Company products in the PRC.
(3) Includes $188 of costs related to the issuance of 40,000 shares of common
stock to The Gabriele Group, L.L.C. for assistance with respect to
management consulting, strategic planning, public relations and promotions.
(4) Includes $337 of costs related to the issuance of 25,000 common shares and
the vesting of 87,500 warrants to Fulcrum under the agreement signed March
21, 2003.
(5) Includes (i) $2,744 of costs related to the issuance of warrants to purchase
600,000 shares of common stock issued to China Harvest International Ltd. as
payment for services to assist in obtaining regulatory approval to conduct
clinical trials in China, (ii) $63 for the issuance of 10,000 shares of
common stock issued to Mr. David Tat Koon Shu for consulting services in
China, (iii) $1,400 for the issuance of 100,000 shares of common stock
issued to Fulcrum for assisting with listing our securities on a recognized
stock exchange and for consulting services, and (iv) $1,016 for the issuance
of 25,000 common shares and the vesting of 87,500 warrants to Fulcrum under
the agreement signed March 21, 2003.
(6) Includes (i) $947 of costs related to the issuance of 25,000 common shares
and the vesting of 87,500 warrants to Fulcrum under the agreement signed
March 21, 2003, and (ii) $247 for the attainment of certain milestones with
respect to the vesting of warrants to purchase 20,000 shares of common stock
issued to Pilot Capital Group, LLC (f/k/a The Gabriele Group, LLC) based
upon agreements signed July 31, 2002.
(7) Includes $480 of costs related to the issuance of 16,667 common shares and
the vesting of 58,335 warrants to Fulcrum under the agreement signed March
21, 2003.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure of market risk associated with risk-sensitive
instruments is not material, as our operations are conducted primarily in U.S.
dollars and we invest primarily in short-term government obligations and other
cash equivalents. We intend to develop policies and procedures to manage market
risk in the future if and when circumstances require.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements appear following Item 15 of this report and
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Disclosures and Procedures
We maintain controls and procedures designed to ensure that we are
able to collect the information we are required to disclose in the reports we
file with the SEC, and to process, summarize and disclose this information
within the time periods specified in the rules of the SEC. Our Chief Executive
and Chief Financial Officers are responsible for establishing and maintaining
these procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of our disclosure controls and
procedures, which took place as of the end of the period covered by this Annual
Report on Form 10-K, our Chief Executive and Chief Financial Officers believe
that these procedures are effective to ensure that we are able to collect,
process and disclose the information we are required to disclose in the reports
we file with the SEC within the required time periods.
Internal Controls
We maintain a system of internal controls designed to provide
reasonable assurance that: transactions are executed in accordance with
management's general or specific authorization; transactions are recorded as
necessary (i) to permit preparation of financial statements in conformity with
generally accepted accounting principles and (ii) to maintain accountability for
assets. Access to assets is permitted only in accordance with management's
general or specific authorization and the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
Since the date of the most recent evaluation of our internal
controls by our Chief Executive and Chief Financial Officers, there have been no
significant changes in such controls
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or in other factors that could have significantly affected those controls,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Regarding Directors and Executive Officers
The table below sets forth the names and ages of our directors and
executive officers as of June 4, 2004, as well as the positions and offices held
by such persons. A summary of the background and experience of each of these
individuals is set forth after the table. Each director serves for a term of one
year and is eligible for reelection at our next annual shareholders' meeting.
Name Age Position(s)
------------------------ ---- ------------------------------------------------
T. Stephen Thompson 57 Director, President and Chief Executive Officer
Cecilia Chan 41 Director and Executive Vice President
Gary C. Parks 54 Treasurer, Secretary and Chief Financial Officer
Harvey R. Colten, MD 65 Director
Judy Lau 44 Director
Levi H.K. Lee, MD 63 Director
Eric L. Sorkin 44 Director
Frederick W. Wackerle 65 Director
T. Stephen Thompson, President, Chief Executive Officer and Director
and a director of Immtech Hong Kong Ltd. also. Mr. Thompson has served as a
Director since November 27, 1991. He joined Immtech in April 1991 from Amersham
Corporation, where he was President and Chief Executive Officer. He was
responsible for Amersham Corporation's four North American divisions: Life
Sciences, Radiopharmaceuticals, Diagnostics and Quality and Safety Products. In
addition, he had direct responsibility for the Clinical Reagent (in vitro
diagnostic) Division in the United Kingdom. He was employed by Amersham
Corporation from 1986 to 1991. Mr. Thompson has 20 years' experience in
healthcare, with previous positions as President of a small diagnostic start-up,
General Manager of the Infectious Disease and Immunology Business Unit in the
Diagnostic Division of Abbott Laboratories from 1981 to 1986, and Group
Marketing Manager for the Hyland Division of Baxter International Inc. from 1978
to 1981. Mr. Thompson is a member of the Board of Directors of Matritech, Inc.
(NASDAQ: NMPS). Mr. Thompson holds a B.S. from the University of Cincinnati and
an MBA from Harvard University.
Cecilia Chan, Executive Vice President and Director. Ms. Chan has
served as Director since November 16, 2001. She has 18 years of experience in
making investments and business development. She began working on Immtech's
growth strategy in 1998 as a private investor, spearheading Immtech's initial
public offering in April 1999. She joined Immtech as
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Vice President in July, 1999 and was elected to our board of directors in
November 2001. Ms. Chan is responsible for strategic development, creating joint
ventures and licensing agreements, fund raising and directing our uses of
capital resources as we advances through milestones and various growth stages.
Prior to joining Immtech, Ms. Chan was a Vice President at Dean Witter Realty,
Inc. until 1993 and thereafter concentrated her efforts as a private investor
until she joined Immtech. During her eight years at Dean Witter, Ms. Chan
completed over $500 million in investments and was vice-president of public
partnerships having assets in excess of $800 million. Since 1993, Ms. Chan has
developed and funded investments in the United States and the PRC. She graduated
from New York University in 1985 with a Bachelor of Science degree in
International Business.
Judy Lau, Director. Ms. Lau has served as Director since October 31,
2003. Since July 2002 to date, Ms. Lau has served as the Chairperson of
Convergent Business Group, a Hong Kong-based investment advisory firm with
investments focused in high technology, life sciences, healthcare and
environmental engineering projects in the greater China region. From May of 2001
to July of 2002, Ms. Lau served as General Manager of China Overseas Venture
Capital Co. Ltd., a venture capital firm. From October of 2000 to April of 2001,
Ms. Lau served as Chief Executive Officer of the Good Fellow Group, a Chinese
investment firm; and from March of 1999 to September of 2000, Ms. Lau was the
Managing Director of America Online HK, an Internet Service Provider and Hong
Kong affiliate of Time Warner, Inc. From April of 1998 to February of 1999, Ms.
Lau worked as a consultant to Pacific Century Group. Ms. Lau has served in the
position of Director of Immtech Hong Kong Ltd. since June, 2003. Ms. Lau was
named in 2000, one of the thirty-six most influential Business Women of Hong
Kong by Capital Magazine and is a Fellow of the Hong Kong Association for the
Advancement of Science and Technology.
Levi Hong Kaye Lee, M.D., Director. Dr. Lee has served as
Director since October 31, 2003. Dr. Lee has been in private medical
practice, specializing in pediatrics, since 1971. His practice is located in
Hong Kong. Dr. Lee received a B.A. in Biochemistry from the University of
California, Berkeley, in 1962, and received his M.D. from the University of
California, San Francisco, in 1966. Dr. Lee has served in the position of
Director of Immtech Hong Kong Ltd. since June, 2003. He was appointed a
Diplomat of the American Board of Pediatrics in 1971.
Gary C. Parks, Treasurer, Secretary and Chief Financial Officer. Mr.
Parks joined Immtech in January 1994, having previously served at Smallbone,
Inc., from 1989 until 1993, where he was Vice President, Finance. Mr. Parks was
a Division Controller with International Paper from 1986 to 1989. Prior to that,
he was Vice President, Finance, of SerckBaker, Inc., a subsidiary of BTR plc,
from 1982 to 1986 and a board member of SerckBaker de Venezuela. Mr. Parks holds
a B.A. from Principia College and an MBA from the University of Michigan.
Harvey Colten, MD, Director. Dr. Colten has served as Director since
October 30, 2000. He is currently Vice President and Senior Associate Dean for
Academic Affairs 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
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industry from 2000 until 2002, and prior to that he was the Dean of the Medical
School and Vice President for Medical Affairs at Northwestern University from
1997 to 2000. He previously served as the Harriet B. Spoehrer Professor and
Chair of the Department of Pediatrics and Professor of Molecular Microbiology at
Washington University School of Medicine, St. Louis, Missouri, whose faculty he
joined in 1986. He earned a B.A. at Cornell University in 1959, an MD from
Western Reserve University in 1963, and an M.A. (honorary) from Harvard in 1978.
Following his clinical training, he was a researcher at the National Institutes
of Health from 1965 to 1970. In 1970, he was appointed to the faculty at the
Harvard Medical School, where he was named Professor of Pediatrics in 1979 and
Chief of the Division of Cell Biology, Pulmonary Medicine, and Director of the
Cystic Fibrosis Program at Children's Hospital Medical Center, Boston. He is a
member of the Institute of Medicine and was Vice-Chair of its Council. He is a
member of the American Society for Clinical Investigation, the Society for
Pediatric Research, the Association of American Physicians, the American
Pediatric Society, the American Association of Immunologists (former secretary
and treasurer), and the American Society for Biochemistry and Molecular Biology.
He is also a Fellow of the American Association for the Advancement of Science,
the American Academy of Allergy and Immunology and the American Academy of
Pediatrics. Dr. Colten is a Diplomat of the American Board of Pediatrics, served
on the American Board of Allergy and Immunology, was a member of the National
Heart, Lung, and Blood Institute Advisory Council, and serves on the Board of
Directors of the Oasis Institute and the March of Dimes Scientific Advisory
Council, in addition to many other Federal and private health groups that advise
on scientific and policy issues. Dr. Colten also served as Vice Chairman of the
Board of Directors of Parents as Teachers National Center. He has been on
editorial boards and advisory committees of several leading scientific and
medical journals, including the New England Journal of Medicine, Journal of
Clinical Investigation, Journal of Pediatrics, Journal of Immunology, Annual
Review of Immunology, Proceedings of the Association of American Physicians and
American Journal of Respiratory Cell and Molecular Biology.
Eric L. Sorkin, Director. Mr. Sorkin has served as Director since
January 6, 2000. He is a private investor. Prior to 1994, Mr. Sorkin worked for
eleven years at Dean Witter Realty Inc., a wholly owned subsidiary of Morgan
Stanley, which grew to hold an investment portfolio of real estate and other
assets of over $3 billion. He became a Managing Director in 1988 and was
responsible for the acquisition, structuring and debt placement of various
investments including real estate, fund management and asset-backed securities.
Mr. Sorkin managed Dean Witter Realty's retail (shopping center) portfolio of
over two million square feet, and participated in the development of office,
residential, industrial and retail property and in the acquisition of over five
million square feet of properties. Since 1994, Mr. Sorkin has developed and
funded investments in the United States and the PRC. He is a graduate of Yale
University with a Bachelor of Arts degree in Economics.
Frederick W. Wackerle, Director. Mr. Wackerle has served as Director
since December 17, 2001. He is an author, private investor and President of Fred
Wackerle, Inc. He has been an advisor to Chief Executive Officers ("CEOs") and
boards and previously was an executive search consultant for 35 years. Mr.
Wackerle specialized in advising corporate boards on management succession. 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
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Pharmaceuticals, Inc., Enzon, Inc., Medtronic Inc. and Ventana Medical Systems.
Mr. Wackerle has recently published a book on management succession entitled,
"The Right CEO-Straight Talk About Making CEO Selection Decisions"
(Jossey-Bass), and is a graduate of Monmouth College, Illinois, where he has
been active on their Board of Trustees. He is also a board member of The
Rehabilitation Institute of Chicago.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers and 10% stockholders of a registered class of equity securities to file
reports of ownership and reports of changes in ownership of our common stock and
other equity securities with the SEC. Directors, executive officers and 10%
stockholders are required to furnish us with copies of all Section 16(a) forms
they file. Based on a review of the copies of such reports furnished to us, we
believe that during fiscal 2003, our directors, executive officers and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them. Ms. Vivian Lee, the wife of Dr. Lee, one of our independent directors,
purchased 2,000 shares and sold 1,000 shares of our common stock in a series of
trades on February 5, 2004, resulting in a profit of $235 to Ms. Lee. Dr. Lee
paid $235 to us as a Section 16 fee.
Board Committees
The board of directors has an audit committee, a compensation
committee and a nominating committee. The function, composition, and number of
meetings of each of these committees are described below.
Audit Committee
The audit committee (a) has sole authority to appoint, replace and
compensate our independent auditors and is directly responsible for oversight of
their work; (b) approves all audit fees and terms, as well as any permitted
non-audit services; (c) meets and discusses directly with our independent
auditors their audit work and related matters and (d) oversees and performs such
investigations with respect to our internal and external auditing procedures and
affairs as the audit committee deems necessary or advisable and as may be
required by applicable law.
The members of the audit committee are Directors Sorkin (Chairman),
Colten and Lau. Each member of the audit committee is "independent" in
accordance with the rules of the SEC and the listing standards of the American
Stock Exchange. The board has determined that Mr. Eric Sorkin, the current
chairman of the audit committee, qualifies as an "audit committee financial
expert" within the meaning of the regulations of the SEC.
Compensation Committee
The compensation committee (a) annually reviews and determines
salaries, bonuses and other forms of compensation paid to our executive officers
and management; (b) selects recipients of awards of incentive stock options and
non-qualified stock options and establishes the number of shares and other terms
applicable to such awards; and (c) construes the provisions of and generally
administers the First Amended and Restated Immtech International, Inc. 2000
Stock Incentive Plan.
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The members of the compensation committee are Directors Wackerle
(Chairman), Lau and Sorkin.
Nominating Committee
The nominating committee has authority to review the qualifications
of, interview and nominate candidates for election to the board of directors.
The members of the nominating committee are Directors Colten
(Chairman), Lee and Wackerle. Each member of the nominating committee is
"independent" in accordance with the listing standards of the American Stock
Exchange.
Code of Ethics
We have adopted a "code of ethics", as defined by the SEC, that
applies to our Chief Executive Officer, Chief Financial Officer, principal
accounting officer and persons performing similar functions with Immtech and our
subsidiaries. We have filed with the SEC a copy of our Code of Ethics as Exhibit
14.1 to this Annual Report on Form 10-K. We also post the text of our Code of
Ethics on our Internet website (www.immtech-international.com).
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding the
compensation of our Chief Executive Officer, our Executive Vice President and
our Chief Financial Officer for the fiscal years ended March 31, 2002, 2003 and
2004. Except as set forth below, no other compensation was paid to these
individuals during the years indicated.
Long-Term
Annual Compensation
Compensation Awards
------------ ----------------
Securities
Underlying
Year Salary ($) Options/SARs (#)
---- ----------- ----------------
T. Stephen Thompson 2004 $185,000 40,000
President, Chief Executive Officer 2003 $150,000 75,000
and Director 2002 $150,000 0
Cecilia Chan 2004 $148,000 25,000
Executive Vice President and 2003 $120,000 50,000
Director 2002 $120,000 0
Gary C. Parks 2004 $134,375 15,000
Secretary, Treasurer and Chief 2003 $143,250(1) 25,000
Financial Officer 2002 $125,000 10,000
------------
(1) Includes a bonus of $18,250.
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Stock Option Grants and Exercises During the Fiscal Year Ended March 31, 2004
The following table sets forth information concerning stock option
grants made during the fiscal year ended March 31, 2004, to our executive
officers named in the "Summary Compensation Table" above. This information is
for illustration purposes only and is not intended to predict the future price
of our common stock. The actual future value of the options will depend on the
market value of the common stock.
STOCK OPTION GRANTS IN FISCAL YEAR ENDED MARCH 31, 2004
Potential Realizable Value At
Assumed Annual Rates of Stock
Individual Grants Price Appreciation For Option Term
---------------------------------------------------------------------------------- -----------------------------------
Percent
of Total
Number of Options/SARs
Securities Granted
Underlying to Exercise
Options/SARs Employees Price Expiration
Name Granted (%) ($/SH) Date 5%($) 10%($)
------------------------- ------------ ------------- --------- ----------- --------- ----------
T. Stephen Thompson 40,000 30.30 21.66 11/5/2013 1,411,274 2,247,218
Cecilia Chan 25,000 18.94 21.66 11/5/2013 882.046 1,404,512
Gary C. Parks 15,000 11.36 21.66 11/5/2013 529,228 842,707
The following table sets forth certain summary information
concerning exercised and unexercised options and warrants to purchase common
stock held by the executive officers named in the "Summary Compensation Table"
as of March 31, 2004.
STOCK OPTION AND WARRANT EXERCISES IN FISCAL YEAR
ENDED MARCH 31, 2004, AND FISCAL YEAR-END OPTION/WARRANT VALUES
Number of Unexercised Value of Unexercised
Options/Warrants at Fiscal In-The-Money Options/Warrants
Shares Year End (#) at Fiscal Year End ($)
Acquired on Realized ----------------------------- ---------------------------------
Exercise (#) Value ($) Exercisable Unexercisable Exercisable Unexercisable
------------ --------- ----------- ------------- ------------- -------------
T. Stephen Thompson 0 0 87,653 75,414 1,209,630(1) 698,640(2)
Cecilia Chan 0 0 253,355 48,957 3,072,060(3) 465,765(4)
Gary C. Parks 0 0 37,628 27,567 492,703(5) 242,284(6)
--------------------------------------------------------------------------------------------------------------------------------
------------
(1) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $3.27 multiplied by the number of shares
underlying the options and warrants.
(2) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $2.55 multiplied by the number of shares
underlying the options.
(3) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $6.14 multiplied by the number of shares
underlying the options and warrants.
(4) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $2.55 multiplied by the number of shares
underlying the options.
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(5) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $4.24 multiplied by the number of shares
underlying the options and warrants.
(6) Based on the March 31, 2004, value of $18.52 per share, minus the average
per share exercise price of $3.08 multiplied by the number of shares
underlying the options.
Director Compensation
We compensate non-employee members of the Board of Directors for
their service as Board members through the grant to each such director of 20,000
options to purchase our common stock upon joining the Board. In addition, each
non-employee director receives options to purchase 15,000 shares of common stock
for each subsequent year of Board service, options to purchase 3,000 shares of
common stock for each year of service on each Board committee and options to
purchase 1,000 shares of common stock for each Board committee chaired. Such
options are generally granted at fair market value on the date of grant, vest
ratably over 2 years and expire 10 years from the date of grant. We also
reimburse the directors for out-of-pocket expenses incurred in connection with
their service as directors.
Employment Agreements
We entered into an employment agreement with T. Stephen Thompson in
1992, pursuant to which we retained Mr. Thompson as our President and Chief
Executive Officer for an annual base salary of $150,000 (subject to annual
adjustment by the Board), plus reimbursement for related business expenses. The
agreement, which includes certain confidentiality and non-disclosure provisions,
grants to Mr. Thompson the right to receive an annual bonus to be established by
the Board in an amount not to exceed 60% of Mr. Thompson's annual base salary
for the year and certain other fringe benefits. If we breach the agreement or
Mr. Thompson is terminated by us without cause, he is entitled to all payments
which he would otherwise accrue over the greater of nine months from the date of
termination or the remaining term under the agreement. Additionally, rights to
all options granted to Mr. Thompson pursuant to the agreement vest immediately
upon his termination without cause or a change of control. The term of Mr.
Thompson's agreement expired on May 11, 1999; however, the agreement is subject
to automatic renewal for successive one-year terms unless terminated by either
party upon 30 days' notice. Except for $12,500 paid to Mr. Thompson during the
fiscal year ended March 31, 1998, Mr. Thompson has waived any right to receive
salary due under his employment agreement prior to June 30, 1998. Beginning July
1, 1998, and continuing until April 30, 1999, Mr. Thompson agreed to accept
one-half of his annual salary as full satisfaction of our salary obligation
under his employment agreement. Mr. Thompson, effective May 1, 1999, has resumed
his full salary rate of $150,000 per annum under his employment agreement, but
will not be paid amounts previously waived. Effective September 1, 2003, Mr.
Thompson received a raise to $210,000 per year.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our Board of Directors
or our Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of June 4, 2004, by (i) each of our
directors and executive officers, (ii) all directors and executive officers as a
group and (iii) each person known to be the beneficial owner of more than 5% of
our common stock.
Number of Shares Percentage of Outstanding
of Common Stock Beneficially Shares
Name and Address Owned of Common Stock
------------------------------------------------------- ------------------------------- -----------------------------
T. Stephen Thompson (1)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 444,842 shares 4.42%
Cecilia Chan (2)
c/o Immtech International, Inc.
One North End Ave.
New York, NY 10282 303,201 shares 2.98%
Gary C. Parks (3)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 68,070 shares 0.68%
Harvey Colten, M.D. (4)
c/o Office of the Dean Columbia University
College of Physicians and Surgeons
630 West 168th Street
New York, NY 10032 36,311 shares 0.37%
Judy Lau (5)
Unit 2905, Shui On Centre
6-8 Harbour Road
Wanchai, Hong Kong 12,750 shares 0.13%
Levi H.K. Lee, M.D.(6)
1405 Lane Crawford House
70 Queens Road Central, Hong Kong 209,127 shares 2.10%
Eric L. Sorkin (7)
c/o Immtech International, Inc.
One North End Ave.
New York, NY 10282 313,229 shares 3.07%
Frederick W. Wackerle(8)
3750 N. Lake Shore Drive
Chicago IL 60613 75,902 shares 0.76%
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Number of Shares Percentage of Outstanding
of Common Stock Beneficially Shares
Name and Address Owned of Common Stock
------------------------------------------------------- ------------------------------- -----------------------------
All executive officers and directors as a
group (8 persons) 1,463,432 shares 13.48%
Chan Kon Fung
Flat B, 16th Floor
132 Broadway
Mei Foo Sun Chuen
Kowloon, Hong Kong 1,246,600 shares 12.59%
------------
(1) Includes (i) 284,439 shares of common stock; (ii) 45,249 shares of common
stock issuable upon the conversion of series A preferred stock; (iii) 12,500
shares of common stock issuable upon the conversion of series B preferred
stock; (iv) 25,000 shares of common stock issuable upon the exercise of
warrants as follows: warrant to purchase 20,000 shares of common stock at
$6.00 per share by February 14, 2007 (only after the series A preferred
stock has been converted and vested), and warrant to purchase 5,000 shares
of common stock at $6.125 per share by September 25, 2007; and (v) 77,654
shares of common stock issuable upon the exercise of options as follows:
vested option to purchase 8,872 shares of common stock at $0.46 per share by
March 21, 2006, vested option to purchase 14,195 shares of common stock at
$1.74 per share by April 16, 2008, the vested portion of 39,587 shares of an
option to purchase 75,000 shares of common stock at $2.55 per share by
December 24, 2012, and the vested portion of 15,000 shares of an option to
purchase 40,000 shares of common stock at $21.66 per share by November 5,
2013.
(2) Includes (i) 34,342 shares of common stock; (ii) 5,781 shares of common
stock issuable upon the conversion of series B preferred stock; (iii)
227,312 shares of common stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 51,923 shares of common stock at $6.47
per share by July 24, 2004, vested warrant to purchase 173,077 shares of
common stock at $6.47 per share by October 12, 2004, and vested warrant to
purchase 2,312 shares of common stock at $6.125 per share by September 25,
2007; and (iv) 35,766 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 26,391 shares of an option to
purchase 50,000 shares of common stock at $2.55 per share by December 24,
2012, and the vested portion of 9,375 shares of an option to purchase 25,000
shares of common stock at $21.66 per share by November 5, 2013.
(3) Includes (i) 21,792 shares of common stock; (ii) 2,262 shares of common
stock issuable upon the conversion of series A preferred stock; (iii) 1,000
shares of common stock issuable upon the exercise of warrants as follows:
warrant to purchase 1,000 shares of common stock at $6.00 per share by
February 14, 2007 (only after the series A preferred stock has been
converted); and (iv) 43,016 shares of common stock issuable upon the
exercise of options as follows: vested option to purchase 14,195 shares of
common stock at $1.74 per share by April 16, 2008, vested option to purchase
10,000 shares of common stock at $10.00 per share by July 19, 2011, the
vested portion of 13,196 shares of an option to purchase 25,000 shares of
common stock at $2.55 per share by December 24, 2012, and the vested portion
of 5,625 shares of an option to purchase 15,000 shares of common stock at
$21.66 per share by November 5, 2013.
(4) Includes (i) 1,088 shares of common stock; and (ii) 35,223 shares of common
stock issuable upon the exercise of options as follows: vested option to
purchase 20,000 shares of common stock at $10.50 per shares by December 28,
2005, the vested portion of 6,028 shares of an option to purchase 7,000
shares of common stock at $4.75 per share by December 18, 2006, the vested
portion of 3,695 shares of an option to purchase 7,000 shares of common
stock at $2.55 per share by December 24, 2007, and the vested portion of
5,500 shares of an option to purchase 22,000 shares of common stock at
$14.29 per share by February 1, 2014.
(5) Includes 12,750 shares of common stock issuable upon the exercise of options
as follows: the vested portion of 7,500 shares of an option to purchase
20,000 shares of common stock at $21.66 per share by November 5,
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2013, and the vested portion of 5,250 shares of an option to purchase
21,000 shares of common stock at $14.29 per share by February 1, 2014.
(6) Includes (i) 133,778 shares of common stock; (ii) 11,312 shares of common
stock issuable upon the conversion of series A preferred stock; (iii) 52,037
shares of common stock issuable upon the conversion of series C preferred
stock; and (iv) 12,000 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 7,500 shares of an option to
purchase 20,000 shares of common stock at $21.66 per share by November 5,
2013, and the vested portion of 4,500 shares of an option to purchase 18,000
shares of common stock at $14.29 per share by February 1, 2014.
(7) Includes (i) 26,420 shares of common stock; (ii) 20,362 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
234,000 shares of common stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 51, 923 shares of common stock at $6.47
per share by July 24, 2004, vested warrant to purchase 173,077 shares of
common stock at $6.47 per share by October 12, 2004, and vested warrant to
purchase 9,000 shares of common stock at $6.00 per share by February 14,
2007 (only after the series A preferred stock has been converted); and (iv)
32,447 shares of common stock issuable upon the exercise of options as
follows: the vested portion of 23,252 shares of an option to purchase 27,000
shares of common stock at $4.75 per share by December 18, 2006, the vested
portion of 3,695 shares of an option to purchase 7,000 shares of common
stock at $2.55 per share by December 24, 2007, and the vested portion of
5,500 shares of any option to purchase 22,000 shares of common stock at
$14.29 per share by February 1, 2014.
(8) Includes (i) 13,186 shares of common stock; (ii) 13,575 shares of common
stock issuable upon the conversion of series A preferred stock; (iii) vested
warrant to purchase 6,000 shares of common stock at $6.00 per share by
February 14, 2007 (only after the series A preferred stock has been
converted); and (iv) 43,141 shares of common stock issuable upon the
exercise of options as follows: the vested option to purchase 15,000 shares
of common stock at $10.50 per share by December 28, 2005, the vested portion
of 18,946 shares of an option to purchase 22,000 shares of common stock at
$4.75 per share by December 18, 2006, the vested portion of 3,695 on an
option to purchase 7,000 shares of common stock at $2.55 per share by
December 24, 2007, and the vested portion of 5,500 shares of an option to
purchase 22,000 shares of common stock at $14.29 per share by February 1,
2014.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following related-party transactions are disclosed.
RADE Management Corporation
---------------------------
From January 1998 to July 1999 we utilized the services of RADE
Management Corporation ("RADE") as a consultant to assist us to raise capital
and to assist us with our initial public offering. On July 1, 1999, Immtech
began leasing office space from RADE in RADE's facility in New York, New York on
a month-to-month basis to house our business development, investor relations and
certain of our administrative functions. During the years ended March 31, 2002,
2003 and 2004, we paid approximately $106,000, $106,000 and $121,000,
respectively, for the use of the facility. In addition, during the years ended
March 31, 2002, 2003 and 2004, we reimbursed RADE approximately $18,000, $0 and
$0, respectively, for expenses paid on our behalf. We have researched leasing
other facilities in the New York metropolitan area and believe that our Lease
with RADE is on terms no less favorable than we would otherwise obtain from
another unaffiliated third-party.
Super Insight Limited
---------------------
On November 28, 2003, we entered into a share purchase agreement and
deed of indemnity related to the purchase of Super Insight Limited (the "Share
Purchase Agreement")
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and an Allonge to the Share Purchase Agreement related to the shares in Super
Insight Limited ("Super Insight") and Immtech Hong Kong Limited ("Immtech Hong
Kong") (the "Allonge") with Mr. Chan Kon Fung ("Mr. Chan"), Lenton Fibre Optics
Development Limited, Super Insight and Immtech Hong Kong. Pursuant to the terms
of the Share Purchase Agreement and the Allonge, we purchased (i) from Mr. Chan
100% of the outstanding shares of Super Insight and its wholly-owned subsidiary,
subsequently named Immtech Life Science Limited ("Immtech Life Science") and
(ii) from Lenton, 100% of Lenton's interest in Immtech Hong Kong. As payment for
Super Insight and Immtech Hong Kong, we transferred to Mr. Chan our 80% interest
in Lenton and paid him $400,000 in cash
In January 2003, Mr. Chan Kon Fung, the counterparty in the Super
Insight transaction listed above, received 1,200,000 shares of our common stock
in exchange for an 80% interest in Lenton Fibre Optics Development Limited; the
same 80% interest we are transferring to Mr. Chan to obtain the 100% interest in
Super Insight. With 1,200,000 shares of our common stock, Mr. Chan became and
remains, a "10% beneficial owner" of Immtech and therefor our board determined
that the acquisition of Super Insight required increased scrutiny as an
affiliate transaction. Our board reviewed the Super Insight transaction prior to
its completion and determined that the terms of the transaction were no less
favorable to us than we could have obtained in a similar transaction with an
unaffiliated third party and therefore approved the transaction.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents the aggregate fees billed for
professional services rendered by Deloitte & Touche LLP during the years ended
March 31, 2003 and 2004. Other than as set forth below, no professional services
were rendered or fees billed by Deloitte & Touche LLP during 2003 or 2004.
2004 2003
Audit Fees (a) $ 205,000 $ 113,000
Audit Related Fees -- --
--------- ---------
Total Audit and Audit Related Fees 205,000 113,000
Tax Fees (b) 4,000 4,000
All Other Fees -- --
--------- ---------
Total Fees $ 209,000 $ 117,000
========= =========
(a) Includes fees and out-of-pocket expenses for the following services: Audit
of the consolidated financial statements Quarterly reviews SEC filings and
consents Financial accounting and reporting consultations (Lenton, Super
Insight and Others)
(b) Includes fees and out-of-pocket expenses for tax compliance, tax planning
and advice.
All work performed by Deloitte & Touche as described above has been
approved by the Audit Committee prior to Deloitte & Touche's engagement to
perform the audit. The Audit Committee pre-approves on an annual basis the
audit, audit-related, tax and other services
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to be rendered by our accountants based on historical information and
anticipated requirements for the following fiscal year. To the extent that our
management believes that a new service or the expansion of a current service
provided by our accountants is necessary, such new or expanded service is
presented to the Audit Committee or one of its members for review and approval.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with this Report.
The following documents are filed as part of this Form 10-K:
1. Financial Statements
The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this report.
2. Financial Statement Schedules
None.
3. Exhibits
The information called for by this paragraph is contained in the
Index to Exhibits of this Form 10-K, which is incorporated herein by reference.
(b) Reports on Form 8-K.
On December 2, 2003, we announced on Form 8-K the purchase of Super
Insight Limited pursuant to which we purchased a portion of a newly-constructed
commercial building in exchange for our 80% interest in Lenton Fibre Optics
Development Limited and $400,000 paid by us in cash. Lenton's primary asset is
an undeveloped industrially zoned land parcel. Concurrently with the
consummation of the transaction, Immtech Hong Kong Limited, Lenton's
wholly-owned subsidiary, was transferred to us and is now directly held.
On December 3, 2003, we announced on Form 8-K, the consummation of a
Testing Agreement with Medicines For Malaria Venture and The University of North
Carolina at Chapel Hill pursuant to which we, with the support of MMV and UNC,
will conduct a proof of concept study of the dicationic drug candidate DB289 for
the treatment of malaria.
On January 21, 2004, we announced on Form 8-K the offering of a $5
million private placement of our Series D Convertible Preferred Stock and
related warrants. On January 22, 2004 the offering was completed and closed.
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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: July 20, 2004 By: /s/ T. Stephen Thompson
---------------------------------- ----------------------------------
T. Stephen Thompson
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Date
--------- ----
/s/ T. Stephen Thompson July 20, 2004
------------------------------------------------ --------------------------
T. Stephen Thompson
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Gary C. Parks July 20, 2004
------------------------------------------------ --------------------------
Gary C. Parks
Treasurer, Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Cecilia Chan July 20, 2004
------------------------------------------------ --------------------------
Cecilia Chan
Executive Vice President and Director
/s/ Harvey Colten, MD July 20, 2004
------------------------------------------------ --------------------------
Harvey Colten, MD
Director
/s/ Judy Lau July 20, 2004
------------------------------------------------ --------------------------
Judy Lau
Director
/s/ Levi H.K. Lee, MD July 20, 2004
------------------------------------------------ --------------------------
Levi H.K. Lee, MD
Director
-79-
/s/ Eric L. Sorkin July 20, 2004
------------------------------------------------ --------------------------
Eric L. Sorkin
Director
/s/ Frederick W. Wackerle July 20, 2004
------------------------------------------------ --------------------------
Frederick W. Wackerle
Director
-80-
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
3.1 (2) Certificate of Incorporation of the Company, as amended
3.2 (8) By-laws of the Company, with amendment
3.3 (18) Amended and Restated Certificate of Incorporation of the
Company, dated June 14, 2004
4.1 (3) Form of Common Stock Certificate
4.2 (2) Warrant Agreement, dated July 24, 1998, by and between the
Company and RADE Management Corporation
4.3 (2) Warrant Agreement, dated October 12, 1998, by and between
the Company and RADE Management Corporation
4.4 (8) Warrant Agreement, dated March 15, 2001, by and between
the Company and The Kriegsman Group
4.5 (9) Certificate of Designation for Series A Convertible
Preferred Stock Private Placement, dated February 14, 2002
4.6 (9) Stock Purchase Warrant, dated February 14, 2002, for
Series A Convertible Preferred Stock Private Placement
4.7 (11) Certificate of Designation for Series B Convertible
Preferred Stock Private Placement, dated September 25,
2002
4.8 (11) Stock Purchase Warrant, dated September 25, 2002, for
Series B Convertible Preferred Stock Private Placement
4.9 (12) Certificate of Designation for Series C Convertible
Preferred Stock Private Placement, dated June 6, 2003
4.10 (17) Certificate of Designation for Series D Convertible
Preferred Stock Private Placement, dated January 15, 2004
4.11 (17) Stock Purchase Warrant, dated January 15, 2004, for Series
D Convertible Preferred Stock Private Placement
4.12 (19) First Amendment to the Certificate of Designation for
Series A Convertible Preferred Stock, dated October 2,
2002
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
-81-
10.4 (1) Letter Agreement, dated May 29, 1998, between the Company
and Franklin Research Group, Inc.
10.5 (1) Indemnification Agreement, dated June 1, 1998, between the
Company and RADE Management Corporation
10.6 (1) Letter Agreement, dated June 24, 1998, between the Company
and Criticare Systems, Inc.
10.7 (1) Letter Agreement, dated June 25, 1998, between the Company
and Criticare Systems, Inc.
10.8 (2) Amendment, dated January 15, 1999, to Letter Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.9 (5) Office Lease, dated August 26, 1999, by and between the
Company and Arthur J. Rogers & Co.
10.10 (8) License Agreement, dated August 25, 1993, by and between
the University of North Carolina at Chapel Hill and
Pharm-Eco Laboratories, Inc.
10.11 (8) Assignment Agreement, dated as of March 27, 2001, by and
between the Company and Pharm-Eco Laboratories, Inc.
10.12 (8) Clinical Research Subcontract, dated as of March 29, 2001,
by and between The University of North Carolina at Chapel
Hill and the Company
10.13 (1) Material Transfer and Option Agreement, dated March 23,
1998, by and between the Company and Sigma Diagnostics,
Inc.
10.14 (1) License Agreement, dated March 10, 1998, by and between
the Company and Northwestern University
10.15 (1) License Agreement, dated October 27, 1994, by and between
the Company and Northwestern University
10.16 (1) Assignment of Intellectual Properties, dated June 29,
1998, between the Company and Criticare Systems, Inc.
10.18 (1) Assignment Agreement, dated June 26, 1998, by and between
the Company and Criticare Systems, Inc.
10.19 (1) Assignment Agreement, dated June 29, 1998, by and between
the Company and Criticare Systems, Inc.
10.20 (1) International Patent, Know-How and Technology License
Agreement, dated June 29, 1998, by and between the Company
and Criticare Systems, Inc.
10.21 (1) Employment Agreement, dated 1992, by and between the
Company and T. Stephen Thompson
-82-
10.22 (2) Funding and Research Agreement, dated September 30, 1998,
by and among the Company, NextEra Therapeutics, Inc. and
Franklin Research Group, Inc.
10.23 (4) Two Year Plus 200% Lock-Up Agreement executed by James Ng
10.24 (4) Employment Agreement, dated 1998, by and between NextEra
and Lawrence Potempa
10.25 (7) Form of Regulation D Subscription Agreement for December
8, 2000 Private Placement
10.26 (7) Form of Regulation S Subscription Agreement for December
8, 2000 Private Placement
10.27 (9) Form of Regulation D Subscription Agreement for February
14, 2002 Series A Preferred Private Placement
10.28 (9) Form of Regulation S Subscription Agreement for February
14, 2002 Series A Preferred Private Placement
10.29 (10) Amendment, dated January 28, 2002, to License Agreement
between the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.30 (11) Form of Regulation D Subscription Agreement for September
2002 Series B Preferred Private Placement
10.31 (11) Form of Regulation S Subscription Agreement for September
2002 Series B Preferred Private Placement
10.32 (12) Form of Regulation D Subscription Agreement for June 2003
Series C Preferred Private Placement
10.33 (12) Form of Regulation S Subscription Agreement for June 2003
Series C Preferred Private Placement
10.34 (14) Regis Pharmaceutical Manufacturing Agreement dated March
4, 2003
10.35 (15) Share Purchase Agreement and Deed of Indemnity as related
to shares in Super Insight Limited, dated November 28,
2003, by and between the Company, Chan Kon Fung and Super
Insight Limited
10.36 (15) Allonge to the Share Purchase Agreement and Deed of
Indemnity as related to shares in Super Insight Limited
and Immtech Hong Kong Limited, dated November 28, 2003, by
and between the Company, Chan Kon Fung, Lenton Fibre
Optics Development Limited, Super Insight Limited, and
Immtech Hong Kong Limited
10.37 (16) Testing Agreement, dated as of November 26, 2003, by and
between Medicines for Malaria Venture, Immtech
International Inc., and The University of North Carolina
at Chapel Hill
10.38 (17) Form of Regulation D Subscription Agreement for January
2004 Series D Preferred Private Placement
-83-
10.39 (17) Form of Regulation S Subscription Agreement for January
2004 Series D Preferred Private Placement
14.1 (18) Code of Ethics
21.1 (13) Subsidiaries of Registrant
23.1 (19) Consent of Deloitte & Touche LLP
31.1 (19) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 (19) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (19) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 (19) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by Reference to our Registration Statement on Form SB-2
(Registration Statement No. 333-64393), as filed with the Securities and
Exchange Commission on September 28, 1998.
(2) Incorporated by Reference to Amendment No. 1 to our Registration Statement
on Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on February 11, 1999.
(3) Incorporated by Reference to Amendment No. 2 our Registration Statement on
Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on March 30, 1999.
(4) Incorporated by Reference to our Form 10-KSB for the fiscal year ended
March 31, 1999 (File No. 001-14907), as filed with the Securities and
Exchange Commission on June 29, 1999.
(5) Incorporated by Reference to our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2000 (File No. 000-25669), as filed with the
Securities and Exchange Commission on June 26, 2000.
(6) Incorporated by Reference to Annex A to our Definitive Proxy Statement
(File No. 000-25669), as filed with the Securities and Exchange Commission
on August 25, 2000.
(7) Incorporated by Reference to our Quarterly Report on Form 10-QSB (File No.
000-25669), as filed with the Securities and Exchange Commission on
February 14, 2001.
(8) Incorporated by Reference to our Annual Report on Form 10-KSB/A (File No.
000-25669), as filed with the Securities and Exchange Commission on June
29, 2001, as amended on July 6, 2001.
(9) Incorporated by Reference to our Form 8-K (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002.
(10) Incorporated by Reference to our Form 10-Q (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002, as
amended on June 10, 2002.
(11) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on September 25, 2002.
(12) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 10, 2003.
(13) Incorporated by Reference to our Form 10-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 27, 2003, as amended on
October 15, 2003.
(14) Incorporated by Reference to our Form 10-K/A (File No. 001-14907), as filed
with the Securities and Exchange Commission on October 15, 2003.
-84-
(15) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 2, 2003.
(16) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 3, 2003.
(17) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on January 21, 2004.
(18) Incorporated by Reference to our Form 10-K (File No. 001- 14907), as
filed with the Securities and Exchange Commission on June 14, 2004.
(19) Filed herewith.
-85-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Financial Statements as of
March 31, 2003 and 2004, for the Years
Ended March 31, 2002, 2003 and 2004 and
for the Period October 15, 1984 (Date of
Inception) to March 31, 2004 (Unaudited)
and Report of Independent Registered
Public Accounting Firm
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
TABLE OF CONTENTS
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ..................F-1
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2003 AND 2004,
FOR THE YEARS ENDED MARCH 31, 2002, 2003 AND 2004, AND FOR
THE PERIOD FROM OCTOBER 15, 1984 (DATE OF INCEPTION) TO
MARCH 31, 2004 (UNAUDITED):
Balance Sheets .....................................................F-2
Statements of Operations ...........................................F-4
Statements of Stockholders' Equity (Deficiency in Assets) ........F-5-7
Statements of Cash Flows ...........................................F-8
Notes to Financial Statements ...................................F-9-40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Immtech International, Inc.:
We have audited the accompanying consolidated balance sheets of Immtech
International, Inc. (a development stage enterprise) and subsidiaries (the
"Company") as of March 31, 2003 and 2004, and the related consolidated
statements of operations, stockholders' equity (deficiency in assets) and cash
flows for each of the three years in the period ended March 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of March 31, 2003
and 2004, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.
Milwaukee, Wisconsin
June 4, 2004
F-1
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND 2004
--------------------------------------------------------------------------------
ASSETS 2003 2004
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 112,040 $ 6,745,283
Restricted funds on deposit 2,739,947 2,154,928
Other current assets 133,525 59,979
----------- -----------
Total current assets 2,985,512 8,960,190
PROPERTY AND EQUIPMENT - Net 3,604,656 3,610,214
OTHER ASSETS 19,848 15,477
----------- -----------
TOTAL ASSETS $ 6,610,016 $12,585,881
=========== ===========
See notes to consolidated financial statements.
F-2
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2004
-------------------------------------------------------------------------------- ------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 541,881 $ 970,308
Accrued expenses 4,821 22,382
Deferred revenue 2,554,071 1,831,093
------------ ------------
Total current liabilities 3,100,773 2,823,783
DEFERRED RENTAL OBLIGATION 20,779 14,413
------------ ------------
Total liabilities 3,121,552 2,838,196
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 296,193
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,440,000 and 4,080,000 shares
authorized and unissued as of March 31, 2003 and 2004, respectively
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 142,800 and 80,800 shares issued
and outstanding as of March 31, 2003 and 2004, respectively, aggregate
liquidation preference of $3,668,005 and $2,075,250 as of March 31, 2003 and
2004, respectively 3,668,005 2,075,250
Series B convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 240,000 shares authorized, 56,725 and 19,925 shares issued and
outstanding as of March 31, 2003 and 2004, respectively, aggregated
liquidation preference of $1,469,967 and $516,093 as of March 31, 2003 and
2004, respectively 1,469,967 516,093
Series C convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 160,000 shares authorized, 72,304 shares outstanding as of March
31, 2004, aggregate liquidation preference of $1,874,186 as of March 31, 2004 1,874,186
Series D convertible preferred stock, par value $0.01 per share,
stated value $25 per share, 200,000 shares authorized, 200,000 shares
outstanding as of March 31, 2004, aggregate liquidation preference of
$5,056,712 as of March 31, 2004 5,056,712
Common stock, par value $0.01 per share, 100,000,000 shares authorized,
7,898,986 and 9,835,286 shares issued and outstanding as of March 31, 2003 and
2004, respectively 78,990 98,353
Additional paid-in capital 40,142,617 58,666,489
Deficit accumulated during the developmental stage (42,167,308) (58,539,398)
------------ ------------
Total stockholders' equity 3,192,271 9,747,685
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,610,016 $ 12,585,881
============ ============
F-3
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2002, 2003 AND 2004 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2004 (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
(Inception)
Years Ended March 31, to March 31,
--------------------------------------------
2002 2003 2004 2004
------------ ------------ ------------ ------------
REVENUES $ 3,522,113 $ 1,608,849 $ 2,416,180 $ 11,259,002
EXPENSES:
Research and development 3,958,107 2,570,370 3,292,737 34,364,268
General and administrative 2,927,726 3,731,398 11,989,670 33,061,554
Equity in loss of joint venture 135,002
------------ ------------ ------------ ------------
Total expenses 6,885,833 6,301,768 15,282,407 67,560,824
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (3,363,720) (4,692,919) (12,866,227) (56,301,822)
OTHER INCOME (EXPENSE):
Interest income 40,610 13,850 20,414 597,992
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942)
Cancelled offering costs (584,707)
Gain on extinguishment of debt 1,427,765
------------ ------------ ------------ ------------
Other income (expense) - net 40,610 13,850 20,414 308,606
------------ ------------ ------------ ------------
NET LOSS (3,323,110) (4,679,069) (12,845,813) (55,993,216)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE PREFERRED
STOCK PREMIUM DEEMED DIVIDENDS (937,935) (451,869) (3,526,277) (4,916,081)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM AMORTIZATION AND
DIVIDENDS 2,369,899
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (4,261,045) $ (5,130,938) $(16,372,090) $(58,539,398)
============ ------------ ------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss $ (0.55) $ (0.71) $ (1.43)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.16) (0.07) (0.39)
------------ ------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (0.71) $ (0.78) $ (1.82)
============ ------------ ------------
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND DILUTED NET
LOSS PER SHARE 6,011,416 6,565,495 8,977,817
See notes to consolidated financial statements.
F-4
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
YEARS ENDED MARCH 31, 2002, 2003 AND 2004 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2004 (UNAUDITED)
--------------------------------------------------------------------------------
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
-------------------------------------- ---------------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
October 15, 1984 (Inception)
Issuance of common stock to founders
Balance, March 31, 1985
Issuance of common stock
Net loss
Balance, March 31, 1986
Issuance of common stock
Net loss
Balance, March 31, 1987
Issuance of common stock
Net loss
Balance, March 31, 1988
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1989
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1990
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1991
Issuance of common stock
Provision for compensation
Issuance of stock options in exchange
for cancellation of indebtedness
Net loss
Balance, March 31, 1992
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1993
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1994
Net loss
Balance, March 31, 1995
Issuance of common stock for compensation
Net loss
Balance, March 31, 1996
Issuance of common stock
Provision for compensation - employees
Provision for compensation - nonemployees
Issuance of warrants to purchase common stock
Net loss
Balance, March 31, 1997
Exercise of options
Provision for compensation - employees
Provision for compensation - nonemployees
Contributed capital - common stockholders
Net loss
Balance, March 31, 1998
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation - nonemployees
Issuance of common stock to Criticare
Conversion of Criticare debt to common stock
Conversion of debt to common stock
Conversion of redeemable preferred
stock to common stock
Net loss
Balance, March 31, 1999
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial public
offering, less offering costs of $513,000
Exercise of options and warrants
Provision for compensation - nonemployees
Issuance of common stock for
compensation - nonemployees
Issuance of common stock for accrued interest
Balance, March 31, 2000
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale
Reclassification adjustment for
loss included in net loss
Comprehensive loss
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation - nonemployees
Contributed capital - common stockholder
Balance, March 31, 2001
Net loss
Issuance of Series A convertible preferred stock
under private placement offerings, less cash
offering costs of $153,985 160,100 $ 4,002,500
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends 29,400
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2002 160,100 $ 4,031,900
Net loss
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792 76,725 $ 1,918,125
Issuance of common stock for services provided
in connection with private placement offerings
Conversion of convertible preferred
stock to common stock (17,300) (437,396) (20,000) (515,671)
Accrual of preferred stock dividends 226,210 76,227
Payment of preferred stock dividends (152,709) (8,714)
Issuance of common stock for land use
rights acquisition
Issuance of common stock and warrants
for services
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2003 142,800 3,668,005 56,725 1,469,967
Net loss
Issuance of Series C convertible preferred stock
under private placement offerings, less offering
costs of $1,685,365 (including cash of $289,000)
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919
Issuance of common stock for services provided
in connection with private placement offerings
Conversion of convertible preferred
stock to common stock (62,000) (1,566,440) (36,800) (939,231)
Accrual of preferred stock dividends 147,311 53,533
Payment of preferred stock dividends (173,626) (68,176)
Exercise of warrants
Issuance of common stock and warrants
for services - nonemployees
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2004 80,800 $ 2,075,250 19,925 $ 516,093
================ =============== ============= ================
See notes to consolidated financial statements.
[TABLE CONTINUED]
Series C Convertible Series D Convertible
Preferred Stock Preferred Stock
----------------------------------------- ------------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
October 15, 1984 (Inception)
Issuance of common stock to founders
Balance, March 31, 1985
Issuance of common stock
Net loss
Balance, March 31, 1986
Issuance of common stock
Net loss
Balance, March 31, 1987
Issuance of common stock
Net loss
Balance, March 31, 1988
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1989
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1990
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1991
Issuance of common stock
Provision for compensation
Issuance of stock options in exchange
for cancellation of indebtedness
Net loss
Balance, March 31, 1992
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1993
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1994
Net loss
Balance, March 31, 1995
Issuance of common stock for compensation
Net loss
Balance, March 31, 1996
Issuance of common stock
Provision for compensation - employees
Provision for compensation - nonemployees
Issuance of warrants to purchase common stock
Net loss
Balance, March 31, 1997
Exercise of options
Provision for compensation - employees
Provision for compensation - nonemployees
Contributed capital - common stockholders
Net loss
Balance, March 31, 1998
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation - nonemployees
Issuance of common stock to Criticare
Conversion of Criticare debt to common stock
Conversion of debt to common stock
Conversion of redeemable preferred
stock to common stock
Net loss
Balance, March 31, 1999
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial public
offering, less offering costs of $513,000
Exercise of options and warrants
Provision for compensation - nonemployees
Issuance of common stock for
compensation - nonemployees
Issuance of common stock for accrued interest
Balance, March 31, 2000
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale
Reclassification adjustment for
loss included in net loss
Comprehensive loss
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation - nonemployees
Contributed capital - common stockholder
Balance, March 31, 2001
Net loss
Issuance of Series A convertible preferred stock
under private placement offerings, less cash
offering costs of $153,985
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2002
Net loss
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792
Issuance of common stock for services provided
in connection with private placement offerings
Conversion of convertible preferred
stock to common stock
Accrual of preferred stock dividends
Payment of preferred stock dividends
Issuance of common stock for land use
rights acquisition
Issuance of common stock and warrants
for services
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2003
Net loss
Issuance of Series C convertible preferred stock
under private placement offerings, less offering
costs of $1,685,365 (including cash of $289,000) 125,352 $ 3,133,800
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919 200,000 $ 5,000,000
Issuance of common stock for services provided
in connection with private placement offerings
Conversion of convertible preferred
stock to common stock (53,048) (1,344,792)
Accrual of preferred stock dividends 175,157 56,712
Payment of preferred stock dividends (89,979)
Exercise of warrants
Issuance of common stock and warrants
for services - nonemployees
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2004 72,304 $ 1,874,186 200,000 $ 5,056,712
============ ================ ========== ================
[TABLE CONTINUED]
Common Stock
----------------------------------------- Additional
Issued and Paid-in
Outstanding Amount Capital
October 15, 1984 (Inception)
Issuance of common stock to founders 113,243 $ 1,132 $ 24,868
------------- ---------------- ----------------
Balance, March 31, 1985 113,243 1,132 24,868
Issuance of common stock 85,368 854 269,486
Net loss
Balance, March 31, 1986 198,611 1,986 294,354
Issuance of common stock 42,901 429 285,987
Net loss
Balance, March 31, 1987 241,512 2,415 580,341
Issuance of common stock 4,210 42 28,959
Net loss
Balance, March 31, 1988 245,722 2,457 609,300
Issuance of common stock 62,792 628 569,372
Provision for compensation 489,975
Net loss
Balance, March 31, 1989 308,514 3,085 1,668,647
Issuance of common stock 16,478 165 171,059
Provision for compensation 320,980
Net loss
Balance, March 31, 1990 324,992 3,250 2,160,686
Issuance of common stock 218 2 1,183
Provision for compensation 6,400
Net loss
Balance, March 31, 1991 325,210 3,252 2,168,269
Issuance of common stock 18,119 181 85,774
Provision for compensation 864,496
Issuance of stock options in exchange
for cancellation of indebtedness 57,917
Net loss
Balance, March 31, 1992 343,329 3,433 3,176,456
Issuance of common stock 195,790 1,958 66,839
Provision for compensation 191,502
Net loss
Balance, March 31, 1993 539,119 5,391 3,434,797
Issuance of common stock 107,262 1,073 40,602
Provision for compensation 43,505
Net loss
Balance, March 31, 1994 646,381 $ 6,464 $ 3,518,904
Net loss
Balance, March 31, 1995 646,381 6,464 3,518,904
Issuance of common stock for compensation 16,131 161 7,339
Net loss
Balance, March 31, 1996 662,512 6,625 3,526,243
Issuance of common stock 12,986 130 5,908
Provision for compensation - employees 45,086
Provision for compensation - nonemployees 62,343
Issuance of warrants to purchase common stock 80,834
Net loss
Balance, March 31, 1997 675,498 6,755 3,720,414
Exercise of options 68,167 682 28,862
Provision for compensation - employees 50,680
Provision for compensation - nonemployees 201,696
Contributed capital - common stockholders 231,734
Net loss
Balance, March 31, 1998 743,665 7,437 4,233,386
Issuance of common stock under
private placement offering 575,000 5,750 824,907
Exercise of options 40,650 406 12,944
Provision for compensation - nonemployees 2,426,000
Issuance of common stock to Criticare 86,207 862 133,621
Conversion of Criticare debt to common stock 180,756 1,808 856,485
Conversion of debt to common stock 424,222 4,242 657,555
Conversion of redeemable preferred
stock to common stock 1,195,017 11,950 1,852,300
Net loss
Balance, March 31, 1999 3,245,517 $ 32,455 $ 10,997,198
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial public
offering, less offering costs of $513,000 1,150,000 11,500 9,161,110
Exercise of options and warrants 247,420 2,474 424,348
Provision for compensation - nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 611,250 6,113 6,106,387
Issuance of common stock for accrued interest 28,147 281 281,189
----------- --------------- ----------------
Balance, March 31, 2000 5,282,334 52,823 27,480,070
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale
Reclassification adjustment for
loss included in net loss
Comprehensive loss
Issuance of common stock under
private placement offering 584,250 5,843 4,299,806
Exercise of options 88,661 886 41,922
Provision for compensation - nonemployees 1,739,294
Contributed capital - common stockholder 13,825
----------------
Balance, March 31, 2001 5,955,245 59,552 33,574,917
Net loss
Issuance of Series A convertible preferred stock
under private placement offerings, less cash
offering costs of $153,985 754,550
Issuance of common stock as offering
costs under private placement offerings 60,000 600 (600)
Accrual of preferred stock dividends
Exercise of options 51,214 512 18,972
Provision for compensation - nonemployees 332,005
----------------
Balance, March 31, 2002 6,066,459 $ 60,664 $ 34,679,844
Net loss
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792 90,640
Issuance of common stock for services provided
in connection with private placement offerings 290,000 2,900 942,200
Conversion of convertible preferred
stock to common stock 228,448 2,285 950,758
Accrual of preferred stock dividends
Payment of preferred stock dividends 45,529 456 160,657
Issuance of common stock for land use
rights acquisition 1,260,000 12,600 2,986,200
Issuance of common stock and warrants
for services 8,333 83 89,042
Exercise of options 217 2 126
Provision for compensation - nonemployees 243,150
---------------
Balance, March 31, 2003 7,898,986 78,990 40,142,617
Net loss
Issuance of Series C convertible preferred stock
under private placement offerings, less offering
costs of $1,685,365 (including cash of $289,000) (565,088)
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919 1,544,368
Issuance of common stock for services provided
in connection with private placement offerings 220,000 2,200 1,394,800
Conversion of convertible preferred
stock to common stock 887,817 8,878 3,841,327
Accrual of preferred stock dividends
Payment of preferred stock dividends 44,398 443 330,197
Exercise of warrants 559,350 5,594 4,468,572
Issuance of common stock and warrants
for services - nonemployees 201,667 2,017 7,231,835
Exercise of options 23,068 231 10,361
Provision for compensation - nonemployees 267,500
---------------
Balance, March 31, 2004 9,835,286 $ 98,353 $ 58,666,489
========== ================ ================
[TABLE CONTINUED]
Deficit Accumulated Total
Accumulated Other Stockholders'
During the Comprehensive Equity
Development Income (Deficiency in
Stage (Loss) Assets)
October 15, 1984 (Inception)
Issuance of common stock to founders $ 26,000
----------------
Balance, March 31, 1985 26,000
Issuance of common stock 270,340
Net loss $ (209,569) (209,569)
---------------- ----------------
Balance, March 31, 1986 (209,569) 86,771
Issuance of common stock 286,416
Net loss (47,486) (47,486)
---------------- ------------------
Balance, March 31, 1987 (257,055) 325,701
Issuance of common stock 29,001
Net loss (294,416) (294,416)
---------------- -----------------
Balance, March 31, 1988 (551,471) 60,286
Issuance of common stock 570,000
Provision for compensation 489,975
Net loss (986,746) (986,746)
---------------- -----------------
Balance, March 31, 1989 (1,538,217) 133,515
Issuance of common stock 171,224
Provision for compensation 320,980
Net loss (850,935) (850,935)
---------------- -----------------
Balance, March 31, 1990 (2,389,152) (225,216)
Issuance of common stock 1,185
Provision for compensation 6,400
Net loss (163,693) (163,693)
---------------- -----------------
Balance, March 31, 1991 (2,552,845) (381,324)
Issuance of common stock 85,955
Provision for compensation 864,496
Issuance of stock options in exchange
for cancellation of indebtedness 57,917
Net loss (1,479,782) (1,479,782)
---------------- ----------------
Balance, March 31, 1992 (4,032,627) (852,738)
Issuance of common stock 68,797
Provision for compensation 191,502
Net loss (1,220,079) (1,220,079)
---------------- ----------------
Balance, March 31, 1993 (5,252,706) (1,812,518)
Issuance of common stock 41,675
Provision for compensation 43,505
Net loss (2,246,426) (2,246,426)
---------------- ----------------
Balance, March 31, 1994 $ (7,499,132) $ (3,973,764)
Net loss (1,661,677) (1,661,677)
---------------- ---------------
Balance, March 31, 1995 (9,160,809) (5,635,441)
Issuance of common stock for compensation 7,500
Net loss (1,005,962) (1,005,962)
---------------- ---------------
Balance, March 31, 1996 (10,166,771) (6,633,903)
Issuance of common stock 6,038
Provision for compensation - employees 45,086
Provision for compensation - nonemployees 62,343
Issuance of warrants to purchase common stock 80,834
Net loss (1,618,543) (1,618,543)
---------------- --------------
Balance, March 31, 1997 (11,785,314) (8,058,145)
Exercise of options 29,544
Provision for compensation - employees 50,680
Provision for compensation - nonemployees 201,696
Contributed capital - common stockholders 231,734
Net loss (1,477,132) (1,477,132)
---------------- -----------
Balance, March 31, 1998 (13,262,446) (9,021,623)
Issuance of common stock under
private placement offering 830,657
Exercise of options 13,350
Provision for compensation - nonemployees 2,426,000
Issuance of common stock to Criticare 134,483
Conversion of Criticare debt to common stock 858,293
Conversion of debt to common stock 661,797
Conversion of redeemable preferred
stock to common stock 3,713,334 5,577,584
Net loss (1,929,003) (1,929,003)
---------------- ----------------
Balance, March 31, 1999 $ (11,478,115) $ (448,462)
----------------
Comprehensive loss:
Net loss (11,433,926) (11,433,926)
Other comprehensive loss:
Unrealized loss on investment
securities available for sale $ (1,178) (1,178)
----------------
Comprehensive loss (11,435,104)
Issuance of common stock under initial public
offering, less offering costs of $513,000 9,172,610
Exercise of options and warrants 426,822
Provision for compensation - nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 6,112,500
Issuance of common stock for accrued interest 281,470
----------------
Balance, March 31, 2000 (22,912,041) (1,178) 4,619,674
----------------
Comprehensive loss:
Net loss (9,863,284) (9,863,284)
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale (1,764) (1,764)
Reclassification adjustment for
loss included in net loss 2,942 2,942
-----
Comprehensive loss (9,862,106)
Issuance of common stock under
private placement offering 4,305,649
Exercise of options 42,808
Provision for compensation - nonemployees 1,739,294
Contributed capital - common stockholder 13,825
----------------
Balance, March 31, 2001 (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 (908,535) 3,848,515
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends (29,400)
Exercise of options 19,484
Provision for compensation - nonemployees 332,005
Balance, March 31, 2002 $ (37,036,370) $ 1,736,038
Net loss (4,679,069) (4,679,069)
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792 (149,432) 1,859,333
Issuance of common stock for services provided
in connection with private placement offerings 945,100
Conversion of convertible preferred
stock to common stock (24)
Accrual of preferred stock dividends (302,437)
Payment of preferred stock dividends (310)
Issuance of common stock for land use
rights acquisition 2,998,800
Issuance of common stock and warrants
for services 89,125
Exercise of options 128
Provision for compensation - nonemployees 243,150
----------------
Balance, March 31, 2003 (42,167,308) 3,192,271
Net loss (12,845,813) (12,845,813)
Issuance of Series C convertible preferred stock
under private placement offerings, less offering
costs of $1,685,365 (including cash of $289,000) (1,120,277) 1,448,435
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919 (1,973,287) 4,571,081
Issuance of common stock for services provided
in connection with private placement offerings 1,397,000
Conversion of convertible preferred
stock to common stock (258)
Accrual of preferred stock dividends (432,713)
Payment of preferred stock dividends (1,141)
Exercise of warrants 4,474,166
Issuance of common stock and warrants
for services - nonemployees 7,233,852
Exercise of options 10,592
Provision for compensation - nonemployees 267,500
Balance, March 31, 2004 $ (58,539,398) $ 0 $ 9,747,685
================ ================== ===============
(Concluded)
F-7
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 2002, 2003 AND 2004 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2004 (UNAUDITED)
October 15,
1984
(Inception)
Years Ended March 31, to March 31,
----------------------------------------------
2002 2003 2004 2004
------------ ------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $ (3,323,110) $ (4,679,069) $(12,845,813) $(55,993,216)
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 332,005 1,277,375 7,501,352 22,361,327
Depreciation and amortization of property and
equipment 98,893 93,420 115,261 752,441
Deferred rental obligation (6,366) (6,366) (6,366) 14,413
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942
Amortization of debt discounts and issuance costs 134,503
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit 3,210,153 (2,137,547) 585,019 (2,154,928)
Other current assets (11,592) (93,644) 73,546 (59,979)
Other assets 4,371 (15,477)
Accounts payable (1,150,704) (4,741) 428,427 1,297,843
Accrued expenses (66,605) 564 17,561 685,395
Deferred revenue (2,945,759) 1,990,636 (722,978) 1,831,093
------------ ------------ ------------ ------------
Net cash used in operating activities (3,863,085) (3,559,372) (4,849,620) (32,436,406)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (64,819) (225,528) (417,012) (1,335,726)
Advances to Joint Venture (135,002)
Proceeds from maturities of investments 1,800,527
Purchases of investment securities (1,803,469)
------------ ------------ ------------ ------------
Net cash used in investing activities (64,819) (225,528) (417,012) (1,473,670)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Net proceeds from issuance of redeemable preferred
stock 3,330,000
Net proceeds from issuance of convertible preferred
stock and warrants 3,848,515 1,859,333 7,416,516 13,124,364
Payments for convertible preferred stock dividends and
for fractional shares of common stock resulting from
the conversions of convertible preferred stock (334) (1,399) (1,733)
Net proceeds from issuance of common stock 19,484 128 4,484,758 20,802,041
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,867,999 1,859,127 11,899,875 40,655,359
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (59,905) (1,925,773) 6,633,243 6,745,283
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,097,718 2,037,813 112,040
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,037,813 $ 112,040 $ 6,745,283 $ 6,745,283
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION (Note 11)
See notes to consolidated financial statements.
F-8
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2002, 2003 AND 2004
--------------------------------------------------------------------------------
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiaries (the "Company") is a pharmaceutical
company advancing the development and commercialization of oral drugs to
treat infectious diseases and neoplastic (cancer) and metabolic (diabetes)
disorders. The Company has drug development programs that include
treatments for fungal infections, malaria, tuberculosis, diabetes,
Pneumocystis carinii pneumonia, and tropical diseases including African
sleeping sickness (a parasitic disease also known as trypanosomiasis) and
Leishmaniasis (a parasitic disease that can cause liver damage). The
Company holds worldwide patents and patent applications, licenses and
rights to license and technologies primarily from a scientific consortium
that has granted it exclusive rights to commercialize products from, and
license rights to, the technology. The Company is a development stage
enterprise and since its inception on October 15, 1984, has engaged in
research and development programs, expanding its network of scientists and
scientific advisors, licensing technology agreements, and advancing the
commercialization of its dication technology platform. The Company uses
the expertise and resources of strategic partners and contracted parties
in a number of areas, including: (i) laboratory research, (ii)
pre-clinical and human clinical trials and (iii) manufacture of
pharmaceutical drugs.
The Company does not have any products currently available for sale, and
no products are expected to be commercially available for sale until after
March 31, 2005, if at all.
Since inception, the Company has incurred accumulated losses of
approximately $55,993,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
continues its commercialization, research and development activities and
clinical trial efforts. In addition, the Company has various research and
development agreements with third parties and is dependent on their
ability to perform under these agreements. There can be no assurance that
the Company's continued research will lead to the development of
commercially viable products. The Company's operations to date have
consumed substantial amounts of cash. The negative cash flow from
operations is expected to continue in the foreseeable future. The Company
will require substantial additional funds to commercialize its product
candidates. The Company's cash requirements may vary materially from those
now planned because of results of research and development, results of
pre-clinical and clinical testing, responses to grant requests,
relationships with strategic partners, changes in the focus and direction
in the Company's research and development programs, competitive and
technological advances, the regulatory process, and other factors. In any
of these circumstances, the Company may require substantially more funds
than are currently available or than management intends to raise.
F-9
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 at least the next twelve months, although there can
be no assurance that the Company will not require additional funds.
Management may seek to satisfy future funding requirements through public
or private offerings of securities, by collaborative or other arrangements
with pharmaceutical or biotechnology companies or from other sources.
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, and to obtain additional research grants and entering into
research and development agreements with other entities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Immtech International, Inc. and its wholly-owned
subsidiaries (see Note 2). All intercompany balances and transactions have
been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of an amount on
deposit at a bank and an investment in a money market mutual fund, stated
at cost, which approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash
in two accounts on deposit at a bank that is restricted for use in
accordance with a clinical research subcontract agreement with The
University of North Carolina at Chapel Hill and with Medicines for Malaria
Venture ("MMV").
Concentration of Credit Risk - The Company maintains its cash in
commercial banks. Balances on deposit are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to specified limits. Balances in excess
of FDIC limits are uninsured.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of March 31, 2003
and 2004, the Company owned approximately 28% of the issued and
outstanding shares of NextEra common stock. The Company has recognized an
equity loss in NextEra to the extent of the basis of its investment, and
the investment balance is zero as of March 31, 2003 and 2004. 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.
Property and Equipment - Property and equipment are recorded at cost and
depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the respective assets ranging from
three to fifty years.
Land Use Rights - Land use rights represent an agreement by Lenton Fibre
Optics Development Limited ("Lenton") to use land in the People's Republic
of China for a
F-10
period of 50 years and was being amortized over that period on a
straight-line basis prior to the Super Insight transaction discussed in
Note 2, resulting in the elimination of this agreement.
Long-Lived Assets - The Company periodically evaluates the carrying value
of its property and equipment. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, a
loss is recognized for the asset and is measured by the difference between
the fair value and the carrying value of the asset.
Minority Interest - Minority interest represents the carryover basis of
the 20% of Lenton not owned by the Company at the date of acquisition,
plus equity in earnings or minus equity in losses from that date (see Note
2).
Deferred Rental Obligation - Rental obligations with scheduled rent
increases are recognized on a straight-line basis over the lease term.
Revenue Recognition - Grants to perform research are the Company's primary
source of revenue and are generally granted to support research and
development activities for specific projects or drug candidates. Revenue
related to grants to perform research and development is recognized as
earned based on the performance requirements of the specific grant.
Upfront cash payments from research and development grants are reported as
deferred revenue until such time as the research and development
activities covered by the grant are performed.
Research and Development Costs - Research and development costs are
expensed as incurred and include costs associated with research performed
pursuant to collaborative agreements. Research and development costs
consist of direct and indirect internal costs related to specific projects
as well as fees paid to other entities that conduct certain research
activities on behalf of the Company.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income. In addition, a valuation allowance is recognized if it is more
likely than not that some or all of the deferred income tax assets will
not be realized. A valuation allowance is used to offset the related net
deferred income tax assets due to uncertainties of realizing the benefits
of certain net operating loss and tax credit carryforwards and other
deferred income tax assets.
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
F-11
net income per share, when applicable, is computed by dividing net income
attributable to common stockholders by the weighted average number of
common shares outstanding increased by the number of potential dilutive
common shares. Diluted net loss per share was the same as the basic net
loss per share for the years ended March 31, 2002, 2003 and 2004.
Potentially dilutive shares for common stock options and warrants and
conversion of Series A, B, C and D Convertible Preferred Stock were not
included in net income (loss) per share as their effect was antidilutive
for each of the years then ended.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," and
applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its employee stock option plans.
During the years ended March 31, 2002, 2003 and 2004, the Company issued
95,750, 203,000 and 277,000 stock options, respectively, to certain
employees and directors. If the Company had recognized compensation
expense for the options granted during the years ended March 31, 2002,
2003, and 2004, consistent with the fair-value method prescribed by SFAS
No. 123, net loss and net loss per share would have been changed to the
pro forma amounts indicated below:
2002 2003 2004
Net loss attributable to common shareholders - as reported $ (4,261,045) $ (5,130,938) $(16,372,090)
Add: stock-based compensation expense included in
reported net loss 0 0 0
Deduct: total employee stock-based compensation expense
determined under fair value method for all awards (270,329) (295,177) (1,205,881)
------------ ------------ ------------
Net loss attributable to common stockholders - pro forma $ (4,531,374) $ (5,426,115) $(17,577,971)
============ ============ ============
Basic and diluted net loss per share attributable to
common stockholders - as reported $ (0.71) $ (0.78) $ (1.82)
============ ============ ============
Basic and diluted net loss per share attributable to
common stockholders - pro forma $ (0.75) $ (0.83) $ (1.96)
============ ============ ============
The following weighted average assumptions were used for grants during the
year ended March 31, 2002: 1) expected dividend yield of 0%, 2) risk-free
interest rate of 5.0%, 3) expected volatility of 87%, and 4) expected
option life of 7.1 years. The following weighted average assumptions were
used for grants during the year ended March 31, 2003: 1) expected dividend
yield of 0%, 2) risk-free interest rate of 3.8%, 3) expected volatility of
87%, and 4) expected option life of 9.5 years. The following weighted
average assumptions were used for grants during the year ended March 31,
2004: 1) expected dividend yield of 0%, 2) risk-free interest rate of
4.3%, 3) expected volatility of 113%, and 4) expected option life of 10
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
F-12
subjective input assumptions can materially affect the fair value
estimate, in the opinion of management, the existing models do not
necessarily provide a reliable single value of its options and may not be
representative of the future effects on reported net income (loss) or the
future stock price of the Company. The weighted average estimated fair
value of employee stock options granted during the years ended March 31,
2002, 2003 and 2004 was $5.46, $2.15 and $18.23, respectively. For
purposes of pro forma disclosure, the estimated fair value of the options
is amortized to expense over the options' vesting period.
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, 2003 and
2004 based on the short-term nature of the instruments.
Segment Reporting - The Company is a development stage pharmaceutical
company that operates as one segment.
Comprehensive Loss - There were no cumulative differences between
comprehensive loss and net loss for the years presented.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. EXCHANGE OF OWNERSHIP INTERESTS
On November 28, 2003, the Company entered into a share purchase agreement
and deed of indemnity (the "Share Purchase Agreement") as related to the
shares in Super Insight Limited ("Super Insight") and a share purchase
agreement and deed of indemnity as related to the shares in Super Insight
and Immtech Hong Kong Limited (the "Allonge") with Mr. Chan Kon Fung ("Mr.
Chan"), Lenton, Super Insight and Immtech Hong Kong Limited. Pursuant to
the terms of the Share Purchase Agreement and the Allonge, Immtech
purchased (i) from Mr. Chan 100% of the outstanding shares of Super
Insight and its wholly-owned subsidiary, subsequently named Immtech Life
Science Limited ("Immtech Life Science") and (ii) from Lenton, 100% of
Lenton's interest in Immtech Hong Kong. As payment for the shares of Super
Insight and Immtech Hong Kong, Immtech transferred to Mr. Chan its 80%
interest in Lenton and $400,000 in cash.
Immtech Life Science has ownership of two floors of a newly-constructed
building located in the Futian Bounded Zone, Shenzhen, in the People's
Republic of China through May 2051, which is classified as leasehold
improvements in the accompanying March 31, 2004 consolidated balance
sheet.
This transaction resulted in the surrender of the Company's ownership
interest in Lenton and the consolidation of the Company's wholly-owned
subsidiary, Super Insight. The
F-13
primary asset of Lenton was land-use rights in China and the primary
assets of Super Insight are leasehold improvements consisting of two
floors of the building described above. This transaction has been
accounted for as a like-kind exchange of similar assets. Accordingly, this
transaction did not impact the Company's consolidated statement of
operations.
3. RECAPITALIZATION, PRIVATE PLACEMENTS AND INITIAL PUBLIC OFFERING
On July 24, 1998 (the "Effective Date"), the Company completed a
recapitalization (the "Recapitalization") pursuant to which, among other
items: (i) the Company's debt holders converted approximately $3,151,000
in stockholder advances, notes payable and related accrued interest and
accounts payable outstanding immediately prior to the Effective Date into
604,978 shares of common stock and approximately $203,000 in cash (see
Note 10); and (ii) the Company's Series A Redeemable Preferred
stockholders converted 1,794,550 shares of Series A Redeemable Preferred
Stock issued and outstanding immediately prior to the Effective Date into
578,954 shares of common stock (see Note 10); (iii) the Company's Series B
Redeemable Preferred stockholders converted 1,600,000 shares of Series B
Redeemable Preferred Stock issued and outstanding immediately prior to the
Effective Date into 616,063 shares of common stock (see Note 10).
Contemporaneously with the completion of the Recapitalization, the Company
issued and sold 575,000 shares of common stock for $1.74 per share, or
aggregate consideration to the Company of $1,000,000 to certain accredited
investors under a private placement offering. For services and expenses
involved with this Recapitalization, the placement agent, New China Hong
Kong Securities Limited ("NCHK") received $50,000 and warrants to purchase
75,000 shares of the Company's common stock at $.10 per share. On May 17,
1999, NCHK exercised their warrants. For advisory services in this
transaction, RADE Management Corporation ("RADE") received warrants to
purchase 225,000 shares of the Company's common stock at $.10 per share.
On April 22, 1999, the warrant agreement with RADE was amended to increase
the exercise price from $.10 per share to $6.47 per share. The warrants
expire July 24, 2004 (see Note 7). The private placement offering resulted
in net proceeds of approximately $831,000. RADE leases an office facility
which is occupied by both the Company and RADE. The office space is paid
for by Immtech on RADE's behalf (see Note 9). During the years ended March
31, 2002, 2003, and 2004, the Company paid approximately $106,000,
$106,000 and $121,000 respectively, for the use of the facility. In
addition, during the year ended March 31, 2002, approximately $18,000, 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 were
netted with the proceeds of the offering. The underwriters received
warrants to purchase 100,000 additional shares of common stock at $16.00
per share (see Note 7). The warrants expired on April 25, 2004.
F-14
On December 8, 2000, the Company completed a private placement offering
which raised approximately $4,306,000 of additional equity capital through
the issuance of 584,250 shares of common stock.
In February 2002, the Company completed private placement offerings which
raised approximately $3,849,000 of additional equity capital (net of
approximately $154,000 of cash offering costs) through the issuance of
160,100 shares of Series A Convertible Preferred Stock and warrants to
purchase 400,250 shares of the Company's common stock at an exercise price
of $6.00 per share. The warrants expire five years from the date of grant
(see Note 7).
In September and October 2002, the Company completed private placement
offerings which raised approximately $1,859,000 of additional equity
capital (net of approximately $59,000 of cash offering costs) through the
issuance of 76,725 shares of Series B Convertible Preferred Stock and
warrants to purchase 191,812 shares of the Company's common stock at an
exercise price of $6.125 per share. The warrants expire five years from
the date of grant (see Note 7).
In June 2003, the Company completed private placement offerings which
raised approximately $2,845,000 of additional equity capital (net of
approximately $289,000 of cash offering costs) through the issuance of
125,352 shares of Series C Convertible Preferred Stock. Total cash and
noncash offering costs with respect to the issuance of the Series C
Convertible Preferred Stock was approximately $1,685,000.
In January 2004, the Company completed private placement offerings which
raised approximately $4,571,000 of additional equity capital (net of
approximately $429,000 of cash offering costs) through the issuance of
200,000 shares of Series D Convertible Preferred Stock and warrants to
purchase 200,000 shares of the Company's common stock at an exercise price
of $16.00 per share. The warrants expire five years from the date of grant
(see Note 7).
4. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and
related diseases. The Company and Franklin have a research and funding
agreement with NextEra in which Franklin provided funding of $1,350,000 to
NextEra to fund the scale-up of manufacturing for and initiation of
certain clinical trials of NextEra's product candidates. The Company
contributed its rmCRP technology as well as use of its current laboratory
facilities for shares of common stock of NextEra. During the year ended
March 31, 2000, the Company advanced $135,000 to NextEra to fund its
operations. The Company's advance to NextEra was expensed during the year
ended March 31, 2000. The Company did not advance any funds to NextEra
during the years ended March 31, 2002, 2003 and 2004.
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
F-15
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 $2,905,000 since
inception (July 8, 1998) through March 31, 2004. NextEra is expected to
continue to incur significant losses during the next several years. In
addition, as of March 31, 2004, NextEra's current liabilities exceeded its
current assets by approximately $361,000 and NextEra had a stockholders'
equity of approximately $147,000.
As of March 31, 2003 and 2004, the Company owned approximately 28% of the
issued and outstanding shares of NextEra common stock.
On April 27, 2000, Franklin filed a complaint against the Company in the
United States District Court for the Southern District of Ohio, Eastern
Division alleging fraud, negligent misrepresentation and breach of the
implied covenant of good faith and fair dealing in connection with the
research and funding agreement entered into between Franklin, the Company
and NextEra. The complaint sought compensatory damages, unquantified
punitive damages, attorneys' fees, costs and expenses. On March 23, 2001,
Franklin voluntarily dismissed its complaint against the Company and
together with NextEra filed a new complaint in the Court of Common Pleas,
Franklin County, Ohio alleging fraud, negligent misrepresentation and
breach of the implied covenant of good faith and fair dealing in
connection with the research and funding agreement entered into between
Franklin, the Company and NextEra. In addition, NextEra alleged the
Company tortuously interfered with an employment agreement between NextEra
and the chief scientific officer of NextEra. The complaint sought
compensatory damages in excess of $25,000, unquantified punitive damages,
attorneys' fees, costs and expenses. On May 25, 2001, the case was
dismissed without prejudice by the Court of Common Pleas, Franklin County,
Ohio. The Company is currently in negotiations with Franklin and its
designees to resolve certain issues, including the possible restructuring
of the joint venture and relationship with NextEra to better position
NextEra in its fund-raising efforts, and increasing the Company's
ownership interest in NextEra as consideration for services provided to
NextEra, expenses the Company previously incurred on behalf of NextEra and
funds previously advanced to NextEra.
NextEra's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to obtain profitable operations. NextEra's
financial plans for the forthcoming year include continuing efforts to
obtain additional equity financing.
The Company has recognized an equity loss in NextEra to the extent of the
basis of its investment. Future recognition of any investment income on
the equity method by the Company for its investment in NextEra will occur
only after NextEra has earnings in excess of previously unrecognized
equity losses. As of March 31, 2003 and 2004, the Company's net investment
in NextEra is zero.
F-16
The following is summarized financial information for NextEra as of March
31, 2002, 2003, and 2004 and for the years then ended:
2002 2003 2004
Current assets $ 309,000 $ 281,000 $ 281,000
Noncurrent assets 642,000 566,000 508,000
Current liabilities:
Advances from Franklin 71,000 -- --
Advances from the Company 135,000 135,000 135,000
Advances from other shareholders 40,000 88,000 183,000
Other 525,000 353,000 324,000
Stockholders' equity 117,000 271,000 147,000
Revenues 46,000 -- --
Net (loss) income (796,000) 91,000 (124,000)
Net loss (inception to date) (2,872,000) (2,781,000) (2,905,000)
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2003 and
2004:
2003 2004
Land use rights $3,501,522
Research and laboratory equipment 474,455 $ 477,609
Furniture and office equipment 157,824 169,069
Leasehold improvements 28,525 3,587,519
---------- ----------
Property and equipment - at cost 4,162,326 4,234,197
Less accumulated depreciation and amortization 557,670 623,983
---------- ----------
Property and equipment - net $3,604,656 $3,610,214
========== ==========
6. INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach which generally requires the recognition of deferred income tax
assets and liabilities based on the expected future income tax
consequences of events that have previously been recognized in the
Company's financial statements or tax returns. In addition, a valuation
allowance is recognized if it is more likely than not that some or all of
the deferred income tax assets will not be realized. A valuation allowance
is used to offset the related net deferred income tax assets due to
uncertainties of realizing the benefits of certain net operating loss and
tax credit carryforwards and other deferred income tax assets.
F-17
The Company has no significant deferred income tax liabilities.
Significant components of the Company's deferred income tax assets are as
follows:
March 31,
--------------------------------
2003 2004
Deferred income tax assets:
Federal net operating loss carryforwards $ 11,437,000 $ 14,566,000
State net operating loss carryforwards 1,486,000 1,972,000
Federal income tax credit carryforwards 701,000 750,000
Deferred revenue 991,000 710,000
------------ ------------
Total deferred income tax assets 14,615,000 17,998,000
------------ ------------
Valuation allowance (14,615,000) (17,998,000)
------------ ------------
Net deferred income taxes recognized in the accompanying balance
sheets $ 0 $ 0
============ ============
As of March 31, 2004, the Company had federal net operating loss
carryforwards of approximately $42,840,000 which expire from 2006 through
2024. The Company also has approximately $41,092,000 of state net
operating loss carryforwards as of March 31, 2004, which expire from 2009
through 2024, 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, 2004, the Company had federal
income tax credit carryforwards of approximately $750,000 which expire
from 2008 through 2024.
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,
----------------------------
2002 2003 2004
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 4.9 9.0 0.0
Benefit of federal and state net operating loss and tax credit
carryforwards and other deferred income tax assets not
recognized 33.9 29.8 38.8
----- ----- -----
Effective income tax rate 0.0% 0.0% 0.0%
----- ----- -----
7. STOCKHOLDERS' EQUITY
On January 7, 2004, the shareholders of the Company approved an increase
in the number of authorized common stock from 30 million to 100 million
shares.
F-18
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15, and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series A Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
is $55,250 and $98,005 of accrued preferred stock dividends at March 31,
2004 and 2003, respectively. Each share of Series A Convertible Preferred
Stock may be converted 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
A"), subject to certain antidilution adjustments, as defined in the
Certificate of Designation. During the year ended March 31, 2001, the
Company issued 160,100 shares of Series A Convertible Preferred Stock for
net proceeds of $3,849,000 (less cash offering costs of approximately
$184,000). On October 15, 2003, the Company issued 4,010 shares of common
stock and paid $296 in lieu of fractional common shares as dividends on
the preferred shares and on April 15, 2003, the Company issued 23,316
shares of common stock and paid $96 in lieu of fractional common shares as
dividends on the preferred shares. On October 15, 2002, the Company issued
28,959 shares of common stock and paid $64 in lieu of fractional common
shares as dividends on the preferred shares and on April 15, 2002, the
Company issued 8,249 shares of common stock and paid $166 in lieu of
fractional common shares as dividends on the preferred shares. During the
years ended March 31, 2004 and 2003, certain preferred stockholders
converted 62,000 and 17,300 shares of Series A Convertible Preferred
Stock, including accrued dividends, for 353,667 and 99,105 shares of
common stock, respectively.
The Company may require that any or all outstanding shares of Series A
Convertible Preferred Stock be converted into shares of the Company's
common stock. The number of shares of common stock to be received by the
holders of the Series A Convertible Preferred Stock upon a mandatory
conversion by the Company is determined by (i) dividing the Liquidation
Price by the Conversion Price A, provided that the closing bid price for
the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion
Price. During the year ended March 31, 2004, the closing price of the
Company's common stock did exceed $9 per share for 20 consecutive days.
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.
F-19
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.
Series B Convertible Preferred Stock - On September 5, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 240,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 8.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series B Convertible
Preferred Stock in the accompanying consolidated balance sheets is $17,968
and $51,842 of accrued preferred stock dividends as of March 31, 2004 and
2003, respectively. Each share of Series B Convertible Preferred Stock may
be converted by the holder at any time into shares of the Company's common
stock at a conversion rate determined by dividing the $25.00 stated value,
plus any accrued and unpaid dividends (the "Liquidation Price"), by a
$4.00 conversion price (the "Conversion Price B"), subject to certain
antidilution adjustments, as defined in the Certificate of Designation.
During the year ended March 31, 2003, the Company issued 76,725 shares of
Series B Convertible Preferred Stock for net proceeds of $1,859,000 (net
of cash offering costs of approximately $59,000). On October 15, 2003, the
Company issued 1,130 shares of common stock and paid $139 in lieu of
fractional common shares as dividends on the preferred shares and on April
15, 2003, the Company issued 11,049 shares of common stock and paid $17 in
lieu of fractional common shares as dividends on the preferred shares. On
October 15, 2002, the Company issued 2,658 shares of common stock and paid
$17 in lieu of fractional common shares as dividends on the preferred
shares. During the years ended March 31, 2004 and 2003, certain preferred
stockholders converted 36,800 and 20,000 shares of Series B Convertible
Preferred stock, including accrued dividends, for 232,851 and 129,343
shares of common stock, respectively.
The Company may require that any or all outstanding shares of Series B
Convertible Preferred Stock be converted into shares of the Company's
common stock. The number of shares of common stock to be received by the
holders of the Series B Convertible Preferred Stock upon a mandatory
conversion by the Company is determined by (i) dividing the Liquidation
Price by the Conversion Price B, provided that the closing bid price for
the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion
Price B. During the year ended March 31, 2004, the closing price of the
Company's common stock did exceed $9 per share for 20 consecutive days.
The Conversion Price B is subject to certain antidilution adjustments, as
defined in the Certificate of Designation.
F-20
The Company may at any time, upon 30-day notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series B Convertible Preferred Stock into
shares of common stock during the 30 day period. Each issued and
outstanding share of Series B Convertible Preferred Stock shall be
entitled to 6.25 votes (subject to adjustment for dilution) with respect
to any and all matters presented to the stockholders of the Company for
their action or consideration. Except as provided by law or by the
provisions establishing any other series of preferred stock, Series B
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class.
Series C Convertible Preferred Stock - On June 6, 2003, the Company filed
a Certificate of Designation with the Secretary of State of the State of
Delaware designating 160,000 shares of the Company's 5,000,000 authorized
shares of preferred stock as Series C Convertible Preferred Stock, $0.01
par value, with a stated value of $25.00 per share. Dividends accrue at a
rate of 8.0% per annum on the $25.00 stated value per share and are
payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined.
Included in the carrying value of the Series C Convertible Preferred Stock
in the accompanying March 31, 2004 consolidated balance sheet is $66,586
of accrued preferred stock dividends. Each share of Series C Convertible
Preferred Stock may be converted 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
C"), subject to certain antidilution adjustments, as defined in the
Certificate of Designation. During the year ended March 31, 2004, the
Company issued 125,352 shares of Series C Convertible Preferred Stock for
net proceeds of $2,845,000 (net of approximately $289,000 of cash offering
costs). Total cash and noncash offering costs with respect to the issuance
of the Series C Convertible Preferred Stock was approximately $1,685,000.
The preferred shares issued have an embedded beneficial conversion feature
based on the market value on the day of issuance and the price of
conversion. The beneficial conversion was equal to approximately
$1,120,000 and was accounted for as a deemed dividend during the year
ended March 31, 2004. On October 15, 2003, the Company issued 4,893 shares
of common stock and paid $594 in lieu of fractional common shares as
dividends on the preferred shares. During the year ended March 31, 2004,
certain preferred stockholders converted 53,048 shares of Series C
Convertible Preferred Stock, including accrued dividends, for 301,299
shares of common stock. The Company may at any time after May 31, 2004,
require that any or all outstanding shares of Series C Convertible
Preferred Stock be converted into shares of the Company's common stock,
provided that the shares of common stock into which the Series C
Convertible Preferred Stock are convertible are registered pursuant to an
effective registration statement, as defined. The number of shares of
common stock to be received by the holders of the Series C Convertible
Preferred Stock upon a mandatory conversion by the Company is determined
by (i) dividing the Liquidation Price by the Conversion Price C provided
that the closing bid price for the Company's common stock exceeds $9.00
for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met,
the number of shares
F-21
of common stock is determined by dividing 110% of the Liquidation Price by
the Conversion Price C. During the year ended March 31, 2004, the closing
price of the Company's common stock did exceed $9 per share for 20
consecutive days. The Conversion Price C is subject to certain
antidilution adjustments, as defined in the Certificate of Designation.
The Company may at any time, upon 30 day notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series C Convertible Preferred Stock into
shares of common stock during the 30 day period. Each issued and
outstanding share of Series C Convertible Preferred Stock shall be
entitled to 5.6561 votes (subject to adjustment for dilution) with respect
to any and all matters presented to the stockholders of the Company for
their action or consideration. Except as provided by law or by the
provisions establishing any other series of preferred stock, Series C
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class.
Series D Convertible Preferred Stock - On January 15, 2004, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 200,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series D Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series D Convertible
Preferred Stock in the accompanying consolidated balance sheet is $56,712
of accrued preferred stock dividends as of March 31, 2004. Each share of
Series D Convertible Preferred Stock may be converted 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 $9.00 conversion price
(the "Conversion Price D"), subject to certain antidilution adjustments,
as defined in the Certificate of Designation. During the year ended March
31, 2004, the Company issued 200,000 shares of Series D Convertible
Preferred Stock for net proceeds of approximately $4,571,000 (net of
approximately $429,000 of cash offering costs).
In connection with the Series D Preferred Stock offering, the Company
entered into a Finder's Agreement with Ace Noble Holdings Limited (the
"Finder") to identify and introduce qualified leads, increase financial
market awareness in the Company and to assist the Company in raising
funds. As consideration for services to be performed under this agreement,
the Company was obligated to pay a cash fee of 8% of funds invested in
Immtech's Series D Preferred Stock by Non-U.S. persons prior to January
23, 2004 by investors introduced by the Finder and expenses not to exceed
$36,000. During the year ended March 31, 2004, fees of $350,000 and
expenses of $36,000 were paid with respect to this agreement, which are
included as part of the $429,000 of cash offering costs.
F-22
The Company may at any time after January 1, 2005, require that any or all
outstanding shares of Series D Convertible Preferred Stock be converted
into shares of the Company's common stock, provided that the shares of
common stock into which the Series D Convertible Preferred Stock are
convertible are registered pursuant to an effective registration
statement, as defined. The number of shares of common stock to be received
by the holders of the Series D Convertible Preferred Stock upon a
mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price D provided that the closing bid
price for the Company's common stock exceeds $18.00 for 20 consecutive
trading days within 180 days prior to notice of conversion, as defined, or
(ii) if the requirements of (i) are not met, the number of shares of
common stock is determined by dividing 110% of the Liquidation Price by
the Conversion Price D. The Conversion Price D is subject to certain
antidilution adjustments, as defined in the Certificate of Designation.
Each issued and outstanding share of Series D Convertible Preferred Stock
shall be entitled to 2.7778 votes (subject to adjustment for dilution)
with respect to any and all matters presented to the stockholders of the
Company for their action or consideration. Except as provided by law or by
the provisions establishing any other series of preferred stock, Series D
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class.
Common Stock - On June 28, 2002, the Company entered into a Finder's
Agreement with an individual to develop and qualify potential strategic
partners for the purpose of testing and/or the commercialization of
Company products in China. As consideration for entering into the
agreement, the individual received 150,000 shares of the Company's common
stock and the Company recognized approximately $757,500 as a general and
administrative expense based on the estimated fair value of the shares
issued.
On July 31, 2002, the Company entered into a one-year agreement with The
Gabriele Group. L.L.C. ("Gabriele") for assistance to be provided by
Gabriele to the Company with respect to management consulting, strategic
planning, public relations and promotions. As compensation for these
services, the Company granted Gabriele 40,000 shares of the Company's
common stock and the Company recognized approximately $187,600 as a
general and administrative expense during the year ended March 31, 2003,
based on the fair value of the shares on the date issued. The Company also
granted Gabriele warrants to purchase 30,000 shares of the Company's
common stock at $6.00 per share. These warrants vest when the price of the
Company's common stock reaches certain milestones. During the year ended
March 31, 2004, the Company recognized general and administrative expenses
of approximately $247,000 because the prescribed milestones had been
reached with respect to 20,000 of the warrants to purchase the Company's
stock. The remaining 10,000 warrants may vest in the future if certain
milestones are achieved. This expense was recorded based on the estimated
fair value of the warrants using the Black-Scholes option valuation model.
On March 21, 2003, the Company entered into media production agreements
with Winmaxmedia, an operating division of Winmax Trading Group, Inc.
("Winmax"), to produce materials to be used in connection with equity
fundraising efforts. As
F-23
consideration for services to be performed under the agreement, the
Company issued 100,000 shares of its common stock and paid approximately
$100,000 of cash during the year ended March 31, 2003, which was recorded
as deferred offering costs within other current assets on the accompanying
March 31, 2003 consolidated balance sheet.
On March 21, 2003, the Company entered into an Investor Relations
Agreement with Fulcrum Holdings of Australia, Inc. ("Fulcrum") for
financial consulting services and public relations management to be
provided over a 12-month period. As consideration for services to be
performed under the agreement, the Company is to issue to Fulcrum 100,000
shares of common stock and warrants to purchase 350,000 shares of common
stock at prices ranging from $6.00 to $15.00 per share. During the year
ended March 31, 2004, the common shares and warrants were issued, and the
related expense was recognized, on a pro-rata basis over the contract
period. During the years ended March 31, 2003 and 2004, 8,333 and 91,667
common shares were issued and general and administrative expenses of
$37,290 and $1,031,756, respectively, were recorded based on the market
value of the common shares on the date of issuance. Also during the years
ended March 31, 2003 and 2004, warrants to purchase 29,167 and 320,833
shares of common stock were issued and general and administrative expenses
of $51,835 and $1,748,411, respectively, were recorded based on the
estimated fair value of the warrants using the Black-Scholes option
valuation model.
On March 21, 2003, the Company entered into a Finder's Agreement with
Wyndham Associates Limited ("Wyndham") to identify potential strategic
partners and assist in the raising of equity financing. As consideration
for services to be performed under the agreement, the Company was
obligated to issue 220,000 shares of common stock. The agreement further
provided that Wyndham would receive a cash fee for any additional equity
investments by investors introduced by Wyndham. During the year ended
March 31, 2004, 220,000 common shares were issued and non-cash offering
costs of $1,397,000 were recorded based on the market value of the
Company's common stock on the date of issuance.
On July 25, 2003, the Company entered into a consulting agreement with
Fulcrum to identify and negotiate with stock exchanges to list the common
stock of the Company and to assist the Company to prepare applications to
list the common stock of the Company on a stock exchange. As consideration
for services under this agreement, upon the listing of the Company's
common stock on a stock exchange, the Company would issue to Fulcrum
100,000 shares of common stock. On August 11, 2003, the Company's common
stock was listed on the American Stock Exchange. Accordingly, the Company
issued 100,000 shares of its common stock to Fulcrum, resulting in the
recognition of general and administrative expenses of $1,400,000 during
the year ended March 31, 2004, based on the market value of the Company's
common stock on the date of issuance.
In September 2003, the Company entered into a separate Finder's Agreement
with Wyndham to identify potential strategic partners and assist in the
private placements of debt, equity and/or warrants through December 2003.
As consideration for services to be performed under this agreement, a cash
fee equal to 8.0% of funds received by the
F-24
Company from investors introduced by Wyndham, is due at the closing date
of the respective private placement. The Company also paid a retainer of
$160,000 to Wyndham. In the event that investors introduced by Wyndham did
not subscribe to invest at least $20,000,000, the $160,000 retainer was to
be returned to the Company. The minimum subscription amount of $20,000,000
was not achieved prior to December 31, 2003 and the $160,000 has not yet
been repaid to the Company; instead it was written-off as a charge to
general and administrative expenses during the year ended March 31, 2004.
On July 16, 2003, the Company entered into a consulting agreement with
David Tat-Koon Shu for services to assist the Company with the formation
of a subsidiary and to gain regulatory approvals to enter into clinical
trials in China. As compensation for these services, Mr. Shu was granted
10,000 shares of the Company's common stock and a general and
administrative expense of $62,900 was recorded during the year ended March
31, 2004 based on the market value of the common stock on the date of
issuance.
Common Stock Options - On October 12, 2000, the Company's stockholders
approved the issuance of options to purchase shares of common stock to
certain employees and other nonemployees who have been engaged to assist
the Company in various research and administrative capacities as part of
the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan provides for
the issuance of up to 350,000 shares of common stock in the form of
incentive stock options and non-qualified stock options. At the
stockholders meeting held November 15, 2002, the stockholders approved an
amendment to the 2000 Stock Incentive Plan to increase the number of
shares of common stock reserved for issuance from 350,000 shares to
1,100,000 shares. Expiring stock options which were issued under the 2000
Stock Incentive Plan are available for reissuance. During the year ended
March 31, 2004, there were 8,500 options previously granted under the 2000
Stock Incentive Plan that expired and are available to be reissued. The
incentive stock options must be granted at a price at least equal to fair
market value at the date of grant.
The Company has granted options to purchase common stock to individuals
who have contributed to the Company in various capacities. The options
contain various provisions regarding vesting periods and expiration dates.
The options generally vest over periods ranging from 0 to 4 years and
expire after five or ten years. As of March 31, 2004, there were a total
of 340,250 shares available for grant.
Options Granted to Nonemployees - During the year ended March 31, 2002,
the Company issued options to purchase 12,000 shares of common stock to
nonemployees and recognized expense of approximately $332,000 related to
such options and certain other options issued in prior years which vest
over a four-year service period. During the year ended March 31, 2003, the
Company issued options to purchase 22,000 shares of common stock to
nonemployees (of which options to purchase 5,000 shares did not vest) and
recognized expense of approximately $243,000 related to such options and
certain other options issued in prior years which vest over a four year
service period. During the year ended March 31, 2004, the Company issued
options to purchase 22,000 shares of common stock to nonemployees and
recognized expense of approximately $267,000 related to such options and
certain other options issued in prior years which vest over a
F-25
four year service period. The expense was determined based on the
estimated fair value of the options using the Black-Scholes option
valuation model and assumptions regarding volatility of the Company's
common stock, risk-free interest rates, and life of the option of the
Company's common stock all at the date such options were issued.
The activity during the years ended March 31, 2002, 2003 and 2004 for the
Company's stock options is summarized as follows:
Weighted
Number of Stock Options Average
Shares Price Range Exercise Price
Outstanding as of March 31, 2001 466,136 $0.34-11.50 $ 4.43
Granted 107,750 4.75-10.00 7.16
Exercised (51,214) 0.34- 0.59 0.38
Expired (14,194) 0.34-11.50 1.91
-------- ----------- ------
Outstanding as of March 31, 2002 508,478 0.34-11.50 5.48
Granted 225,000 2.25-4.75 2.75
Exercised (217) 0.59 0.59
Expired (34,787) 0.59-10.50 7.72
-------- ----------- ------
Outstanding as of March 31, 2003 698,474 0.34-11.50 4.49
Granted 299,000 6.08-21.66 17.80
Exercised (26,400) 0.46-11.50 2.57
Expired (8,500) 2.55-11.50 9.56
-------- ----------- ------
Outstanding as of March 31, 2004 962,574 0.34-21.66 8.63
======== =========== ======
Exercisable as of March 31, 2002 340,186 $0.34-11.50 3.86
Exercisable as of March 31, 2003 415,709 0.34-11.50 4.52
Exercisable as of March 31, 2004 567,838 0.34-21.66 6.02
F-26
The following table summarizes information about stock options outstanding
as of March 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Range Remaining Average Average
of Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life-Years Price Exercisable Price
$0.34-0.46 152,634 2.87 $ 0.44 152,634 $ 0.44
1.74-2.55 257,190 6.56 2.37 139,538 2.23
4.42-4.75 73,000 3.06 4.73 52,503 4.72
6.08-11.50 202,750 5.26 10.38 180,142 10.68
14.29-21.66 277,000 9.63 18.71 43,021 20.16
------- ----- ------ ------- -------
962,574 5.07 $ 8.63 567,838 $ 6.02
======= ===== ====== ======= =======
Warrants - For advisory services in connection with the Recapitalization
(see Note 3), RADE received warrants to purchase 225,000 shares of the
Company's common stock at $.10 per share. On April 22, 1999, the warrant
agreement with RADE was amended to increase the exercise price from $.10
per share to $6.47 per share. The warrants expire July 24, 2004. On
October 12, 1998, RADE received warrants to purchase 750,000 shares of the
Company's common stock at $.10 per share. On April 22, 1999, the warrant
agreement was amended to increase the exercise price from $.10 per share
to $6.47 per share. The warrants were issued as compensation for
management consulting, market analysis and strategic advisory services
performed from July 1998 through December 1998. The warrants expire
October 12, 2004.
In connection with an initial public offering, the underwriters received
warrants to purchase 100,000 additional shares of common stock at $16.00
per share. The warrants expired on April 25, 2004.
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. 41,200 of these warrants were
exercised on August 11, 2003 and 58,800 warrants were exercised on August
21, 2003.
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.
F-27
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. These 100,000 warrants were exercised on August 20, 2003.
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 on April 20, 2001.
On January 31, 2002, the Company entered into a one year consulting
agreement with Yorkshire Capital Limited ("Yorkshire") for services
related to identifying investors and raising funds in connection with the
February 2002 private placement offerings and assistance to be provided by
Yorkshire to the Company with respect to financial consulting, planning,
structuring, business strategy, public relations and promotions, among
other items. In connection with the closing of the private placement
offerings, the Company granted Yorkshire warrants to purchase 360,000
shares of the Company's common stock at prices ranging from $6.00 to
$12.00 per share. Warrants to purchase 100,000 shares of the Company's
common stock at an exercise price of $6.00 per share vested upon the
closing of the private placement offerings. The remaining warrants did not
vest and were cancelled. The warrants expire on February 14, 2007 and
contain certain antidilution provisions. The Company may, upon 30 days'
notice, redeem any vested warrants for $0.10 per share if the Company's
Common Stock trades at 200% of the exercise price for 20 consecutive
trading days. Yorkshire may exercise any vested warrants during such
notice period. In addition, Yorkshire received 60,000 shares of the
Company's common stock as additional consideration for identifying
investors and raising funds in connection with the closing of the private
placement offerings. As compensation for the consulting services, the
Company was required to pay a retainer fee to Yorkshire of $10,000 per
month for the term of the agreement.
In February 2002, the Company, in connection with the Series A Convertible
Preferred Stock private placement offering, issued warrants to purchase
400,250 shares of the Company's common stock at an exercise price of $6.00
per share of common stock. The warrants expire 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
F-28
tendering the appropriate exercise price. The warrants contain certain
antidilution provisions.
The warrants issued in February 2002 to the holders of the Series A
Convertible Preferred 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 deemed 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 deemed 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 deemed dividend of $908,535
was reported as a dividend in determining the net loss attributable to
common stockholders in the accompanying statement of operations for the
year ended March 31, 2002.
In addition, on February 1, 2002, the Company entered into an introductory
brokerage agreement with Ace Champion, Ltd. ("Ace") and Pacific Dragon
Group, Ltd. ("Pacific Dragon") (collectively, the "Introductory Brokers")
for assistance to be provided by the Introductory Brokers to the Company
with respect to obtaining funds in connection with the aforementioned
February 2002 private placement offerings (see Note 3). As compensation
for such services, Ace and Pacific Dragon received warrants to purchase
100,000 shares and 300,000 shares, respectively, of the Company's common
stock at an exercise price of $6.00 per share, subject to certain
conditions. The Company may, after February 22, 2003, upon 30 days'
notice, provided that the Company's common stock has traded at or above
200% of the exercise price for 20 consecutive trading days, redeem any
unexercised warrants for $0.10 per share, as defined. The Introductory
Brokers may exercise their warrants during the 30-day notice period. The
warrants expire on February 22, 2007 and contain certain antidilution
provisions.
In September 2002, in connection with of the Series B Convertible
Preferred Stock private placement offering, the Company issued warrants to
purchase 191,812 shares of the Company's common stock at an exercise price
of $6.125 per share of common stock. The warrants expire at various dates
in September 2007. The warrant exercise period commenced immediately upon
issuance of the warrant. At any time after the first anniversary of the
date of grant and if the Company's common stock closes above 200% of the
exercise price for 20 consecutive trading days, the Company may, upon 20
days' notice, redeem any unexercised portion of any warrants for a
redemption fee of $.10 per share of common stock underlying the warrants.
During the 20-day notice period, if the warrants are then exercisable as a
result of the conversion or redemption of the Series B Convertible
Preferred Stock, such warrant holder may then exercise all or a portion of
the warrants by tendering the appropriate exercise price.
The warrants issued in September 2002 to the holders of the Series B
Convertible Preferred Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $149,432 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series B Convertible Preferred Stock resulting in
F-29
a $149,432 preferred stock deemed dividend calculated in accordance with
EITF Issue No. 00-27. The deemed dividend on the Series B Convertible
Preferred Stock was charged to deficit accumulated during the development
stage immediately upon issuance, as the preferred stock is immediately
convertible. The preferred stock deemed dividend of $149,432 was reported
as a dividend in determining the net loss attributable to common
stockholders in the accompanying statement of operations for the year
ended March 31, 2003.
On July 16, 2003, the Company entered into an agreement with China Harvest
International Ltd. ("China Harvest") for services to be provided to assist
the Company in obtaining regulatory approval to conduct clinical trials in
China. As consideration for these services, the Company granted China
Harvest warrants to purchase 600,000 shares of common stock from the
Company at $6.08 per share. These warrants are fully vested and have an
exercise period of five years. During the year ended March 31, 2004,
approximately $2,744,000 was recorded as general and administrative
expenses, based on the estimated value of the warrants using the
Black-Scholes option valuation model.
In January 2004, in connection with of the Series D Convertible Preferred
Stock private placement offering, the Company issued warrants to purchase
200,000 shares of the Company's common stock at an exercise price of
$16.00 per share of common stock. The warrants expire at various dates in
January 2009. The warrant exercise period commenced immediately upon
issuance of the warrant. At any time after the first anniversary of the
date of grant and if the Company's common stock closes above 200% of the
exercise price for 20 consecutive trading days, the Company may, upon 20
days' notice, redeem any unexercised portion of any warrants for a
redemption fee of $.10 per share of common stock underlying the warrants.
During the 20-day notice period, if the warrants are then exercisable as a
result of the conversion or redemption of the Series D Convertible
Preferred Stock, such warrant holder may then exercise all or a portion of
the warrants by tendering the appropriate exercise price.
The warrants issued in January 2004 to the holders of the Series D
Convertible Preferred Stock were valued using the Black-Scholes option
valuation model and the amount recorded of $1,973,287 was determined by
applying the relative fair value method in relation to the estimated fair
value of Series D Convertible Preferred Stock resulting in a $1,973,287
preferred stock deemed dividend calculated in accordance with EITF Issue
No. 00-27. The deemed dividend on the Series D Convertible Preferred Stock
was charged to deficit accumulated during the development stage
immediately upon issuance, as the preferred stock is immediately
convertible. The preferred stock deemed dividend of $1,973,287 was
reported as a dividend in determining the net loss attributable to common
stockholders in the accompanying statement of operations for the year
ended March 31, 2004.
F-30
The activity during the years ended March 31, 2002, 2003 and 2004 for the
Company's warrants to purchase shares of common stock is summarized as
follows:
Weighted
Number of Warrants Average
Shares Price Range Exercise Price
Outstanding as of March 31, 2001 2,275,000 $6.47-20.52 $ 12.85
Granted 1,160,250 6.00-12.00 7.01
Cancelled (1,000,000) 10.75-20.52 19.05
------------ ------------ ------------
Outstanding as of March 31, 2002 2,435,250 6.00-16.00 7.52
Granted 250,977 6.00-15.00 6.64
Cancelled (260,000) 9.00-12.00 10.50
------------ ------------ ------------
Outstanding as of March 31, 2003 2,426,227 6.00-16.00 7.11
Granted 1,120,833 6.00-16.00 9.16
Exercised (559,350) 6.00-16.00 8.00
------------ ------------ ------------
Outstanding as of March 31, 2004 2,987,710 6.00-16.00 $ 7.70
============ ============ ============
Exercisable as of March 31, 2002 1,775,000 $6.00-16.00 $ 7.43
Exercisable as of March 31, 2003 2,039,227 6.00-16.00 7.32
Exercisable as of March 31, 2004 2,977,712 6.00-16.00 7.72
The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2004:
Exercise Price Warrants
Per Share Outstanding Expiration Date
$ 6.00 100,000 3/21/05
6.00 238,000 2/14/07
6.00 413,500 2/22/07
6.00 10,000 7/31/07
6.08 600,000 7/16/08
6.13 101,310 9/25/07
6.13 2,500 10/28/07
6.47 225,000 7/24/04
6.47 750,000 10/12/04
10.00 125,000 3/21/05
15.00 125,000 3/21/05
16.00 97,400 4/25/04
16.00 200,000 1/22/09
---------
Total warrants outstanding 2,987,710
=========
F-31
8. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional
fees for the attainment of certain milestones. The Company may receive
royalties on the sales of such products that may result from these
research and development activities and the other parties generally
receive exclusive marketing and distribution rights for certain products
for set time periods in specific geographic areas.
The Company initially acquired its rights to the platform technology and
dications developed by a consortium of universities consisting of The
University of North Carolina at Chapel Hill ("UNC"), Georgia State
University, Duke University and Auburn University (the "Scientific
Consortium") pursuant to an agreement, dated January 15, 1997 (as amended,
the "Consortium Agreement") among the Company, Pharm-Eco Laboratories,
Inc. ("Pharm-Eco"), and UNC (to which each of the other members of the
Scientific Consortium agreed shortly thereafter to become a party). The
Consortium Agreement commits the parties to collectively research,
develop, finance the research and development of, manufacture and market
both the technology and compounds owned by the Scientific Consortium and
previously licensed or optioned to Pharm-Eco and licensed to the Company
in accordance with the Consortium Agreement (the "Current Compounds"), and
all technology and compounds developed by the Scientific Consortium after
January 15, 1997, through use of Company-sponsored research funding or
National Cooperative Drug Development grant funding made available to the
Scientific Consortium (the "Future Compounds" and, collectively with the
Current Compounds, the "Compounds").
The Consortium Agreement contemplated that upon the completion of the
Company's initial public offering ("IPO") of shares of its common stock
with gross proceeds of at least $10,000,000 by April 30, 1999, the Company
and Pharm-Eco, with respect to the Current Compounds, and the Company and
UNC, (on behalf of the Scientific Consortium), with respect to Future
Compounds, would enter into license agreements for, or assignments of, the
intellectual property rights relating to the Compounds held by Pharm-Eco
and the Scientific Consortium; pursuant to which the Company would pay
royalties and other payments based on revenues received for the sale of
products based on the Compounds.
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000. Pursuant to the Consortium Agreement, both
Pharm-Eco and the Scientific Consortium then became obligated to grant or
assign to the Company an exclusive worldwide license to use, manufacture,
have manufactured, promote, sell, distribute, or otherwise dispose of any
products based directly or indirectly on all of the Current Compounds and
Future Compounds.
F-32
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to Pharm-Eco or
persons designated by Pharm-Eco.
Pursuant to the Consortium Agreement, the Company may, subject to the
satisfaction of certain conditions, be required to issue 100,000 shares of
common stock to the Scientific Consortium upon the filing by the Company
of the first new drug application or an abbreviated new drug application
with the Food and Drug Administration with respect to a product
incorporating certain Compounds. In addition, the Company will pay the
Scientific Consortium an aggregate royalty of up to 5.0% of net sales
derived from the Compounds, except that the royalty rate payable on any
Compound developed at Duke University will be determined by negotiations
at the time such Compound is developed. In the event that the Company
sublicenses its rights with respect to the Compounds to a third party, the
Company will pay the Scientific Consortium a royalty based on a percentage
of any royalties the Company receives, and a percentage of all signing,
milestone and other payments made to the Company pursuant to the
sublicense agreement.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium
whereby the Company received the exclusive license to commercialize
dication technology and compounds developed or invented by one or more of
the Consortium scientists after January 15, 1997, and which also
incorporated into such License Agreement the Company's existing license
with the Scientific Consortium with regard to the Current Compounds.
In June 1999, the Company entered into a research and manufacturing
agreement with Pharm-Eco for Pharm-Eco to produce good manufacturing
practices quality, as defined, dicationic drugs and products for clinical
testing and for early commercialization. Pharm-Eco was unable to
manufacture certain required compounds and the Company subsequently
engaged alternate suppliers who successfully manufactured the compounds.
In August 2000, Pharm-Eco and two of its senior executives filed suit in
Delaware against the Company in connection with a dispute under the
Consortium Agreement. The Company responded by denying the allegations and
filing a counter-claim against Pharm-Eco for breach of contract.
The Company filed a Motion for Summary Judgment, which was granted on
February 21, 2001. In his Memorandum Opinion, the Vice Chancellor hearing
the proceeding dismissed all of the plaintiffs' claims against the Company
and held that Pharm-Eco had breached the Consortium Agreement by failing
to grant or assign to the Company a license for the Current Compounds. On
March 12, 2001, the Vice Chancellor signed a Final Order and Judgment
directing Pharm-Eco to execute and deliver to the Company an agreement
granting or assigning to the Company the license. On March 27, 2001,
Pharm-Eco and the Company entered into an agreement assigning the license.
No further claims against the Company remain in this proceeding, and on
May 1, 2001, a Stipulation of Dismissal was filed with the Court.
F-33
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
7), (b) the obligation to issue shares of common stock upon the occurrence
of a certain future event, (c) the obligation to pay a percentage of all
non-royalty payments that the Company might receive under any sublicense
that the Company might enter into with respect to certain compounds, and
(d) certain accounts payable which Pharm-Eco claimed to be owed of
approximately $159,000; and a release of any and all claims that Pharm-Eco
may have had against the Company. The cash payment received and the
accounts payable obligations which were forgiven, aggregating
approximately $1,159,000, were recorded as a credit to (reduction of)
research and development expense during the year ended March 31, 2002; as
the Company had previously expensed the estimated fair value of the shares
of common stock issued to Pharm-Eco at the time of the IPO and the
accounts payable obligations, as research and development expense.
The Company was required, under an agreement which has subsequently
expired, to make quarterly research grants in the amount of $100,000 to
UNC through April 30, 2002. During the years ended March 31, 2002 and
2003, the Company expensed grant payments to UNC of $400,000 and $100,000,
respectively. Such payments were expensed as research and development
costs. There were no grant payments to UNC during the year ended March 31,
2004.
The Consortium Agreement provides that the Company is required to pay to
UNC on behalf of the Scientific Consortium reimbursement of patent and
patent-related fees, certain milestone payments and royalty payments based
on revenue derived from the Scientific Consortium's dication technology.
Each month on behalf of the inventor scientist or university, as the case
may be, UNC submits an invoice to the Company for payment of
patent-related fees related to current compounds or future compounds
incurred prior to the invoice date. The Company is also required to make
milestone payments in the form of the issuance of 100,000 shares of its
common stock to the Consortium when we file our initial New Drug
Application ("NDA") or an Abbreviated New Drug Application ("ANDA") based
on Consortium technology and are required to pay to UNC on behalf of the
Scientific Consortium (other than Duke University) (i) royalty payments of
up to 5% of our net worldwide sales of "current products" and "future
products" (products based directly or indirectly on current compounds and
future compounds, respectively) and (ii) a percentage of any fees we
receive under sublicensing arrangements. With respect to products or
licensing arrangements emanating from Duke University technology, the
Company is required to negotiate in good faith with UNC (on behalf of Duke
University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and
defend patents so long as the Company chooses to retain the license to
such patents.
F-34
In August 1999 and 2000, the Company was awarded three Small Business
Innovation Research ("SBIR") grants aggregating approximately $1,429,000
from the National Institutes of Health ("NIH") to research various
infections. During the year ended March 31, 2002, the Company recognized
revenues of approximately $502,000, from these grants and expensed
payments to UNC and certain other Scientific Consortium universities of
approximately $163,000, 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 a three year grant to continue research
on "Novel Procedures for Treatment of Opportunistic Infections." During
the years ended March 31, 2002 and 2003, the Company recognized revenues
of approximately $74,000 and $70,000 from this grant and expensed payments
of approximately $65,000 and $70,000 to UNC and certain other Scientific
Consortium universities for contracted research related to this grant.
During the year ended March 31, 2004, no revenues or expenses were
recorded related to this grant.
During the years ended March 31, 2002, 2003 and 2004, the Company expensed
approximately $438,000, $333,000 and $526,000, respectively, of other
payments to UNC and certain other Scientific Consortium universities for
patent related costs and other contracted research. Total payments
expensed to UNC and certain other Scientific Consortium universities were
approximately $1,066,000, $503,000 and $526,000 during the years ended
March 31, 2002, 2003 and 2004, respectively. Included in accounts payable
as of March 31, 2003 and 2004, was approximately $15,000 and $132,000,
respectively, due to UNC and certain other Scientific Consortium
universities.
In November 2000, The Bill & Melinda Gates Foundation ("Gates Foundation")
awarded a $15,114,000 grant to UNC to develop new drugs to treat Human
Trypanosomiasis (African sleeping sickness) and Leishmaniasis. On March
29, 2001, UNC entered into a clinical research subcontract agreement with
the Company, whereby the Company is to receive up to $9,800,000, subject
to certain terms and conditions, over a five year period to conduct
certain clinical and research studies.
In April 2003, the Gates Foundation awarded a $2,713,124 supplemental
grant to UNC for the expansion of phase IIB/III clinical trials for
treatment of Human Trypanosomiasis (African sleeping sickness) and
improved manufacturing processes. The supplemental increase in the
subcontract with UNC to the Company due to this amendment is $2,466,475,
bringing the total available funding to the Company under this agreement
to $12,266,475. The proceeds due to the Company under this arrangement are
restricted to the development of new drugs for the treatment of Human
Trypanosomiasis, Leishmaniasis, along with an improved manufacturing
processes and must be segregated from other funds and used for specific
purposes.
During the years ended March 31, 2002, 2003 and 2004, the Company received
installment payments under this grant of approximately $0, $3,380,000, and
$1,025,000, respectively, and approximately $2,946,000, $1,389,000 and
$2,114,000 was utilized for clinical and research purposes conducted and
expensed during the years ended March 31,
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2002, 2003 and 2004, respectively. The Company recognized revenues of
approximately $2,946,000, $1,389,000 and $2,114,000 during the years ended
March 31, 2002, 2003 and 2004, respectively, for services performed under
the agreement. The remaining amount (approximately $2,554,000 and
$1,465,000 as of March 31, 2003 and 2004, 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 grants. The agreement provides
for payments of up to approximately $1.2 million over the term of the
agreement. The Company recognized expense of approximately $317,000,
$498,000 and $425,000 during the years ended March 31, 2002, 2003 and
2004, respectively, related to this agreement.
On April 22, 2002, the Company entered into a Confidentiality, Testing and
Option Agreement with Neurochem, Inc. ("Neurochem"), a Canadian
corporation, to supply Neurochem with selected dicationic compounds for
the testing, evaluation and potential future licensing of such compounds
for (i) the treatment and diagnosis of amyloidosis and the related
underlying conditions of Alzheimer's Disease, cerebral amyloid angiopathy,
primary amyloidosis, diabetes, rheumatic diseases and (ii) the treatments
of conditions related to secondary amyloidosis. Under the agreement,
Neurochem had the right to license technology related to the tested
compounds upon the conclusion of the Confidentiality, Testing and Option
Agreement, as defined in the agreement. On April 4, 2003, the Company
notified Neurochem that the Confidentiality, Testing and Option Agreement
had previously expired by its terms and that all rights granted to
Neurochem thereunder had concurrently expired, including any right
Neurochem may or may not have had to license such technology.
On November 26, 2003, the Company entered into a testing agreement with
Medicines for Malaria Venture ("MMV"), a foundation established in
Switzerland, and UNC. Pursuant to this agreement the Company, with the
support of MMV and UNC, is to conduct a proof of concept study of the
dicationic drug candidate DB289, including Phase II and Phase III human
clinical trials, and will pursue drug development activities of DB289
alone, or in combination with other anti-malaria drugs, with the goal of
obtaining marketing approval of a product for the treatment of malaria.
Under the terms of the agreement, MMV has committed to advance funds to
Immtech to pay for human clinical trials and regulatory preparation and
filing costs for the approvals to market DB289 for treatment of malaria by
at least one internationally accepted regulatory body and one malaria
endemic country. The funding under this agreement is for the performance
of specific research and is not subject to maximum funding amounts. The
term of the funding portion of this agreement is three years and is
subject to annual renewals. The Company has forecasted such costs to be
approximately $8.2 million over the next three years. In return for this
funding from MMV, Immtech is required to sell all malaria drugs derived
from this research at an affordable price. As used in the agreement, and
affordable price shall not be less than the cost to manufacture and
deliver
F-36
the drugs plus administrative overhead costs (not to exceed 10% of the
cost to manufacture) and a modest profit when selling into a malaria
endemic country, as defined. Sales of malaria drugs to non-malaria endemic
countries require that the Company pay a royalty not to exceed 7% of sales
be paid to MMV until the amount funded under the agreement with UNC is
refunded to MMV.
MMV has agreed to fund the forecasted amount based on the progress
achieved, including payment to the Company of approximately $668,000
during the year ended March 31, 2004 related to human clinical trials. The
Company recognized revenues of approximately $302,000 during the year
ended March 31, 2004 for expenses incurred related to activities within
the scope of the agreement with MMV. At March 31, 2004, the Company has
approximately $366,000 recorded as deferred revenue with respect to this
agreement.
9. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In December 1999, the Company entered into a lease of
its main office and research facility under an operating lease that
requires lease payments starting in March 2000 of approximately $12,100
per month through March 2003 and $12,800 from April 2003 through March
2005. The Company is required to pay certain real estate and occupancy
costs. In July 1999, the Company began leasing an additional office
facility from RADE, a related party, that is occupied by both the Company
and RADE, on a month-to-month basis, for approximately $10,100 per month.
Total rent expense was approximately $270,000, $285,000 and $310,000 for
all leases during the years ended March 31, 2002, 2003, and 2004,
respectively.
As of March 31, 2004, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
Year
Ending Lease
March 31, Payments
2005 $153,000
---------
Total $153,000
=========
Other Contingencies - In connection with obtaining the consent of
Criticare Systems, Inc. ("Criticare"), a significant stockholder of the
Company, to the private placement of stock by NCHK in 1998, the Company
transferred to Criticare, on July 2, 1998, certain of its intangible
assets and 86,207 shares of the Company's common stock for $150,000. These
intangible assets included (1) a license for rmCRP as a therapy for
treating sepsis (a bacterial infection which quickly overwhelms the immune
system and can lead to sudden death), and (2) rights to certain diagnostic
products.
The license granted to Criticare for rmCRP included patents and know-how
developed by the Company. NextEra has licensed the rights for producing
rmCRP back to the Company for use with sepsis applications. Criticare
assigned the technology to another party and the assignee had until July
2, 1999, to raise a minimum of $500,000 to fund
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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 Transferrin ("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. Criticare is
responsible for the maintenance and prosecution of the patents for both
technologies.
In June 2000, Technikrom, Inc. ("Technikrom") filed a claim against the
Company with the American Arbitration Association in Chicago, Illinois. In
that proceeding, Technikrom sought to recover $124,000 in fees, interest
and costs for certain method development services provided to the Company
relating to the purification of a protein known as rmCRP. The Company
filed a counterclaim against Technikrom for fraudulent inducement of
contract which sought compensatory damages of at least $224,000, plus
interest and costs. The Company also sought a declaratory judgment that
Technikrom, inter alia, failed to use its best efforts to develop a
purification method within the time parameters set by the parties. The
parties engaged an arbitrator and in November 2001 Technikrom was awarded
a $95,000 settlement, which the Company subsequently paid.
The Company is involved in various other 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.
10. OTHER RETIRED OBLIGATIONS
Recapitalization - In connection with the Recapitalization (see Note 3)
the following transactions occurred on July 24, 1998:
o Criticare, a significant stockholder of the Company, who, prior to
the Recapitalization, owned 1,000,000 shares of Series A Redeemable
Preferred Stock, 1,200,000 shares of Series B Redeemable Preferred
Stock and 198,708 shares of common stock, had advanced $597,722 to
the Company. The advances were payable on demand. Criticare
exchanged $597,722 of advances and $68,368 of related accrued
interest for 145,353 shares of common stock. The Company also had
certain notes payable to Criticare aggregating $148,777 and related
accrued interest of $43,426 that were exchanged for 35,403 shares of
common stock. The carrying value of the outstanding Criticare
indebtedness in excess of the estimated fair value of the shares of
common stock and cash exchanged was accounted for as additional
paid-in capital.
o Certain other stockholders exchanged $387,450 of advances for
196,824 shares of common stock. The Company recognized a gain on the
extinguishment of debt of
F-38
$80,404 for the outstanding indebtedness under the advances in
excess of the estimated fair value of the 196,824 shares of common
stock ($307,046).
o Certain other notes payable aggregating $1,306,673, related accrued
interest aggregating $337,290 and accounts payable aggregating
$261,597 were exchanged for 227,398 shares of common stock and
$203,450 cash. The Company recognized a gain on the extinguishment
of debt of $1,347,361 for the outstanding aggregate indebtedness
under such notes ($1,306,673), related accrued interest ($337,290)
and accounts payable ($261,597) in excess of the estimated fair
value of the shares of common stock ($354,749) and cash ($203,450)
exchanged.
o Series A and B Redeemable Preferred stockholders exchanged their
preferred shares for an aggregate 1,195,017 shares of common stock.
The holders of the Series A and Series B Redeemable Preferred Stock
had cumulative dividend preferences at the rate of 8% per annum,
compounded daily, of the liquidation value thereof, plus accumulated
and unpaid dividends thereon, in preference to any dividend on
common stock, payable when and if declared by the Company's Board of
Directors. Dividends accrued whether or not they had been declared
and whether or not there were profits, surplus or other funds of the
Company legally available for the payment of dividends. The
difference between the initial estimated fair value of the Series A
Redeemable Preferred Stock and the aggregate redemption value of
$440,119 was a premium which was amortized by a credit to retained
earnings (deficit accumulated during the developmental stage) and a
debit to the carrying value of the redeemable preferred stock during
the period from issuance to the required redemption date, using the
interest method. In addition, while the redeemable preferred shares
were outstanding, dividends aggregating $1,783,354 were charged to
retained earnings (deficit accumulated during the development
stage). The Series A and Series B Redeemable Preferred Stock had
redemption (carrying) values of $2,780,324 and $2,797,260,
respectively, as of the date of the Recapitalization. In connection
with the Recapitalization, the Series A and Series B Redeemable
Preferred stockholders agreed to accept 578,954 and 616,063 shares
of common stock, respectively, for their shares of the preferred
stock. The difference between the carrying value of the Series A and
Series B Redeemable Preferred Stock and the estimated fair value of
the common shares exchanged of $1,877,138 and $1,836,196,
respectively, was credited to deficit accumulated during the
development stage.
Advances from Stockholder and Affiliate - As of March 31, 1999, the
Company's president and NextEra had each advanced $25,000 to the Company.
The advances were non-interest bearing and were repaid in May 1999.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years
ended March 31, 2002, 2003 and 2004.
F-39
Non-Cash Investing and Financing Activities:
During the years ended March 31, 2002, 2003 and 2004, the Company issued
common stock, common stock options and warrants as compensation for
services and engaged in certain other non-cash investing and financing
activities. The amounts of these transactions are summarized as follows:
Years Ended March 31,
-------------------------------------------
2002 2003 2004
Expense related to issuance of common stock
to nonemployees as compensation for services $ 982,390 $ 3,891,608
Expense related to issuance of common stock
options as compensation for services $ 332,005 243,150 267,500
Expense related to issuance of warrants
to purchase common stock as compensation
for services 51,835 3,342,244
Issuance of common stock for offering
costs 1,397,000
Convertible preferred stock dividends recorded 29,400 302,437 432,713
Issuance of common stock as payment of
convertible preferred stock dividends 161,113 330,640
Issuance of common stock for conversions
of convertible preferred stock 953,043 3,850,205
Exchange of ownership interests:
Value of land use rights exchanged
Land use rights (3,443,867)
Minority interest 296,193
Value of leasehold improvement acquired 3,547,674
Issuance of common stock for acquisition
of leasehold improvements:
Fair value of land use rights acquired $ 3,501,522
Less: Minority interest (296,193)
Cash paid for acquisition costs (204,924)
Increase in accounts payable for
acquisition costs (1,605)
-----------
Issuance of common stock for acquisition
of leasehold improvements $ 2,998,800
===========
********
F-40