United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 2005.
|__| 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
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
150 Fairway Drive, Suite 150,
Vernon Hills, Illinois 60061
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, 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 June 10,
2005, was $148,005,516.
As of June 10, 2005, the total number of shares of the registrant's common stock
outstanding was 11,409,178 shares.
Documents incorporated by reference. None.
IMMTECH INTERNATIONAL, INC.
TABLE OF CONTENTS
Page
PART I.
ITEM 1. BUSINESS.........................................................1
ITEM 2. PROPERTIES......................................................44
ITEM 3. LEGAL PROCEEDINGS...............................................44
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.........................................50
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................52
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......63
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................63
ITEM 9A CONTROLS AND PROCEDURES.........................................63
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............64
ITEM 11. EXECUTIVE COMPENSATION..........................................70
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................73
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
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "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
extending its proprietary aromatic cation technology platform to the treatment
of cancer, diabetes and other diseases. We have advanced clinical programs that
include new treatments for malaria, Pneumocystis pneumonia ("PCP") and African
sleeping sickness (trypanosomiasis), and drug development programs for fungal
infections and tuberculosis. We hold worldwide patents and patent applications,
and licenses and rights to license technology, primarily from a scientific
consortium that has granted us a worldwide license and exclusive rights to
commercialize products from, and
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license rights to, the technology. The scientific consortium includes scientists
from The University of North Carolina at Chapel Hill ("UNC"), Georgia State
University ("Georgia State"), Duke University ("Duke University") and Auburn
University ("Auburn University") (collectively, the "Scientific Consortium").
Our strategy is to develop and commercialize a pipeline of new oral drugs
to treat infectious diseases and other disorders utilizing a proprietary library
of aromatic cation compounds. 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 to treat acute infectious diseases have been brought to
market during this period. New drugs are needed to overcome the health risks
from multi-drug resistant pathogens and to address the increasing number of new
pathogens that are causing disease. We are developing a new paradigm focused on
reducing the time and cost to develop drugs aimed at solving global health
issues.
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)
preclinical and human clinical trials and (iii) manufacture of pharmaceutical
drugs.
We are working with our scientific and foundation partners to (i) complete
the clinical programs for malaria, Pneumocystis pneumonia and African sleeping
sickness, (ii) advance new drug candidates into the clinic and (iii) validate
the broad application of our technology platform and illustrate its low toxicity
and oral deliverability (See "Products and Programs" below). We believe we can
build a sustainable and profitable business by selling drugs in niche markets in
certain developing countries as we target treatments for multi-billion dollar
markets such as fungal infections, tuberculosis, cancer and diabetes. The United
States Food and Drug Administration ("FDA") has granted "fast-track" designation
to our first oral drug candidate, DB289, to treat African sleeping sickness.
Fast-track designation may allow for accelerated FDA review of DB289 to treat
African sleeping sickness. However, there is no guarantee that fast-track
designation will result in faster product development or impact the likelihood
or timing of product approval.
For the fiscal year ended March 31, 2005, we had revenues of approximately
$5.9 million and a net loss of approximately $13.4 million which included
non-cash compensation expenses of approximately $5.2 million related to the
vesting of common stock options and extensions of warrants during the year. Our
management believes we have sufficient capital for operations through our next
fiscal year. There is no guarantee, however, that we will not need additional
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funds before then or that sufficient funds will be available after April 2006 to
fund continuing 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 two Phase III pivotal human clinical trials and one
Phase II clinical trial of DB289 either in progress or planned within this
calendar year and several more laboratory development programs in progress
testing the safety and effectiveness of other compounds in animal models for
various indications, including TB and fungal diseases. We are able to coordinate
the development of simultaneous treatment programs using DB289 by building on
the results of our Phase II safety and efficacy trials to initiate a Phase III
study in African sleeping sickness, a Phase IIb study in malaria and a Phase III
study in PCP. The dosage and treatment regimen for indications vary in each
trial; however, our safety data from Phase I and Phase II trials of DB289 for
treatment of African sleeping sickness, malaria and PCP have allowed us to
expedite development of the aromatic cation technology platform for clinical
use.
Malaria
Malaria is the second most common infectious disease in the world and
is a significant problem for over 2.6 billion people exposed to this
mosquito-borne disease. Each year an estimated 300 to 500 million new clinical
cases of malaria occur globally that result in 1.5 to 2.0 million deaths. It is
estimated by the WHO that over a million children infected with malaria die in
Africa every year; one child every 30 seconds. The Global Fund to Fight AIDS,
Tuberculosis and Malaria, and The Medicines for Malaria Venture ("MMV"), both
foundations
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supported by The Bill and Melinda Gates Foundation ("The Gates Foundation"), are
supporting the development of new oral drugs and combination therapies for the
safe and effective treatment of patients with common and drug-resistant forms of
malaria.
On November 26, 2003, we entered into a Testing Agreement with MMV 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 human clinical trials, and drug development activities of DB289
alone and in combination with other anti-malarial drugs, with the goal of
obtaining FDA or equivalent 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 the treatment of malaria.
MMV has agreed pursuant to the terms of the Testing Agreement to pay to obtain
regulatory approvals for DB289 from at least one internationally accepted
regulatory agency 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.
During the twelve months ended March 31, 2005, the Company received for
its efforts related to the Testing Agreement with MMV and UNC approximately $2.4
million. The Company recognized revenues and expenses of approximately $2.3
million during the twelve month period ended March 31, 2005 related to
activities within the scope of the Testing 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, synthesize and optimize a
new series of aromatic cationic compounds in order to identify a second
generation drug for treating advanced cases of malaria. Immtech is a third party
beneficiary of the Discovery Agreement and, pursuant to the terms of the
Consortium Agreement (defined below), has a worldwide license and exclusive
right to commercialize the discoveries resulting therefrom.
Clinical Trials Using DB289 for Malaria Treatment
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. For purposes of this study, patients were considered to be "cured" if
patients remained free of malaria parasites at 28 days after the start of
treatment. All 32 patients 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
monitored for 28 days after the start of treatment to ensure that the malaria
parasite had been eliminated.
Out of the 32 patients in the Phase IIa malaria trial, nine were infected
with Plasmodium vivax and 23 were infected with Plasmodium falciparum (the most
deadly form of malaria
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contracted by humans). 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 96% (22 of 23 patients) eliminated the
original malaria parasite (and were considered to be cured). Blood samples taken
from two of the patients on the 28th day after the start of the treatment
program contained malaria parasites but, after more extensive testing of the
genetics of the parasites, an independent third party concluded that one of the
two failed patients had cleared the original malaria parasite but had been
infected with a new malaria infection. Nine P. vivax patients were treated with
DB289 for five days followed by oral Primaquine (a drug 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 after the start 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.
In May 2005, we commenced enrollment in a Phase IIb clinical trial of
DB289 for the treatment of uncomplicated P. falciparum malaria. This study is
being conducted in Thailand and we have targeted to enroll approximately 120
patients. The study is designed to compare the effectiveness of various
three-day dose regimens of DB289 given alone (as mono-therapy) and in
combination with artesunate (a drug for treating malaria that is derived from
the artemisia plant). For comparison purposes, a separate control group will
receive a combination of the drugs artesunate and mefloquin which is a standard
treatment for malaria in Thailand. All patients will be treated and then
monitored for 28 days.
The patients who participate in the malaria trial will be randomly
assigned to groups, each of which will be treated for three days using different
dose regimens of DB289; patients will receive either 200 mg of DB289 once per
day, either alone or in combination with artesunate, or 100 mg of DB289 twice
per day. The patients' blood samples will be evaluated for parasites in the
prescreening process to establish a baseline and checked at regular times for
the three days of therapy, and then periodically until the 28th day of the
study. For purposes of this study, patients will be considered "cured" if the
malaria parasites are eliminated 7 days after the start of therapy and do not
recur within 28 days after the start of treatment. A separate control group will
receive a standard combination therapy regimen and the results from that group
will be compared to the patients treated with DB289.
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Clinical Trial Trial Design End Points Sites/Size
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DB289 alone and in o Phase IIb o Parasite clearance Thailand - approximately
combination with o DB289 alone and o Potential drug 120 patients
artesunate for the in combination with interactions between
treatment of malaria artesunate DB289 and artesunate
o Randomized open o Safety
label o Rate of clinical
o Oral dosing for 3 improvement
days o Comparison to
control group
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A related Phase I study conducted in late 2004 in Paris, France evaluated
the potential for increased dosing of DB289 for a shortened time period of three
days. In this study we analyzed the pharmacokinetics of DB289 in 54 healthy
volunteers (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). We enrolled people from African, Asian and Caucasian populations to
evaluate the differences between once per day and twice per day dosing, with
doses ranging from 200 mg to 600 mg per day for three days. The data from this
trial indicated that DB289 dosed at 200 mg once per day reached blood levels
that are expected to have a therapeutic effect in treating malaria in three
days. This shortened treatment period (3 days vs. 5 days) and once daily dosing
is expected to increase compliance with a prescribed treatment regimen by
malaria patients.
Pneumocystis pneumonia
Pneumocystis pneumonia ("PCP") is a fungus that overgrows the air sacs in
the lungs of those whose immune system has been suppressed, causing a
potentially life-threatening pneumonia. PCP was previously know as Pneumocystis
carinii pneumonia and is now called Pneumocystis jiroveci pneumonia. PCP is one
of the most common opportunistic infections in HIV/AIDS patients. Other
populations susceptible to PCP include patients on chemotherapy, those
undergoing transplant surgery, elderly patients and infants. An estimated 40
million adults and children are afflicted with PCP worldwide.
In 2002, we received approval from the FDA and the Ministry of Health in
Peru to commence a pilot Phase II clinical trial of DB289 to treat Pneumocystis
pneumonia. All patients had acquired immune deficiency syndrome ("AIDS") and had
failed standard therapy for PCP prior to enrollment in the trial. Two dosing
regimens were studied in this trial; the first 8 patients received 50 mg of
DB289 twice per day for 21 days; subsequently 27 patients received 100 mg of
DB289 twice per day for 21 days.
Preliminary results demonstrated that the clinical signs and symptoms of
PCP improved in all patients treated with DB289 and DB289 was well tolerated,
with no significant adverse events reported, other than one determined by the
principal investigator to not be related to the administration of DB289. No
patient was given further treatment for PCP during the trial, which included a 3
week follow-up period after completing the 21 day DB289 treatment. Patients
treated with the higher dosage regimen generally showed faster symptom
improvement and required a shorter time to achieve a steady state of drug
concentration in the blood. Based on these results, the higher dosage regimen
will be used in the upcoming Phase III trial described below.
Within the next several months, we plan to initiate a pivotal Phase III
clinical trial program using DB289 to treat PCP in North and South America,
including the United States. Designed as a comparative trial against the current
standard of care, trimethoprim-sulfamethoxazole, the program's objectives are to
show that DB289 has similar efficacy and tolerability. Our current clinical
trial protocol for testing of DB289 for the treatment of PCP is set forth below:
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Clinical Trial Trial Design / Phase End Points Sites/Size
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o DB289 for o Phase III pivotal o Efficacy of clinical o North and
the treatment of o Oral dosing of DB289 for 14 cure South America,
PCP days o Safety and tolerability including U.S.
o Twice daily dosages of o Improvement in and Peru
100 mg of DB289 clinical symptoms o Approximately
o Randomized and double-blind o Comparison to current 270 patients
standard of care
If we meet the designated end points in our Phase III pivotal trial, we
plan to submit a New Drug Application, or NDA, to the FDA (or similar
applications with regulatory agencies in foreign countries) for approval of
DB289 to treat PCP. If and when marketing approval is received, we expect to
sell DB289 for the treatment of PCP both in the United States and other
countries.
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, where more than 60 million people are at risk
of contracting the disease. WHO estimates that there are 300,000 to 500,000
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"). Existing treatments for
African sleeping sickness can be highly toxic and cannot be administered orally.
African sleeping sickness is fatal if left untreated.
Our clinical trials of DB289 to treat African sleeping sickness are being
conducted under an Investigational New Drug ("IND") application with the FDA. On
April 23, 2004, the FDA granted "Fast-Track" drug development designation to use
DB289 to treat human African sleeping sickness. We believe our studies have
demonstrated DB289's potential to safely and effectively treat this
life-threatening disease for which no other oral treatment exists, without the
serious side-effects associated with alternative (non-orally deliverable)
therapies. We believe 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. There is no guarantee, however, that fast-track
designation will result in faster product development or impact the likelihood
and timing of product approval.
We believe our studies demonstrate that DB289 can be used to treat human
African sleeping sickness without the serious side-effects associated with
pentamidine, the primary treatment currently in use in Africa. Pentamidine is
the current standard therapy for treatment of African sleeping sickness which is
generally administered by intramuscular injection by medical personnel in
hospital or clinic facilities. The oral administration 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 therapies is limited.
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In September 2002, we completed an open-label, non-controlled Phase IIa
study of DB289 in the DRC to treat 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). Clearance of the parasite at
the end of treatment testing was the primary endpoint for this study. Patients
evaluated at three and six months after treatment remained parasite free with
two relapses detected. Follow-up testing for this trial was completed in March
2005, with a cure rate of 76% at 24 months after treatment, the secondary
endpoint for the study. Based upon the promising early 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 phase of a multi-phase, multi-site
Phase II/III randomized human clinical trial to treat African sleeping sickness
with DB289, initially designed to enroll 350 people. The first phase of the
study included the testing of 81 patients who were administered twice daily
dosing of 100 mg of DB289 for five days. Half the patients in this phase of the
study received DB289 and half the patients received pentamidine intramuscular
injections (standard first line therapy). The clinical trial was conducted in
two sites in Maluku and Vanga in the DRC. 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, lymph nodes and cerebrospinal fluid ("CSF", a fluid that
surrounds the brain and spinal cord). In February 2004 treatment of the first 81
patients was completed. The results from the initial 81 patients continued to
show DB289 to be well tolerated with a favorable safety profile. At the Vanga
site 5 patients treated with DB289 for 5 days did not clear the parasite from
their lymph nodes and received additional treatment. The patients have completed
the 12 month follow-up testing without any recurrence of the disease, while 1 of
the 41 patients treated with pentamidine has experienced a relapse of the
disease.
Based on this information, the 30 patients in the second phase of the
trial were administered DB289 for 10 days (twice daily at 100 mg per dose);
twice the duration of the prior treatment regimen. All 30 patients cleared the
African sleeping sickness parasite at the end of the treatment period and those
returning for testing at the 3-month follow-up, which is the primary endpoint
for the trial, remained disease free. No untoward adverse events were reported.
Medical investigators will continue to monitor the patients at 6, 12, 18 and 24
month follow-up evaluations to check for any recurrence of the disease. No
additional patients are to be enrolled in this trial.
For the Phase III pivotal study we plan to open additional clinical sites,
two in the DRC, one in Angola and one or two in south Sudan where we intend
collectively with the two original sites to enroll 250 patients. We expect that
this study will provide the appropriate efficacy and safety data required to
support regulatory approval to use DB289 to treat stage 1 African sleeping
sickness.
The Phase III pivotal clinical trial design for using DB289 to treat human
African sleeping sickness has been established under a Special Protocol
Assessment with the FDA, which means the clinical trial protocol has been
reviewed and agreed to by the FDA prior to the
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start of the trial. In addition, in light of the potential benefit of using
DB289 to treat African sleeping sickness, the FDA has approved the inclusion of
pregnant women, nursing mothers and children into our Phase III clinical trial.
The trial design is set forth below:
------------------------------------------------------------------------------------------------
Clinical Trial Trial Design / Phase End Points Sites/Size
------------------------------------------------------------------------------------------------
o DB289 to o Phase III pivotal o Clearance of parasite o Democratic
treat human o Oral dosing for 10 days from blood, lymph nodes and Republic of the
trypanosomiasis (100 mg twice a day) CSF after treatment and 12 Congo, Angola and
o Randomized comparison and 24 months post-treatment Sudan
to pentamidine o Safety and o Approximately
tolerability of DB289 250 patients,
compared to pentamidine including pregnant
women, nursing
mothers and
adolescents 12 and
older
We plan to submit a New Drug Application, or NDA, to the FDA (or similar
applications with regulatory agencies in foreign countries) for approval of
DB289 to treat African sleeping sickness and to apply for an Accelerated
Approval of our NDA (or similar accelerated approval under the foreign
regulatory programs), if we meet the designated end points in our Phase III
pivotal trial. The FDA has indicated that it would consider a NDA for DB289 to
treat African sleeping sickness upon submission of safety and efficacy data at
the 12 month end point. Typically, if approval is based upon Accelerated
Approval or a similar accelerated approval program, continued testing through
the 24 month post-treatment program is required to validate the surrogate
endpoints used in the trial. Additional studies, including a clinical Phase IV
trial may also be required. The clinical data and the parasitological cure rate
at the follow-up testing at 12 months post-treatment will be submitted to the
FDA in support of Accelerated Approval and the data from the 24 month
post-treatment testing will be the primary endpoint in support of final
approval. 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 as a WHO Recommended Drug, and be included on their Essential Medicines
List. We believe inclusion of DB289 as a WHO Recommended Drug and inclusion on
the Essential Medicines List will enable us to sell DB289 to treat African
sleeping sickness, while continuing to perform any required post-approval
studies. The WHO generally accepts marketing approvals from drug regulatory
agencies in the United States, UK, European Union and Japan as well as other
countries with established regulatory agencies.. In addition to becoming a WHO
Recommended drug and/or inclusion 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, we intend to
approach certain governmental and charitable agencies to offer to sell DB289 for
distribution in the sub-Sahara nations. We anticipate six to nine 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.
-9-
Funding for African sleeping sickness research and clinical trials
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, in addition to UNC,
five other universities and research centers around the world that collectively
employ scientists and physicians considered to be the foremost experts in one or
both of these diseases.
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 agreed to pay to us up to $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. 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 to treat African sleeping sickness.
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 DB289
to treat African sleeping sickness into the pivotal multi-phase, multi-site
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. Under the Clinical Research Agreement, approximately $1.0
million of the additional grant was paid to us in June 2003 and approximately
$1.4 million on March 14, 2005 (approximately $1.4 million of the of the $3.0
million March 14, 2005 payment described below was attributable to our services
under the additional grant).
In the aggregate, we have received The Gates Foundation grant funds under
the Clinical Research Subcontract as follows: (a) $4.3 million was paid to us in
fiscal year 2001 to fund Phase II clinical trials to test DB289's effectiveness
against African sleeping sickness in approximately 30 patients, (b)
approximately $1.4 million was paid to us in September 2002 upon the successful
completion of our Phase IIa clinical trial, (c) approximately $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, (d) approximately $1.0 million in June
2003 relating to the additional grant for improving drug synthesis and
formulation and (e) approximately $3.0 million was paid to us on March 14, 2005
(a portion of which was from the additional acceleration grant described above)
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 extended by mutual
agreement or terminated for a material breach by either party. Through March 31,
2005, we have received approximately $11.7 million under sub-contracts with UNC
for the development of DB289 to treat African sleeping sickness. We and our
research partners are working with our funding sources to develop next steps and
to endeavor to secure an increase in funding to advance the development of a
treatment for African sleeping sickness.
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During the year ended March 31, 2005 the Company received approximately
$3.0 million under the clinical research subcontract. Approximately $3.6 million
was utilized for clinical and research purposes conducted and expensed during
the twelve month period ended March 31, 2005.
Antifungal Program
In collaboration with the Company's scientists, Scientific Consortium
scientists have identified several aromatic cationic compounds with the
potential to treat both Candida and Aspergillus infections, which account for a
significant percentage of all systemic fungal infections. In vitro studies have
identified 5 dications that display broad based antifungal activity against each
of Candida, Aspergillus and Cryptococcus fungi. Additional compounds were
reactive specifically against Candida fungi and Aspergillus fungi. We are
currently formulating larger quantities of our lead compounds for in vivo
testing of systemic fungal infection in animal models of Candida and
Aspergillus. We believe that the results from these studies will enable us to
select in calendar 2005 a compound to advance into preclinical studies required
prior to human trials.
The market for an effective antifungal drug was estimated by DataMonitor
in 2003 to be approximately $4.0 billion annually and growing 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 a patient 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 rapidly lead to 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.
Tuberculosis Program
Mycobacterium tuberculosis ("TB") is the world's number one killer among
infectious diseases, causing 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, or one-third of the world's population, are infected
with TB, including 10 to 15 million people in the U.S. The combination of the
rapid spread of TB and the appearance of multi-drug resistant ("MDR") strains of
the TB organism make TB a major health threat throughout the world. 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 its most threatening disease and an alarming
increase in MDR TB cases is also developing in the United States. TB is a
difficult infection to treat because the bacteria that cause the disease can
"hide" inside white blood cells where they are protected against antibiotic
drugs.
WHO and the National Institutes of Health ("NIH") have increased research
efforts to discover new drugs to treat TB. Their research is focused on
developing oral drugs that are effective against MDR strains of TB and the
creation of therapies to shorten the treatment period
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required to cure the disease. Their overall target is to reduce the current
nine-to eighteen-month treatment period to two to six months.
In collaboration with the NIH laboratories and Dr. Scott G. Franzblau of
the University of Illinois at Chicago ("UIC"), we have screened nearly 800 of
our dication compounds for potential drug candidates to treat TB. Of the 50
compounds showing favorable activity, 5 dications showed in vitro activity
comparable or superior in performance to drugs currently available to treat TB.
Prodrug analogs of several lead compounds have been synthesized and will be
tested for in vivo activity. Several new compounds with positive in vitro
activity will be tested in in vivo models of TB. In addition, animal
pharmacologic and toxicity studies will be used to determine dose level and
safety of drug candidates. We believe that the results from these tests will
enable us to select in calendar 2005 a compound to advance into preclinical
studies required prior to human trials.
Cancer Program
Hundreds of our aromatic cationic compounds have been screened by the
National Cancer Institute of the NIH for activity against 64 different cancer
cell lines in tissue culture studies. Thirty-eight compounds were identified as
having promising activity against certain cancers including lung, breast,
prostate or colon cancer and were referred for further evaluation in in vivo
models.
Additional studies with aromatic cations have identified several of our
compounds that form "stacked dimers" which can interact with specific DNA
sequences that control gene expression. These compounds may offer significant
potential for the development of a novel class of therapeutics that could be
used to treat cancer.
We have previously provided CombinatoRx, Inc. of Boston, Massachusetts,
under a confidentiality, material transfer and testing agreement, certain of our
aromatic cationic compounds, including DB289 and DB75, for testing for activity
against certain cancers. Prior to our supply of compounds to CombinatoRx for
testing, CombinatoRx tested various combinations of drugs not normally
associated with cancer treatments for effectiveness against cancer and had
promising results. Several of our aromatic dication compounds have similar
medicinal properties to those used by CombinatoRx in its earlier tests.
Other Programs and Trials
Malaria - We are planning a clinical trial designed to study the use of
DB289 as a prophylaxis (drug used for prevention) for those traveling to
malaria-endemic regions. The market for a malaria prophylaxis includes
approximately 125 million international travelers who visit malaria-endemic
regions each year. In addition, we are completing preclinical studies required
prior to conducting human clinical trials of DB289 for the treatment of malaria
in children and pregnant women.
Three other indications - neurological disorders, diabetes and hepatitis C
- are therapeutic areas for which we believe our aromatic cation technology
platform is appropriate and promising. In addition, recent research indicates
that the aromatic cation compounds may be
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useful as small molecule drugs that can potentially selectively control gene
expression and provide treatment for microbial infections, cancer and disorders
of genetic origin.
C. Technology
Aromatic Cation Compounds
Our pharmaceutical program focuses on the development and
commercialization of oral drugs to treat fungal, parasitic, bacterial and viral
diseases and certain other disorders. Aromatic dications are molecules having
two positively charged ends that are held together by a linker; at the atomic
level, they look like molecular barbells. Our portfolio of compounds also
includes a subclass of aromatic compounds containing a single positive charge
(monocations). Certain aromatic monocations have been found to have excellent
activity against specific targeted diseases, most notably viral diseases.
One mechanism of action of many of our compounds involves binding to
segments of deoxyribonucleic acid ("DNA"). Aromatic cation drugs bind in the
minor groove of DNA and in so doing, interfere with the activity of enzymes
needed for microbial growth. The composition of the dications, with positive
charges on the ends and linkers of different length, shape, flexibility and
curvature, allows binding to specific sites of the DNA or other receptors,
interfering with key biochemical processes fundamental to microbe growth and
development.
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, and is therefor difficult and costly
to administer outside of a hospital setting. In addition, due to its narrow
dosage margin between safety and toxicity, it needs to be administered by a
person trained in the use and administration of drugs.
Scientists at UNC discovered that much of pentamidine's toxicity was the
result of bi-products formed when the drug is metabolized, or breaks down within
the body. This discovery led to the design of new compounds which do not
metabolize in the same way. Additional modifications to the structures of these
compounds improved their binding activity and enhanced the applicability of this
new class of antimicrobial agents as new drugs.
Scientific Consortium members have thus far designed and synthesized over
2,300 well-defined aromatic cationic compounds. Many of the compounds have been
tested in a wide variety of assays and animal models for activity against
various diseases. Consortium scientists at UNC and Georgia State continue to
design and synthesize cationic molecules using computer models that help predict
structures that will be medicinally efficacious. One or more of the universities
within the Scientific Consortium have patents covering the molecular structure
of the compounds and, 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 aromatic cations for activity against specific microorganisms (using
both laboratory and animal models). Our scientists have many years of experience
in making aromatic cation compounds
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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 a worldwide license and exclusive right to commercialize such
compounds and uses.
DB289
DB289 is an aromatic dication that utilizes prodrug oral delivery
technology to deliver (via capsule or tablet pill) the active drug into blood
circulation. 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 single dose study evaluated the dosage levels
of DB289 for safety and pharmacokinetics. The multi-dose study was designed to
evaluate the safety and pharmacokinetics of three dosage levels of DB289
administered twice a day over a period of five 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 of DB289 through
the digestive system. The studies showed that DB289 passed easily through the
digestive membrane and the drug was present (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 of the volunteers were similar to levels that showed positive activity in
animal models in malaria, PCP and African sleeping sickness.
On May 4, 2005, we announced results of a human Phase I trial to compare
the current capsule formulation with two new tablet formulations of DB289. The
study, conducted in Florida in 42 healthy volunteers, tested the consistency of
absorption of DB289 into the blood of each of the three formulations and any
differences in absorption between the capsule and tablet formulations. Each
volunteer took one 100 mg dose of each formulation, in random order, with
successive doses after a seven day interval. The results showed that the pressed
tablets of DB289 produced blood concentration levels similar to the capsule
formulation and that the tablet formulations yielded more consistent blood
levels of the drug. The tablets cost less to manufacture and are expected to be
more stable and easier to ship, store and dispense in tropical climates with
high temperature and humidity.
Prodrug Formulation
One of the most significant accomplishments of our research and
development program was the discovery of technology to make aromatic cation
drugs orally deliverable. This proprietary technology temporarily masks the
positive charges of the aromatic cation, enabling it to effectively move across
negatively-charged digestive barriers 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 (and then
through the blood-brain barrier, if so desired) had reduced the attractiveness
of aromatic cations as effective drug treatments. Our scientists
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have patented prodrug synthesis methods allowing for oral delivery and making
this entire class of compounds significantly more attractive for commercial
development.
D. The Scientific Consortium
The Scientific Consortium responsible for the invention and development of
the aromatic cation library of compounds includes scientists from UNC, Georgia
State, Duke University and Auburn University.
Consortium Agreement and License
On January 15, 1997, we entered into a Consortium Agreement with UNC and a
third party (to which each of Georgia State, Duke University and Auburn
University agreed shortly thereafter to become a party). The Consortium
Agreement provided that aromatic cations 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 license with the Scientific Consortium with regard to compounds
developed on or prior to January 15, 1997 ("current compounds").
Pursuant to the Consortium Agreement, the worldwide license and exclusive
right to commercialize (together with related technology and patents) to use,
manufacture, have manufactured, promote, sell, distribute or otherwise dispose
of any and all products based directly or indirectly on aromatic cations
developed by the Scientific Consortium on or prior to January 15, 1997, was
transferred by the third party to us. The January 28, 2002, License Agreement
grants to us a similar worldwide license and exclusive right to commercialize
discoveries covering products based on cationic technology developed by the
Scientific Consortium after January 15, 1997 and incorporates the license and
exclusive right to commercialize discoveries assigned to us by the Consortium
Agreement. The Consortium Agreement provides us with rights to the Scientific
Consortium's growing library of aromatic cationic compounds (which currently
exceeds 2,300 well-defined cations) 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 aromatic cations,
infectious diseases, computer modeling of cationic 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 aromatic cation technology platform. 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, 2005, we reimbursed UNC approximately $441,000 for such
patent and patent-related costs, and in the past, we have reimbursed to UNC
approximately $1,861,000 in the aggregate in patent and patent-related costs. We
are also required to make milestone
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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.
E. Our Subsidiaries
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 1.2 million 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, through a sublicense agreement, we transferred to Immtech HK
the rights licensed to us under the Consortium Agreement to develop and license
the aromatic cation technology platform in certain Asian countries and to
commercialize resulting products. 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.
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
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substantial financial and medical expertise and resources located in Hong Kong
and China. Immtech Therapeutics is a Hong Kong company.
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
$400,000 in cash. Super Insight is a British Virgin Islands company.
Immtech Life Science Limited
Immtech Life Science owns two floors of a building (the "Property")
located in the Futian Free Trade Zone, Shenzhen, in the People's Republic of
China. We are exploring the possibility of housing a pharmaceutical production
facility for the manufacture of products here or at another location within PRC.
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 would 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.
F. Manufacturing
The Scientific Consortium
Scientific Consortium members, specifically the synthetic chemistry
laboratories at Georgia State and 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 aromatic cations 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 purposes.
-17-
Third Party Sources
In October 2003, we entered into an agreement with Cardinal Health PTS,
Inc. ("Cardinal Health") to develop prototype formulations of DB289 to improve
oral bioavailability of DB289. Pursuant to a September 2004 agreement, once the
formulation was selected, we engaged Cardinal Health to produce commercial
quantities of good manufacturing practices ("GMP") grade DB289 tablets with drug
product to be produced by a third party. The tablets were used in a Phase I
clinical trial that compared the bioavailability of the original capsules to the
tablets produced by Cardinal Health. 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. Since February 2004,
we have entered into several additional agreements with Cambrex for process
optimization, analytical method development and production of scaled-up
quantities of GMP grade DB289. 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.
In January 2005, we entered into an agreement with UPM Pharmaceuticals,
Inc. ("UPM") for the manufacture, packaging and labeling of GMP grade tablets of
DB289 for clinical trials (including the Phase III trials for PCP and African
sleeping sickness), as well as continued formula optimization and method
validation testing. UPM has previously conducted analytical method validation
and stability studies for us, as well as manufacturing supplies for clinical
trials. UPM is a leading provider of contract drug development, manufacturing,
analytical and regulatory services. UPM provides formulation, cGMP
manufacturing, clinical trial materials, analytical testing and related
regulatory documentation for pharmaceutical companies.
Our China Facility
See disclosure above under the heading "Immtech Life Science Limited". The
Property is located in a mixed-use office park and is suitable for
administrative offices and research and development facilities, as well as
potentially housing a pharmaceutical production facility capable of producing up
to 10 tons of drug product per year. In addition, we have begun the site
selection process to find a location in PRC for a manufacturing plant capable of
producing up to 60 tons of GMP quality drug product per year. Depending on a
variety of factors, we may elect not to develop the Property or may use the
Property as a finishing and packaging facility rather than as a manufacturing
plant.
G. Strategy
Our strategy is to develop and commercialize a pipeline of new oral drugs
to treat infectious diseases and other disorders utilizing a proprietary library
of aromatic cation compounds. 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 the
treatment of infectious diseases have been brought to market during this period.
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New drugs are needed to overcome the health risks of multi-drug resistant
pathogens and the increasing number of new pathogens that are causing disease.
We are developing a new paradigm focused on reducing the time and cost to
develop drugs aimed at solving global health issues.
Our pipeline of drug development activities includes programs in fungal
diseases and tuberculosis. We expect during this calendar year to select a drug
candidate for the treatment of fungal infections and for tuberculosis and to
begin preclinical safety and pharmacology studies required prior to human
trials. In addition, we have evidence that our compounds may be useful in
treating bacterial infections, as well as potentially being effective in the
treatment of cancer.
Three other indications - neurological disorders, diabetes and hepatitis C
- are therapeutic areas for which we believe our aromatic cation technology
platform is appropriate and promising. In addition, recent research indicates
that the aromatic cation compounds may be useful as small molecule drugs that
can potentially selectively control gene expression and provide treatment for
microbial infections, cancer and disorders of genetic origin.
We believe we have been successful in developing a drug with a low
toxicity profile that is orally available using our aromatic cation platform 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 are advancing our pipeline in both antifungal and TB drugs, and
continue to pursue other attractive therapeutic opportunities.
We intend to proceed with the development and commercialization of
aromatic cations (which include dications) as drug products pursuant to our
agreement with the Scientific Consortium as follows:
o Generate revenues by sales of human drug products to commercial
entities, governments, international organizations and foundations
expedited through the FDA's Accelerated Approval program and/or
other countries' similar programs;
o Generate additional stockholder value by developing our pipeline of
drug candidates targeting fungal infections, tuberculosis and other
indications;
o Conclude Phase IIb trials of DB289 for the treatment of malaria and
prepare for Phase III pivotal trial;
o Conduct a pilot study of the use of DB289 as a prophylaxis for
malaria;
o Utilize the FDA's fast-track designation of DB289 for the treatment
of African sleeping sickness to potentially expedite commercial
sales through Accelerated Approval of our NDA or any foreign
accelerated drug approval procedure;
o Conduct pivotal Phase III human clinical trial of DB289 for the
treatment of Pneumocystis pneumonia (PCP);
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o Develop, alone or with pharmaceutical, biotechnology or financial
partners, drug development programs for the treatment of cancer and
diabetes; and
o License our compounds as agents for use in animal health
indications.
Our strategy is to commercialize aromatic cations and our prodrug
technology and generate revenues first in niche markets by selling drugs for
serious or life-threatening diseases where aromatic cations 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
believe our first product candidates demonstrate the power and versatility of
the aromatic cation platform and prodrug 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 believe that our collaborations and use of grant funds enable us to minimize
stockholder dilution as we advance 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 compounds which the Scientific Consortium members are developing
for other indications.
H. Research and Development
Our current and future success will depend in large part on our ability to
commercialize products based upon the technology platform for developing cations
currently licensed to Immtech through the Consortium Agreement and future
cations for which we have a worldwide license and exclusive rights to
commercialize from the Scientific Consortium.
We estimate that we have spent approximately $1.1 million, $0.9 million
and $1.5 million, respectively, in fiscal years ended March 31, 2003, 2004 and
2005, on Company sponsored research and development and approximately $1.5
million, $2.4 million and $5.8 million, respectively, in fiscal years ended
March 31, 2003, 2004 and 2005, on research and development sponsored by others.
All research and development activity for fiscal years ended March 31, 2003,
2004 and 2005 has been in support of our pharmaceutical commercialization
effort.
I. Patents and Licenses
Our pharmaceutical compounds, including DB289 and DB75, 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
-20-
products. Protection of our aromatic cation technology platform includes
exclusive licensing rights to 222 aromatic cation patents and patent
applications, 138 of which have been issued in the United States and in various
global markets as of March 2005. In addition to the 222 aromatic cation 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. 148 of
our licensed patents and patent applications, which includes 45 licensed U.S.
patents and patent applications, were submitted after June 8, 1995, including
patents covering DB289, DB75 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 several months at a minimum. As a result, there
can be no assurance that patents will be issued from any of our patent
applications or from applications licensed to us. The scope of any of our issued
patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier. We also rely in part on trade secret,
copyright and trademark protection of our intellectual property. We protect our
trade secrets by entering into confidentiality agreements with third parties,
employees and consultants. Employees and consultants sign agreements to assign
to us their interests in patents and copyrights arising from their work for us.
Key employees also agree not to engage in unfair competition with us after their
employment by using our confidential information. We have additional secrecy
measures as well. However, these agreements can be breached and, if they were,
there might not be an adequate remedy available to us. Also, a third party could
learn our trade secrets through means other than by breach of our
confidentiality agreements, or our trade secrets could be independently
developed by our competitors.
Patents
Patents and patent applications include protection for the chemical
substances and uses of pharmaceutical compounds to treat conditions related to
diseases including PCP, TB, Cryptosporidium parvum, Giardia lamblia, Leishmania
mexicana amazonesis, Trypanosoma
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brucei rhodesienes, various fungi, Plasmodium falciparum, Alzheimer's disease,
amyloidosis, Type II diabetes, 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 compounds 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 stack in a way to cover a
larger section of a DNA binding site.
Patent Licenses
In accordance with the terms of the Consortium Agreement, we have obtained
license rights to the patents covering the technology platform for making
aromatic cationic pharmaceutical drugs and to treat certain indications with
such products. As of March 31, 2005, we have exclusively licensed 222 patents
and patent applications, which includes 59 U.S. patents and patent applications.
All of the patents on our aromatic cationic product candidates have been filed
by UNC jointly with the other academic institutions of the Scientific
Consortium.
Patent Rights
Since January 1997, as required under the Consortium Agreement, we have
filed, together with Scientific Consortium members, approximately 115 patent
applications, of which approximately 56 have been granted through March 31,
2005. The Consortium Agreement grants us the right to license for
commercialization product candidates underlying the patents and patent
applications for aromatic cations produced by the Scientific Consortium.
J. 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, including the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our product candidates.
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 as a WHO
Recommended Drug and for
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inclusion on the WHO's Essential Medicines List. The WHO generally accepts
marketing approvals from drug regulatory agencies in the United States, UK,
European Union and Japan as well as other countries with established regulatory
agencies for the Essential Medicines List. In most cases, inclusion as a WHO
recommended Drug and/or inclusion on the Essential Medicine 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;
o submission to the FDA of an investigational new drug, or IND,
application which, must become effective before human clinical
trials may begin;
o completion of adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug candidate for each
proposed indication in accordance with ethical principles and good
clinical practice, or GCP, requirements;
o submission to the FDA of a new drug application, or NDA;
o satisfactory completion of an FDA pre-approval 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,
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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.
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.
o Phase III: These are commonly referred to as pivotal studies. 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 larger 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, the 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
submitted for filing, by law the FDA has 30 days to accept or reject the NDA.
Once filed, the FDA has a stated goal of reviewing most applications and
responding to the sponsor within 10 months. The review process can be
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
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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
safety 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 post-marketing 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 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,
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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 post-market 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 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
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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.
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 our DB289 drug candidate for use
in clinical trials abroad.
K. 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
discovery research and chemistry development arm. In addition, many of these
companies have extensive experience in preclinical 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,
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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 preclinical 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. We are
developing products to treat infectious diseases and other diseases, some with
no current or effective therapies. Currently, DB289 is in clinical trials to
treat malaria, PCP and African sleeping sickness. Other drugs moving forward in
our pipeline address markets for new drugs for use in treating fungal, TB, and
other 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 o Rifampin
(Watson Pharma.) (Hoffman (Aventis) (Pfizer) (Aventis, Ciba Geneva)
LaRoche)
o Chloroquine o Melarsoprol o Itraconazole o Isoniazid
(Sanofi-Synthelabo o Pentamidine (Aventis) (Lannett Co. Inc.,
Inc.) (Aventis) o Ketoconazole Bristol-Meyers
o Eflornithine Squibb, Hoffman
o Mefloquine (Aventis) o Miconazole LaRoche)
(Hoffman LaRoche) (Johnson &
o Suramin Johnson) o Pyrazinamide
o Amodiaquine (Bayer) (Lederle
(Pfizer) o Terbinafine Laboratories, ICN
(Novartis) Canada
o Coartem Pharmaceuticals,
(Novartis) o Caspofungin Pharmascience Inc.)
(Merck)
o Ethambutol
o Amphotericin B (Lederle
lipid complex Laboratories, ICN
(Fujisawa) Canada
Pharmaceuticals)
o Micafungin
(Fujisawa)
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,
pentamidine must be administered either by injection or by inhalation). We
therefore believe that competition for our product candidates for certain
indications has not been developed or approved.
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L. EMPLOYEES
As of June 8, 2005, we had 21 employees (including 2 employees who work
for Immtech HK, our Hong Kong subsidiary), 11 of whom hold advanced degrees. 10
work in support of clinical trials, research and development and regulatory
compliance, and the other 11 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
aromatic cation technology platform. We expect to add new employees in our
regulatory, clinical development and commercial development departments as our
programs advance.
M. 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 in various stages of human clinical trials, and in some cases
preclinical, 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, since obtaining the
rights thereto in 1997, advancing the commercialization of the aromatic cation
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, 2006, 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 either in Phase II or about to
enter Phase III human clinical testing stage using DB289, our first oral drug
candidate, for several indications including malaria, Pneumocystis pneumonia and
trypanosomiasis (African sleeping sickness) 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, 2005,
we had an accumulated deficit of approximately $72.6 million. Losses from
operations were approximately $12.9 million and $13.6 million, for the fiscal
years ended March 31, 2004 and March 31, 2005, 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 operations. Our cash requirements may vary
materially from those now planned because of results of research and
development, results of preclinical and clinical testing, responses to our
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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 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 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). Until one or more of our product
candidates is approved for sale, our funding is limited to grants, funds from
testing and research agreements, fees associated with licensing of our
technology and proceeds from sales of equity or debt securities.
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. None of our executive officers has as of this date, expressed any
intention to retire or leave our employ. We do not have "key-man" life insurance
policies on any of our executives.
Most of our business' financial aspects, including investor relations,
intellectual property control and corporate governance, are under the
supervision of T. Stephen Thompson, Cecilia Chan and Gary Parks. Together, 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.
A substantial portion 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 member institutions of the Scientific Consortium and
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other research groups that assist in the development of our product candidates.
A substantial portion 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, 2005
through a combination of sales of equity instruments and revenue generated from
research agreements and grants. As of March 31, 2005, our accumulated deficit
was approximately $72.6 million net of approximately $17.2 million which 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 agreed to pay to
us up to $9.8 million in installments over a period not to exceed five years
subject to our achieving certain milestones. Subsequently, The Gates Foundation
granted an additional $2.7 million to UNC to accelerate the African sleeping
sickness study which was also subject to the subcontract with UNC. As of March
31, 2005, we had received approximately $11.7 million, the total amount of
funding available to us under the clinical research sub-contract with respect to
the current grants. We and our research partners are working with our funding
sources to develop next steps and to endeavor to secure an increase in funding
to advance the development of a treatment for African sleeping sickness.
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 approximately $3.0 million through March 31, 2005 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 to
treat malaria by at least one internationally accepted regulatory agency and one
malaria-endemic country. Subsequently on April 25, 2005, MMV advanced to us an
additional $1.0 million. We forecast such costs to be approximately $8.2 million
over the three years from inception.
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We will continue to apply for new grants to support continuing research
and development of our proprietary aromatic cation technology platform 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.
Our first oral drug candidate, DB289, requires 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 preclinical 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 pharmaceutical
and
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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 enroll in the trial. 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 African sleeping
sickness trials may cause delays in enrollment and difficulty in the completion
of trials.
Completion of testing, studies and trials may take several years, and the
length of time varies substantially with the type, complexity, novelty and
intended use of the product. Delays or rejections may be based upon many
factors, including changes in regulatory policy during the period of product
development. No assurance can be given that any of our development programs will
be successfully completed, that any Investigational New Drug ("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 are exploring the possibility of constructing 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.
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.
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We use the expertise and resources of strategic partners and third parties
in a number of key areas, including (i) discovery research, (ii) preclinical and
human clinical trials, (iii) product development and (iv) manufacture of
pharmaceutical drugs. We have a worldwide license and exclusive
commercialization rights to a proprietary aromatic cation technology 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 our ability to protect or obtain necessary patents and
protect our proprietary information; our ability to develop and commercialize
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. Patent litigation is expensive
and time-consuming and the outcome cannot be predicted. It is also possible that
competitors will develop similar products simultaneously. Our breach of any
license agreement or the failure to obtain a license to any technology or
process which may be required to develop or commercialize one or more of our
product candidates may have a material adverse effect on our business including
the need for additional capital to develop alternate
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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.
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
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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 proprietary aromatic
cation technology 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
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.
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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 to treat 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., Novartis, 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 preclinical 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 the 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 previously been approved to conduct human clinical trials for
various indications in each of the United States, Germany, France, the
Democratic Republic of Congo, Angola, Thailand, Peru and South Africa.
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 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.
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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 agencies 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 candidate, to treat 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. There is, however, 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 may 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 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 preclinical 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 preclinical and clinical testing, which
may take several years and the expenditure of substantial financial and other
resources. Before commencing clinical trials in
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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 agency or approved by the FDA for marketing in the United States or
by any such foreign regulatory agencies 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 to
prospective 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
will be available from government health administration authorities, private
health insurers, non-governmental organizations 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 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. 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 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.
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Health care reform proposals are regularly 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 (subject to adjustment for certain dilutive
events). 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 3, 2005 we had 11,409,178 shares of common stock outstanding,
plus (160,400 shares of series A convertible preferred stock, convertible into
approximately 341,628 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) 52,452 shares of series C convertible preferred stock convertible into
approximately 296,674 shares of common stock at the conversion rate of 1:5.656,
(4) 160,280 shares of series D convertible preferred stock convertible into
approximately 445,210 shares of common stock at the conversion rate of 1:2.778,
(5) 1,276,407 options to purchase shares of common stock with a weighted-average
exercise price of $9.31 per share and (6) 2,738,612 warrants to purchase shares
of common stock with a weighted-average exercise price of $7.51 of the shares
outstanding, 8,957,217 shares of common stock are freely tradable without
restriction. All of the remaining 2,451,961 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
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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 3, 2005, we have outstanding vested options to purchase 956,359
shares of common stock at a weighted-average exercise price of $8.89 and vested
warrants to purchase 2,728,612 shares of common stock with a weighted-average
price of $7.54.
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 3, 2005 had a low of $7.58 and high of $16.25. 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 may pay vendors in stock as consideration for their services; this may result
in stockholder dilution, additional costs and difficulty retaining certain
vendors.
In order for us to preserve our cash resources, we have previously and may
in the future 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 stockholders 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 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
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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 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 laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and related regulations,
are likely to increase our expenses and administrative burden. Changes in the
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act 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, 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
have and will continue 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 commercialization 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 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. These provisions may be in
some respects broader than the specific indemnification provisions under
Delaware law. The indemnification provisions 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
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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 officer and director liability assists
us to attract and retain qualified employees and directors. However, in the
event an officer, a director or the board of directors commits an act that may
legally be indemnified under Delaware law, we will be responsible to pay for
such officer(s) or 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
stockholders best interests because it enhances our ability to attract and
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.
We are exposed to potential risks from recent legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act requires that we maintain effective internal
controls over financial reporting and disclosure controls and procedures. Among
other things, we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management to report on, and
our independent registered public accounting firm to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Compliance with Section 404 requires substantial accounting
expense and significant management efforts. Our testing, or the subsequent
review by our independent registered public accounting firm, may reveal
deficiencies in our internal controls that would require us to remediate in a
timely manner so as to be able to comply with the requirements of
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Section 404 each year. If we are not able to comply with the requirements of
Section 404 in a timely manner each year, we could be subject to sanctions or
investigations by the SEC, the American Stock Exchange or other regulatory
authorities that would require additional financial and management resources and
could adversely affect the market price of our common stock.
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 trial 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, 2010. Our
rent for the Vernon Hills facility is approximately $8,200 per month through
March 2008. 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 People's Republic of China. The property comprises the first
two floors of an industrial 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.
ITEM 3. LEGAL PROCEEDINGS
We are parties to the following legal proceedings:
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging that Neurochem misappropriated the Company's trade
secrets by filing a series of patent applications relating to compounds
synthesized and developed by the
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Consortium, with whom Immtech has an exclusive licensing 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 immediately advise Immtech if any invention was discovered
and to cooperate with Immtech and its counsel in filing any patent applications.
In its complaint, the Company also alleges, among other things, that
Neurochem fraudulently induced the Company into signing the testing agreement,
and breached numerous provisions of the testing agreement, thereby blocking the
development of the Consortium's compounds for the treatment of Alzheimer's
disease. By engaging in these acts, the Company alleges that Neurochem has
prevented the public from obtaining the potential benefit of new drugs for the
treatment of Alzheimer's disease, which would compete with Neurochem's Alzhemed
drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company has agreed to have a three member ICC arbitration
panel (the "Arbitration Panel") hear and rule on the dispute on the expectation
that the Arbitration Panel will reach a more timely and economical resolution.
In this regard, the ICC hearing is scheduled from September 7, 2005 through
September 16, 2005, and the Company anticipates a resolution of this matter by
the end of the calendar year.
The Company has filed with the Arbitration Panel a document that
identifies the issues to be considered and provided a preliminary estimate of
$18 to $42 million in damages that it is seeking. Neurochem, Inc. and Neurochem
(International) Limited also filed with the Arbitration Panel a document that
identified the issues they deem the Arbitration Panel should consider and
provided a preliminary estimate of $3.5 million in damages that they are seeking
based on their counterclaims.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors. The Von der Ruhr Plaintiff's complaint alleged that (i) the Company
refused to authorize the Company's transfer agent to remove the restrictive
legends from the stock certificates of the Von der Ruhr Plaintiffs, (ii) the
Company refused to honor the Von der Ruhr Plaintiffs' exercise of certain stock
options and (iii) the Company refused to honor an agreement regarding certain
technology. The Von der Ruhr Plaintiffs also allege that certain officers and
directors interfered with the Von der Ruhr Plaintiffs' contracts with the
Company. The complaint sought unspecified monetary damages and punitive damages,
in addition to equitable relief and costs. In a filing made in late February,
2005, the Von der Ruhr Plaintiffs specified damages of approximately $44.5
million in damages, which includes $42 million related to the alleged technology
agreement claim, which the Company believes is meritless. The Company has filed
a motion for summary judgment with the Court seeking to
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have several of the counts of the complaint, including the one related to the
alleged technology agreement, dismissed and will continue to vigorously defend
against this proceeding.
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 November 12, 2004 at the Westin O'Hare Motel in Rosemont, Illinois have been
disclosed in our quarterly report on Form 10-Q for the quarter ended December
31, 2004, filed with the SEC on February 9, 2005.
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 $7.40 $4.00
Quarter ended June 30, 2002 $5.99 $2.80
Quarter ended September 30, 2002 $5.15 $2.39
Quarter ended December 31, 2002 $3.80 $2.12
2003
Quarter ended March 31, 2003 $4.85 $1.58
Quarter ended June 30, 2003 $7.00 $4.15
Quarter ended September 30, 2003 $18.82 $5.70
Quarter ended December 31, 2003 $32.51 $9.00
2004
Quarter ended March 31, 2004 $19.50 $10.11
Quarter ended June 30, 2004 $22.80 $11.85
Quarter ended September 30, 2004 $12.75 $8.45
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High Low
----------- ------------
Quarter ended December 31, 2004 $14.73 $7.58
2005
Quarter ended March 31, 2005 $15.70 $10.03
Stockholders
As of June 3, 2005, the Company had approximately 239 stockholders of
record of our common stock and the number of beneficial owners of shares of
common stock as of such date was approximately 3,108. As of June 3, 2005, the
Company had approximately 11,409,178 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.
Recent Sales of Unregistered Securities
We issued unregistered securities in the following transactions during the
fiscal quarter ended March 31, 2005:
o On February 23, 2005 we issued 5,000 shares of common stock from the
exercise of options by Patrick Yeramian having received $22,100 for
their exercise.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2005, regarding
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
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Number of securities
remaining available
for future issuance
Number of securities to be Weighted average exercise under equity
issued upon exercise of price of outstanding compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights(1) reflected in column(a))
Plan category (in thousands) (a) (b) (c)
------------------------------------ ---------------------------- --------------------------- ------------------------
Equity compensation plans approved
by security holders(2) 1,330,057 $9.26 1,049,250
Equity compensation plans not
approved by security holders(3) 2,740,412 $7.51
---------------------------- --------------------------- ------------------------
Total 4,070,469 $8.08 1,049,250
------------------
(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 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 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
anti-dilution 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
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dividing 110% of the Liquidation Price by the Conversion Price. The Conversion
Price is subject to anti-dilution 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 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 $0.10 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.
Conversions of Preferred Stock to Common Stock
Series A. On March 21, 2005, a holder of Series A Convertible Preferred
Stock ("Series A Stock") converted 12,000 shares of Series A Stock and accrued
dividends into 68,422 shares of common stock.
Series C. On March 3, 2005 and March 16, 2005, holders of Series C
Convertible Preferred Stock ("Series C Stock") converted 2,000 shares and 2,000
shares of Series C stock and accrued dividends into 11,419 shares and 11,424
shares of common stock, respectively.
Series D. On March 3, 2005, March 16, 2005 and March 21, 2005, holders of
Series D Convertible Preferred Stock ("Series D Stock") converted 4,000 shares,
8,000 shares and 25, 200 shares of Series D stock and accrued dividends into
11,272 shares, 22,558 shares and 71,153 shares of common stock, respectively.
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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):
Year ended March 31,
------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ----------- ----------- ----------- -----------
Statement of Operations:
REVENUES ......................... $ 5,931 $ 2,416 $ 1,609 $ 3,522 $ 1,355
------------ ----------- ----------- ----------- -----------
EXPENSES:
Research and development ...... 7,309 3,293 2,570 3,958(2) 6,695
General and administrative .... 12,190(6) 11,989(5) 3,732(4) 2,928 4,719(1)
Equity in loss of joint venture
------------ ----------- ----------- ----------- -----------
Total expenses ................ 19,499 15,282 6,302 6,886 11,414
LOSS FROM OPERATIONS ............. (13,569) (12,866) (4,693) (3,364) (10,059)
------------ ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income ............... 135 20 14 41 199
Interest expense ..............
Loss on sales of investment
securities - net ............ (3)
Cancelled offering costs ......
Gain on extinguishment of debt
------------ ----------- ----------- ----------- -----------
Other income (expense) - net .. 135 20 14 41 196
NET LOSS ......................... (13,433) (12,846) (4,679) (3,323) (9,863)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS(3) .................. (580) (3,526) (452) (938)(3)
REDEEMABLE PREFERRED STOCK
CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS ....
------------ ----------- ----------- ----------- -----------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS .................. (14,013) (16,372) (5,131) (4,261) (9,863)
============ =========== =========== =========== ===========
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
------------ ----------- ----------- ----------- -----------
Net loss ...................... (1.27) (1.43) (0.71) (0.55) (1.78)
Convertible preferred stock
dividends ................... (0.05) (0.39) (0.07) (0.16)
------------ ----------- ----------- ----------- -----------
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS ........ $ (1.32) $ (1.82) $ (0.78) $ (0.71) $ (1.78)
============ =========== =========== =========== ===========
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Year ended March 31,
------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------ ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED
LOSS PER SHARE ................ 10,606,917 8,977,817 6,565,495 6,011,416 5,545,190
Balance Sheet Data:
Cash and cash equivalents ........ 9,472 6,745 112 2,038 2,098
Restricted funds on deposit ...... 2,044 2,155 2,740 602 3,813
Investment securities available
for sale
Working capital (deficiency) ..... 8,069 6,136 (115) 1,567 663
Total assets ..................... 15,276 12,586 6,610 2,876 6,168
Convertible preferred stock ...... 7,752 9,522 5,138 4,032
Deficit accumulated during
development stage ............. (72,552) (58,539) (42,167) (37,036) (32,775)
Stockholders' equity ............. 11,741 9,748 3,192 1,736 859
------------------
(1) Includes $1,288 of costs related to the issuance of warrants to purchase
300,000 shares of common stock as compensation for financial consulting
services (see Note 7 to Notes to Financial Statements).
(2) Includes $1,159 credit to (reduction in) research and development costs
for the settlement of certain disputed costs previously expensed during
the year ended March 31, 2000 (see Note 8 to Notes to Financial
Statements).
(3) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(4) Includes $758 of costs related to the issuance of 150,000 shares of common
stock to Cheung Ming Tak to act as the Company's non-exclusive agent to
develop and qualify potential strategic partners for the purpose of
testing and/or the commercialization of Company products in the PRC; $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").
(5) 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 the
Company's 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 Groups, LLC (f/k/a The
Gabriela Group, LLC) based upon agreements signed July 31, 2002.
(6) Includes non-cash charges of (i) $4,531 of costs related to the four year
extension of warrants received from RADE Management Corporation ("RADE")
(see Item 13 below), (ii) $233 for the issuance of 20,000 options to Mr.
Tony Mok for consulting services in China, (iii) $301 for the extension of
the unexercised Fulcrum warrants to December 23, 2005 and (iv) $10 for the
extension of warrants initially issued to underwriters to purchase 21,400
shares of common stock from April 24, 2004 to May 11, 2004.
-51-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a pharmaceutical company advancing the development and
commercialization of oral drugs to treat infectious diseases and extending our
proprietary aromatic cation technology platform to the treatment of cancer,
diabetes and other diseases. We have advanced clinical programs that include new
treatments for malaria, Pneumocystis pneumonia and African sleeping sickness
(trypanosomiasis), and drug development programs for fungal infections and
tuberculosis. We hold worldwide patents and patent applications, licenses and
rights to license technology, primarily from a scientific consortium that has
granted us a worldwide license and exclusive right to commercialize products
from, and license rights to, the technology.
We are working with our scientific and foundation partners to (i) complete
the clinical programs for malaria, Pneumocystis pneumonia and African sleeping
sickness, (ii) advance new drug candidates into the clinic and (iii) validate
the broad application of our technology platform and illustrate its low toxicity
and oral deliverability (See "Item 1 - Products and Programs" above). We believe
we can build a sustainable and profitable business by selling drugs in niche
markets in certain developing countries as we target treatments for
multi-billion dollar markets such as fungal infections, tuberculosis, cancer and
diabetes. The United States Food and Drug Administration ("FDA") has granted
"fast-track" designation to our first oral drug candidate, DB289, to treat
African sleeping sickness. Fast-track designation may allow for accelerated FDA
review of DB289 to treat African sleeping sickness, however, there is no
guarantee that fast-track designation will result in faster product development
or impact the likelihood or timing of product approval.
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, since
obtaining the rights thereto in 1997, advancing the commercialization of the
aromatic cation technology platform. To minimize stockholders' dilution, we use
foundation and government grants, 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 have licensing and exclusive commercialization rights
to an aromatic cationic anti-infective pharmaceutical technology platform and
are developing drugs intended for commercial use based on that technology.
Dication drugs (a structural class of aromatic cation drugs defined by molecules
with positive charges on each end held together by a linker) bind in the minor
groove of an organism's DNA, and, in so doing, interfere with the activity of
enzymes needed for microbial growth, thereby killing the infectious organisms
that cause fungal, parasitic, bacterial and viral diseases. Structurally,
dications are chemical molecules that have two positively charged ends held
together by a chemical linker (shaped like a molecular barbell). The composition
of the dications, with positive charges on the ends and linkers of different
length, shape, flexibility and curvature, allows binding to specific sites of
the DNA or other receptors, interfering with key biochemical processes
fundamental to microbe growth and development.
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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, 2005, we incurred cumulative net
losses of approximately $69,426,000. 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;
o research grants, such as Small Business Technology Transfer Program
("STTR") grants and Small Business Innovation Research ("SBIR")
grants; and
o borrowing funds or the issuance of securities.
The timing and amounts of grant and payment revenues, if any, will likely
fluctuate sharply and depend upon the achievement of specified milestones, and
results of operations for any period may be unrelated to the results of
operations for any other period.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of 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
-53-
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 inflow 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, 2003, March 31, 2004 and March 31, 2005 of
approximately $45,000, $250,000 and $2,270,000 respectively. Since our inception
through March 31, 2005, approximately $2,565,000 has been expensed on research
and development for the malaria project.
Pneumocystis pneumonia ("PCP")
We expensed research and development costs for the PCP program for the
fiscal years ended March 31, 2003, March 31, 2004, and March 31, 2005 of
approximately $194,000, $241,000 and $362,000, respectively. Since our inception
through March 31, 2005, approximately $827,000 has been expensed on the PCP
program.
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African Sleeping Sickness (Trypanosomiasis)
Research and development costs expensed by the Company for our
trypanosomiasis program for the fiscal years ended March 31, 2003, March 31,
2004, and March 31, 2005 have been approximately $1,228,000, $2,018,000 and
$3,584,000, respectively. Since our inception through March 31, 2005,
approximately $10,150,000 has been expensed on the trypanosomiasis program.
Antifungal & Tuberculosis ("TB") Programs
Each of the antifungal and TB programs 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, 2003, March 31, 2004, and March 31, 2005 of
approximately $1,000, $32,000 and $29,000, respectively. Since our inception
through March 31, 2005, approximately $396,000 has been expensed on the
antifungal program.
We expensed research and development costs for the TB program for the
fiscal years ended March 31, 2003, March 31, 2004 and March 31, 2005 of
approximately $10,000, $24,000 and $72,000 respectively. Since our inception
through March 31, 2005, approximately $176,000 has been expensed on the TB
program.
Cancer Program
We expensed research and development costs for the cancer program for the
fiscal years ended March 31, 2003, March 31, 2004, and March 31, 2005 of
approximately $0, $0 and $0, respectively. Since our inception through March 31,
2005, approximately $24,000 has been expensed on the cancer program.
Liquidity and Capital Resources
From our inception through March 31, 2005, 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
$50,905,000
o payments from research agreements, foundation grants and SBIR grants
and STTR program grants of approximately $17,190,000; and
o the use of stock, options and warrants in lieu of cash compensation.
On July 30, 2004, we completed a secondary public offering of common stock
wherein we sold 899,999 shares of common stock. The shares were sold to the
public at $10.25 per share. The net proceeds were approximately $8,334,000.
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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 a $25.00 (plus accrued but unpaid dividends) liquidation
preference pari passu with our other outstanding preferred stock, (iii) is
convertible at the initial conversion rate into 2.7778 shares of common stock
and (iv) may be converted to common stock by us at any time. 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 did
not vest, and therefore were cancelled, since our common stock did not meet or
exceed 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
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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 and
subsequently exercised.
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
preclinical 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, 2005, we had federal net operating loss carry-forwards of
approximately $60,440,000, which expire from 2006 through 2025. We also had
approximately $57,760,000 of stated net operating loss carryforwards as of March
31, 2005, which expire from 2009 through 2025, 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, 2005, we had federal income
tax credit carryforwards of approximately $1,060,000, which expire from 2008
through 2025.
We believe our existing resources, but not including proceeds from any
grants we may receive, are sufficient to meet our planned expenditures through
June 2006, although there can be no assurance that we will not require
additional funds. In addition, we anticipate the receipt of approximately an
additional $4.0 million under the agreement with MMV in calendar year 2005. 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), preclinical 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 in the Peoples Republic of China
("PRC") on which we may construct a pharmaceutical manufacturing facility. We
plan, in the facility or in combination with other facilities, to install a
pharmaceutical production line to produce oral drug products. (See "Item I -
Business - F. Manufacturing - Our China Facility" above) 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, 2005 consisting of operating lease
obligations as follows:
Year Ending Lease
March 31, Payments
-------------- --------------
2006 $98,000
--------------
2007 98,000
--------------
2008 98,000
--------------
2009 103,000
--------------
2010 99,000
--------------
Total $496,000
Results of Operations
Year Ended March 31, 2005 Compared with Year Ended March 31, 2004
Revenues under collaborative research and development agreements were
approximately $5,931,000 and $2,416,000 in the years ended March 31, 2005 and
2004, respectively. In 2005, we recognized revenues of approximately $3,592,000
relating to the clinical research subcontract agreement between us and UNC
funded by a grant that UNC received from The Gates Foundation, and approximately
$2,275,000 relating to the testing agreement with MMV, while in 2004, there were
revenues recognized of approximately $2,114,000 relating to the clinical
research subcontract agreement, and revenues of approximately $302,000 relating
to the testing agreement with MMV. Additionally there were revenues of
approximately $63,000 recognized from an SBIR grant from the NIH in 2005.
Research and development expenses increased from approximately $3,293,000 in
2004 to approximately $7,309,000 in 2005. Expenses relating to the clinical
research subcontract agreement with UNC increased from approximately $2,099,000
in 2004 to approximately $3,584,000 in 2005. Expenses related to the testing
agreement with MMV increased from approximately $301,000 in 2004 to
approximately $2,270,000 in 2005. Expenses relating to preclinical and clinical
trial costs primarily for Pneumocystis pneumonia increased from approximately
$198,000 in 2004 to approximately $633,000 in 2005. The increase in expenses for
Pneumocystis pneumonia was primarily due to ongoing costs with the clinical
trial in Peru.
General and administrative expenses were approximately $12,190,000 in
2005, compared to approximately $11,990,000 in 2004. Non-cash general and
administrative expenses for common stock, stock options and warrant issuance in
2005 were approximately $5,075,000 as compared to approximately $7,234,000 in
2004. Non-cash expenses in 2005 included (i) approximately $4,531,000 for the
four year extension of warrants initially issued to RADE
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Management Corporation ("RADE") (See Item 13 of Annual Report Form 10-K for
fiscal year ended March 31, 2005), (ii) approximately $233,000 for the issuance
of 20,000 options issued to Mr. Tony Mok for consulting services in China, (iii)
approximately $301,000 for the extension of Fulcrum warrants to December 23,
2005 and (iv) approximately $10,000 for the extension of 21,400 underwriter
warrants from April 24, 2004 to May 11, 2004, as compared to non-cash expenses
in 2004 of (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 $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 decreased from
approximately $481,000 in 2004 to approximately $449,000 in 2005. Legal fees and
related mediation fees with the International Chamber of Commerce for the
Neurochem arbitration increased from approximately $1,610,000 in 2004 to
approximately $2,393,000 in 2005 primarily due to increased litigation fees.
Expenses relating to the start-up and consolidation of Immtech Therapeutics,
Super Insight, Immtech Life Science and Immtech Hong Kong into Immtech accounts
were approximately $398,000 in 2004 while ongoing expenses for these entities
were approximately $347,000 in 2005. Accounting fees decreased from
approximately $223,000 in 2004 to approximately $199,000 in 2005. Payroll and
associated expenses increased from approximately $691,000 in 2004 to
approximately $1,187,000 in 2005 due primarily to new hires. Contract services
increased from approximately $43,000 in 2004 to approximately $277,000 in 2005
due primarily to the use of consultants, and market research. Travel increased
from approximately $193,000 in 2004 to approximately $500,000 in 2005. Insurance
and state franchise taxes increased from approximately $127,000 in 2004 to
approximately $476,000 in 2005. Marketing related expenses increased from
approximately $287,000 in 2004 to approximately $662,000 in 2005. All other
general and administrative expenses decreased from approximately $703,000 in
2004 to approximately $625,000 in 2005.
We incurred a net loss of approximately $13,433,000 for the year ended
March 31, 2005, as compared to a net loss of approximately $12,846,000 for the
year ended March 31, 2004.
In 2005, we also charged deficit accumulated during the development stage
of approximately $580,000 of non-cash convertible preferred stock dividends and
convertible preferred stock premium deemed dividends as compared to
approximately $3,526,000 in 2004.
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 a clinical research subcontract
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agreement with UNC funded by a grant that UNC received from The Gates
Foundation, compared to approximately $1,389,000 in 2003. Additionally, we
recognized approximately $302,000 in 2004 relating to the testing agreement with
MMV which started in 2004. We did not recognize any revenue from SBIR grants
from the NIH in 2004, while in 2003 there were SBIR grant revenues of
approximately $70,000. The additional $150,000 revenue recognized in 2003 was
from the testing agreement with Neurochem.
Research and development expenses increased from approximately $2,570,000
in 2003 to approximately $3,293,000 in 2004. The increase in research and
development costs is primarily attributable to the increase in the revenues
relating to the clinical research subcontract agreement with UNC and the
initiation of work related to the MMV agreement.
General and administrative expenses were approximately $11,990,000 in
2004, compared to approximately $3,732,000 in 2003. In the year ended 2004,
there were non-cash general and administrative compensation expenses of
approximately $7,234,000 related to the issuance of common stock, stock options
and warrants for services as compared to approximately $1,035,000 in 2003.
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 2003 and 2004, respectively, we also charged deficit accumulated during
the development stage of approximately $452,000 and $3,526,000 of non-cash
convertible preferred stock dividends and convertible preferred stock premium
deemed 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
---------------------------------------------------
March 31, December September June 30,
2005 31, 2004 30, 2004 2004
--------- --------- --------- ---------
Statements of Operations Data:
REVENUES ........................................ $ 3,043 $ 325 $ 1,705 $ 858
--------- --------- --------- ---------
EXPENSES:
Research and development ..................... 2,595 1,441 2,187 1,086
General and administrative ................... 3,026(9) 5,271(8) 2,464(7) 1,429(6)
Total expenses ............................. 5,651 6,712 4,651 2,515
LOSS FROM OPERATIONS ............................ (2,579) (6,387) (2,946) (1,657)
--------- --------- --------- ---------
OTHER INCOME(EXPENSE):
Interest income .............................. 51 48 27 9
--------- --------- --------- ---------
NET LOSS ........................................ (2,527) (6,339) (2,919) (1,648)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS(1) .. (139) (145) (148) (148)
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .... $ (2,665) $ (6,484) $ (3,067) $ (1,797)
========= ========= ========= =========
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss ..................................... $ (0.23) $ (0.59) $ (0.28) $ (0.17)
Convertible preferred stock dividends ........ (0.01) (0.01) (0.01) (0.02)
--------- --------- --------- ---------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS ....................... $ (0.24) $ (0.60) $ (0.29) $ (0.19)
========= ========= ========= =========
Fiscal Quarter Ended
---------------------------------------------------
March 31, December September June 30,
2004 31, 2003 30, 2003 2003
--------- --------- --------- ---------
Statements of Operations Data:
REVENUES ........................................ $ 618 $ 654 $ 659 $ 485
--------- --------- --------- ---------
EXPENSES:
Research and development ..................... 966 815 905 607
General and administrative ................... 1,807(5) 2,580(4) 6,596(3) 1,007(2)
Total expenses ............................. 2,773 3,395 7,501 1,614
LOSS FROM OPERATIONS ............................ (2,155) (2,741) (6,842) (1,129)
--------- --------- --------- ---------
OTHER INCOME(EXPENSE):
Interest income .............................. 10 6 4 1
--------- --------- --------- ---------
NET LOSS ........................................ (2,145) (2,735) (6,838) (1,128)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS(1) .. (2,107) (131) (93) (1,195)
--------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS .... $ (4,252) $ (2,866) $ (6,931) $ (2,323)
========= ========= ========= =========
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net loss ..................................... $ (0.22) $ (0.30) $ (0.79) $ (0.14)
Convertible preferred stock dividends ........ (0.22) (0.01) (0.01) (0.15)
--------- --------- --------- ---------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS ....................... $ (0.44) $ (0.31) $ (0.80) $ (0.29)
========= ========= ========= =========
-----------
(1) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(2) 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.
(3) 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.
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(4) 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.
(5) 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.
(6) Includes (i) $233 of costs related to the issuance of 20,000 options to
Mr. Tony Mok for consulting services in China, and (ii) $10 for the
extension of 21,400 underwriter warrants from April 24, 2004 to May 11,
2004.
(7) Includes $1,032 of costs related to the four year extension of 225,000
RADE warrants from July 24, 2004 to July 24, 2008.
(8) Includes $3,498 of costs related to the four year extension of 750,000
RADE warrants from October 12, 2004 to October 12, 2008.
(9) Includes $301 of costs related to the extension of the unexercised Fulcrum
warrants from March 21, 2005 to December 23, 2005.
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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: (1) transactions are executed in accordance with management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit preparation of financial statements in conformity with generally
accepted accounting principles and (ii) maintain accountability for assets.
Access to assets is permitted only in accordance with management's general or
specific authorization and the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). We have
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designed our internal control system to provide reasonable assurance to our
board of directors regarding the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of our management,
including our chief executive and chief financial officers, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO"). Based on our evaluation, our management
concluded that our internal control over financial reporting was effective as of
March 31, 2005.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of March 31, 2005, has been audited by Deloitte &
Touche, LLP, an independent registered public accounting firm, as stated in
their Report on Internal Control over Financial Reporting which is included
herein on page F-2 hereto.
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 3, 2005, 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 stockholders' meeting.
Name Age Position(s)
---------------------------------------- -------- --------------------------------------------------------
T. Stephen Thompson 58 Director, President and Chief Executive Officer
Cecilia Chan 42 Director and Executive Vice President
Gary C. Parks 55 Treasurer and Chief Financial Officer
Carol Ann Olson, MD, Ph.D. 52 Vice President and Chief Medical Officer
Daniel M. Schmitt 43 Vice President, Licensing and Commercial Development
Deborah Zonies 45 Secretary and General Counsel
Harvey R. Colten, MD 66 Director
Judy Lau 45 Director
Levi H.K. Lee, MD 64 Director
Eric L. Sorkin 45 Director
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Name Age Position(s)
---------------------------------------- -------- --------------------------------------------------------
Frederick W. Wackerle 66 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.
(AMEX: MZT). 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 20 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 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.
Gary C. Parks, Treasurer 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.
Carol Ann Olson, MD, Ph.D., Vice President and Chief Medical Officer. Dr.
Olson is responsible for the management of the clinical trial programs and
medical affairs of the Company, including the development of integrated clinical
plans and management of medical related issues with worldwide regulators. Prior
to joining Immtech, Dr. Olson worked at Abbott Laboratories, Pharmaceutical
Division for eleven years in various capacities, most recently as Global Project
Head and Global Medical Director for Anti-Infective Development. In this
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function, she had line management responsibility for strategic planning,
execution of clinical development plans, manufacturing and commercialization,
product safety, scientific communications and regulatory affairs for outpatient
respiratory antibiotics, including Clarithromycin and Cefdinir. As part of her
responsibilities at Abbott, Dr. Olson managed the filing of Investigative New
Drug (IND) applications and New Drug Applications (NDA) with the United States
Food and Drug Administration (FDA). Prior to this position Dr. Olson was Global
Franchise Medical Director responsible for the Anti-Infective Franchise Program
at Abbott from 2000 -- 2002. In 2001, she participated on a team responsible for
Medical Affairs Acquisition & Integration Management for the Knoll/BASF Pharma
Acquisitions. During Dr. Olson's initial years at Abbott (1994 - 2000), she held
a number of Medical Director Positions for different product groups in the
Pharmaceutical Division. Dr. Olson received both her Medical Doctor degree and
Ph.D., Biochemistry, from the University of Chicago. She received a Master of
Science degree from North Dakota State University and attended Concordia
College, where she earned a B.A. degree. Additionally, Dr. Olson was a Medical
Fellow Specialist -- Division of Infectious Diseases, Department of Medicine at
the University of Minnesota and Medical Resident, Department of Medicine at the
University of Chicago. While at Abbott she earned a number of awards including
the Chairman's Award, Abbott Laboratories (1994).
Daniel M. Schmitt, Vice President, Licensing and Commercial Development.
Mr. Schmitt is responsible for development and execution of commercial
strategies for Immtech's pipeline of products. Mr. Schmitt has over 17 years of
product planning and business development experience, having held similar
positions in both large pharmaceutical and small biotechnology companies. Most
recently, Mr. Schmitt was Director of Academic Partnerships at First Genetic
Trust ("FGT"). Prior to joining FGT, Mr. Schmitt was Director of Global Oncology
at Searle/Pharmacia, where he headed the teams responsible for developing
strategies for launching and commercializing Searle's anti-angiogenesis and
immunotherapy drug programs. During his career, he has led, or contributed to,
the successful development and launch of over 12 pharmaceutical products,
including 5 new chemical entities. Mr. Schmitt received his M.B.A. and a B.S. in
Chemistry from West Virginia University and has held research positions
affiliated with the National Foundation for Cancer Research and at the
University of North Carolina School of Medicine.
Deborah Zonies, Secretary and General Counsel. Deborah Zonies brings to
Immtech a unique blend of legal knowledge and operational experience, having
worked for several high tech companies in a management role. Prior to joining
Immtech, she was Vice President of Business Affairs and General Counsel for
Protocol Communications, Inc. While at Protocol, Ms. Zonies negotiated numerous
acquisition agreements and several rounds of private debt and equity financings.
Prior to Protocol, Ms. Zonies co-founded Digital Art Exchange, Inc., which
implemented digital file transfers for graphic arts companies. She previously
worked at the law firms of Testa, Hurwitz & Thibeault and Mudge Rose Guthrie
Alexander & Ferdon. Ms. Zonies is a Member of the Bar of the Commonwealth of
Massachusetts and of the State of New York. She received her Bachelor of Arts
from Smith College and her Juris Doctorate from the University of Notre Dame Law
School.
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,
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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.
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 joining Columbia University, he served as
Chief Medical Officer at iMetrikus, Inc., a healthcare Internet company focused
on improving the communication between the patient, physician and the medical
industry from 2000 until 2002, and prior to that he was the Dean of the Medical
School and Vice President for Medical Affairs at Northwestern University from
1997 to 2000. He previously served as the Harriet B. Spoehrer Professor and
Chair of the Department of Pediatrics and Professor of Molecular Microbiology at
Washington University School of Medicine, St. Louis, Missouri, whose faculty he
joined in 1986. He earned a B.A. at Cornell University in 1959, an MD from
Western Reserve University in 1963, and an M.A. (honorary) from Harvard in 1978.
Following his clinical training, he was a researcher at the National Institutes
of Health from 1965 to 1970. In 1970, he was appointed to the faculty at the
Harvard Medical School, where he was named Professor of Pediatrics in 1979 and
Chief of the Division of Cell Biology, Pulmonary Medicine, and Director of the
Cystic Fibrosis Program at Children's Hospital Medical Center, Boston. He is a
member of the Institute of Medicine and was Vice-Chair of its Council. He is a
member of the American Society for Clinical Investigation, the Society for
Pediatric Research, the Association of American Physicians, the American
Pediatric Society, the American Association of Immunologists (former secretary
and treasurer), and the American Society for Biochemistry and Molecular Biology.
He is also a Fellow of the American Association for the Advancement of Science,
the American Academy of Allergy and Immunology and the American Academy of
Pediatrics. Dr. Colten is a Diplomat of the American Board of Pediatrics, served
on the American Board of Allergy and Immunology, was a member of the National
Heart, Lung, and Blood Institute Advisory Council, and serves on the Board of
Directors of the Oasis Institute and the March of Dimes Scientific Advisory
Council, in addition to many other Federal and private health groups that advise
on scientific and policy issues. Dr. Colten also served as Vice Chairman of the
Board of Directors of Parents as Teachers National Center. He has been on
editorial boards and advisory committees of several
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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 consultant. He has been
an advisor to Chief Executive Officers ("CEOs") and boards and previously was an
executive search consultant for 40 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 Pharmaceuticals,
Inc., Enzon, Inc., Medtronic Inc. and Ventana Medical Systems. Mr. Wackerle has
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 and an
Executive Advisory Partner to Wind Point Partners, a private equity concern.
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 2005, our directors, executive officers and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them.
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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.
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
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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, 2003, 2004 and
2005. Except as set forth below, no other compensation was paid to these
individuals during the years indicated.
Annual Compensation Long-Term Compensation
Awards
Securities Underlying
Year Salary ($) Options/SARs (#)
------ ---------------------- ------------------------
T. Stephen Thompson 2005 $ 239,990 30,000
President, Chief Executive Officer and 2004 $ 185,000 40,000
Director 2003 $ 150,000 75,000
Cecilia Chan 2005 $ 186,975 20,000
Executive Vice President and 2004 $ 148,000 25,000
Director 2003 $ 120,000 50,000
Gary C. Parks 2005 $ 156,781 15,000
Treasurer and Chief Financial Officer 2004 $ 134,375 15,000
2003 $ 143,250(1) 25,000
Carol Ann Olson, MD, Ph.D. 2005 $ 91,270(2) 40,000
Vice President and Chief Medical Officer 2004 -- --
2003 -- --
Daniel M. Schmitt 2005 $ 62,102(3) 30,000
Vice President, Licensing and 2004 -- --
Commercial Development 2003 -- --
Deborah Zonies 2005 $ 108,853(4) 30,000
Secretary and General Counsel 2004 -- --
2003 -- --
------------------
(1) Includes a bonus of $18,250.
(2) Employment commenced on October 18,2004.
(3) Employment commenced on November 4, 2004.
(4) Employment commenced on July 15, 2004.
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Stock Option Grants and Exercises During the Fiscal Year Ended March 31, 2005
The following table sets forth information concerning stock option grants
made during the fiscal year ended March 31, 2005, to our executive officers
named in the "Summary Compensation Table" above. This information is for
illustration purposes only and is not intended to predict the future price of
our common stock. The actual future value of the options will depend on the
market value of the common stock.
Stock Option Grants In Fiscal Year Ended March 31, 2005
-------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value At
Assumed Annual Rates of Stock
Price Appreciation For Option
Individual Grants Term
------------------------------------------------------------------------------------------------ -----------------------------
Number of Percent of
Securities Total
Underlying Options/SARs Exercise
Options/SARs Granted to Price Expiration
Name Granted Employees (%) ($/SH) Date 5% ($) 10% ($)
----------------------------------- -------------- ---------------- ---------- ----------------- --------------- ------------
T. Stephen Thompson 30,000 11.28 9.41 9/17/2014 459,837 732,213
Cecilia Chan 20,000 7.52 9.41 9/17/2014 306,558 488,142
Gary C. Parks 15,000 5.64 9.41 9/17/2014 229,918 366,107
Carol Ann Olson 40,000 15.04 8.38 10/17/2014 546,005 869,422
Daniel M. Schmitt 20,000 7.52 8.15 11/3/2014 265,510 422,780
10,000 3.76 13.82 2/17/2015 225,113 358,455
Deborah Zonies 20,000 7.52 9.56 7/14/2014 311,445 495,924
10,000 3.76 13.82 2/17/2015 225,113 358,455
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,
2005.
Stock Option and Warrant Exercises In Fiscal Year Ended March 31, 2005,
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 0 141,405 51,662 $ 999,162(1) $ 248,976(2)
Cecilia Chan 0 0 288,356 33,956 $ 1,741,012(3) $ 165,989(4)
Gary C. Parks 0 0 58,947 21,248 $ 380,505(5) $ 93,650(6)
Carol Ann Olson 0 0 0 40,000 $ 0 $ 161,600(7)
Daniel M. Schmitt 0 0 0 30,000 $ 0 $ 71,400(8)
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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
--------------- -------------- --------------- --------------- --------------- --------------------
Deborah Zonies 0 0 7,500 22,500 $ 21,449(9) $ 21,750(10)
------------------
(1) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $3.58 multiplied by the number of shares
underlying the options and warrants.
(2) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $6.19 multiplied by the number of shares
underlying the options.
(3) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $5.99 multiplied by the number of shares
underlying the options and warrants.
(4) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $6.19 multiplied by the number of shares
underlying the options.
(5) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $4.55 multiplied by the number of shares
underlying the options and warrants.
(6) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $6.87 multiplied by the number of shares
underlying the options.
(7) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $8.38 multiplied by the number of shares
underlying the options.
(8) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $10.04 multiplied by the number of shares
underlying the options.
(9) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $9.56 multiplied by the number of shares
underlying the options.
(10) Based on the March 31, 2005, value of $12.42 per share, minus the average
per share exercise price of $11.45 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
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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, 2004, Mr. Thompson received a
raise to $263,294 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.
ITEM 11. 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 3, 2005, 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
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
-------------------------------------- -------------------- -------------------
T. Stephen Thompson (1)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 503,307 shares 4.33%
Cecilia Chan(2)
c/o Immtech International, Inc.
One North End Ave.
New York, NY 10282 338,109 shares 2.89%
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Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
-------------------------------------- -------------------- -------------------
Gary C. Parks(3)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 90,835 shares 0.79%
Carol Ann Olson, MD, Ph.D.(4)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 0 shares 0.00%
Daniel M. Schmitt(5)
c/o Immtech International, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 0 shares 0.00%
Deborah Zonies(6)
c/o Immtech International, Inc.
One North End Ave.
New York, NY 10282 10,833 shares 0.09%
Harvey Colten, M.D.(7)
c/o Office of the Dean Columbia
University College of Physicians
and Surgeons
630 West 168th Street
New York, NY 10032 58,866 shares 0.51%
Judy Lau(8)
Room 1801, 18th Floor
Kwai Hung Holdings Centre
89 Kings Road
North Point, Hong Kong 41,125 shares 0.36%
Levi H.K. Lee, M.D.(9)
1405 Lane Crawford House
70 Queens Road Central,
Hong Kong 236,362 shares 2.05%
Eric L. Sorkin(10)
c/o Immtech International, Inc.
One North End Ave.
New York, NY 10282 338,967 shares 2.89%
Frederick W. Wackerle(11)
3750 N. Lake Shore Drive
Chicago IL 60613 100,877 shares 0.88%
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Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
-------------------------------------- -------------------- -------------------
All executive officers and
directors as a group (11 persons) 1,719,281 shares 13.64%
------------------
(1) Includes (i) 284,152 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 warrant to purchase
5,000 shares of common stock at $6.125 per share by September 25, 2007;
and (v) 136,406 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 64,589 shares of an option to purchase 75,000 shares of common
stock at $2.55 per share by December 24, 2012, the vested portion of
35,000 shares of an option to purchase 40,000 shares of common stock at
$21.66 per share by November 5, 2013, and the vested portion of 13,750
shares of an option to purchase 30,000 shares of common stock at $9.41 per
share by September 7, 2014.
(2) Includes (i) 42,715 shares of common stock; (ii) 5,781 shares of common
stock issuable upon the conversion of series B preferred stock; (iii)
225,512 shares of common stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 50,123 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) 64,101 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 33,059 shares of an option to
purchase 40,000 shares of common stock at $2.55 per share by December 24,
2012, the vested portion of 21,875 shares of an option to purchase 25,000
shares of common stock at $21.66 per share by November 5, 2013, and the
vested portion of 9,167 shares of an option to purchase 20,000 shares of
common stock at $9.41 per share by September 7, 2014.
(3) Includes (i) 21,848 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) 65,725 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 21,530 shares of an option to purchase 25,000
shares of common stock at $2.55 per share by December 24, 2012, 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 and the vested portion of
6,875 shares of an option to purchase 15,000 shares of common stock at
$9.41 per share by September 7, 2014.
(4) Includes 0 shares of common stock issuable upon the exercise of options as
follows: the vested portion of 0 shares of an option to purchase 40,000
shares of common stock at $8.38 per share by October 17, 2014.
(5) Includes 0 shares of common stock issuable upon the exercise of options as
follows: the vested portion of 0 shares of an option to purchase 20,000
shares of common stock at $8.15 per share by November 3, 2014 and the
vested portion of 0 shares of an option to purchase 10,000 shares of
common stock at $13.82 per share by February 17, 2015.
(6) Includes 10,833 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 10,833 shares of an option to
purchase 20,000 shares of common stock at $9.56 per share by July 14, 2014
and the vested portion of 0 shares of an option to purchase 10,000 shares
of common stock at $13.82 per share by February 17, 2015.
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(7) Includes (i) 1,088 shares of common stock; and (ii) 57,778 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, vested option to purchase 7,000 shares of common stock
at $4.75 per share by December 18, 2006, the vested portion of 6,028
shares of an option to purchase 7,000 shares of common stock at $2.55 per
share by December 24, 2007, the vested portion of 16,500 shares of an
option to purchase 22,000 shares of common stock at $14.29 per share by
February 1, 2014, and the vested portion of 8,250 shares of an option to
purchase 22,000 shares of common stock at $11.03 by November 15, 2014.
(8) Includes 41,125 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 17,500 shares of an option to
purchase 20,000 shares of common stock at $21.66 per share by November 5,
2013, the vested portion of 15,750 shares of an option to purchase 21,000
shares of common stock at $14.29 per share by February 1, 2014 and the
vested portion of 7,875 shares of an option to purchase 21,000 shares of
common stock at $11.03 by November 15, 2014.
(9) Includes (i) 135,263 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) 37,750 shares of common stock issuable upon the
exercise of options as follows: the vested portion of 17,500 shares of an
option to purchase 20,000 shares of common stock at $21.66 per share by
November 5, 2013, the vested portion of 13,500 shares of an option to
purchase 18,000 shares of common stock at $14.29 per share by February 1,
2014 and the vested portion of 6,750 shares of an option to purchase
18,000 shares of common stock at $11.03 by November 15, 2014.
(10) Includes (i) 26,827 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) 57,778 shares of common stock issuable upon the exercise of options
as follows: the vested option to purchase 27,000 shares of common stock at
$4.75 per share by December 18, 2006, the vested portion of 6,028 shares
of an option to purchase 7,000 shares of common stock at $2.55 per share
by December 24, 2007, the vested portion of 16,500 shares of any option to
purchase 22,000 shares of common stock at $14.29 per share by February 1,
2014, and the vested portion of 8,250 shares of an option to purchase
22,000 shares of common stock at $11.03 by November 15, 2014.
(11) Includes (i) 13,524 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) 67,778 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 option to purchase 22,000 shares of common stock at $4.75 per share
by December 18, 2006, the vested portion of 6,028 on an option to purchase
7,000 shares of common stock at $2.55 per share by December 24, 2007, the
vested portion of 16,500 shares of an option to purchase 22,000 shares of
common stock at $14.29 per share by February 1, 2014 and the vested
portion of 8,250 shares of an option to purchase 22,000 shares of common
stock at $11.03 by November 15, 2014.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following transactions are disclosed as transactions transacted with a
party that was, at one time or from time-to-time, a "related party".
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,
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investor relations and certain of our administrative functions. During the years
ended March 31, 2003, 2004 and 2005, we paid approximately $106,000, $121,000
and $124,000, respectively, for the use of the facility. 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") 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 1.2 million 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 1.2 million shares of our common stock, Mr. Chan became 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 Audit Committee selects our independent auditor for each fiscal year.
During the year ended March 31, 2005, Deloitte & Touche LLP was employed
primarily to perform the annual audit and to render other services, including
audit services related to the Company's internal control reporting to comply
with Sarbanes-Oxley Section 404. The following table presents the aggregate fees
billed for professional services rendered by Deloitte & Touche LLP during the
years ended March 31, 2004 and 2005. Other than as set forth below, no
professional services were rendered or fees billed by Deloitte & Touche LLP
during 2004 or 2005.
2005 2004
-------- --------
Audit Fees(1) ...................... $192,000 $219,000
Audit Related Fees ................. -- --
Total Audit and Audit Related Fees . 192,000 219,000
Tax Fees(2) ........................ 7,000 4,000
All Other Fees ..................... -- --
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2005 2004
-------- --------
Total Fees ......................... $199,000 $223,000
------------------
(1) 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 consultation, and costs
in our fiscal year ended March 31, 2005 preparing the 2005 audit
requirement for compliance with Sarbanes-Oxley Act section 404 and
financial testing.
(2) 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 LLP's engagement to
perform the audit. The Audit Committee pre-approves on an annual basis the
audit, audit-related, tax and other services 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.
We filed the following report on Form 8-K during our fiscal fourth
quarter.
On March 14, 2005 we filed a Current Report on Form 8-K announcing receipt
of a payment in the amount of approximately $2,995,000 (aggregating to
approximately
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$11.7 million) under the Clinical Research Subcontract with UNC funded by grants
from The Gates Foundation.
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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: June 14, 2005 By: /s/ T. Stephen Thompson
------------------------------ ---------------------------------------
T. Stephen Thompson
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Date
/s/ T. Stephen Thompson June 14, 2005
---------------------------------------------- ------------------------------
T. Stephen Thompson
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Gary C. Parks June 14, 2005
---------------------------------------------- ------------------------------
Gary C. Parks
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Cecilia Chan June 14, 2005
---------------------------------------------- ------------------------------
Cecilia Chan
Executive Vice President and Director
/s/ Harvey Colten, MD June 14, 2005
---------------------------------------------- ------------------------------
Harvey Colten, MD
Director
/s/ Judy Lee June 14, 2005
---------------------------------------------- ------------------------------
Judy Lau
Director
/s/ Levi H.K. Lee, MD June 14, 2005
---------------------------------------------- ------------------------------
Levi H.K. Lee, MD
Director
/s/ Eric L. Sorkin June 14, 2005
---------------------------------------------- ------------------------------
Eric L. Sorkin
Director
/s/ Frederick W. Wackerle June 14, 2005
---------------------------------------------- ------------------------------
Frederick W. Wackerle
Director
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EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
1.1 (19) Form of Underwriting Agreement between the Company and
Jefferies & Company, Inc. dated July 26, 2004.
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
3.4 (21) Amendment to Bylaws dated February 9, 2005
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
10.1 (1) Letter Agreement, dated January 15, 1997, by and among 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
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10.3 (6) 2000 Stock Option and Award Plan
10.4 (1) Letter Agreement, dated May 29, 1998, between the Company
and Franklin Research Group, Inc.
10.5 (1) Indemnification Agreement, dated June 1, 1998, between the
Company and RADE Management Corporation
10.6 (1) Letter Agreement, dated June 24, 1998, between the Company
and Criticare Systems, Inc.
10.7 (1) Letter Agreement, dated June 25, 1998, between the Company
and Criticare Systems, Inc.
10.8 (2) Amendment, dated January 15, 1999, to Letter Agreement among
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 among 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
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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
among 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
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10.39 (17) Form of Regulation S Subscription Agreement for January 2004
Series D Preferred Private Placement
10.40 (20) Form of First Amendment to Office Lease, dated August 18,
2004, by and between the Company and Arthur J. Rogers & Co.
14.1 (18) Code of Ethics
21.1 (13) Subsidiaries of Registrant
23.1 (22) Consent of Deloitte & Touche LLP
31.1 (22) Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 (22) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 (22) Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 (22) 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.
-84-
(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.
(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) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on July 27, 2004.
(20) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on October 8, 2004.
(21) Incorporated by Reference to our Form 10-Q (File No. 001-14907), as filed
with the Securities and Exchange Commission on February 9, 2005.
(22) Filed herewith.
-85-
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Financial Statements as of
March 31, 2004 and 2005, for the Years
Ended March 31, 2003, 2004 and 2005 and
for the Period October 15, 1984 (Date of
Inception) to March 31, 2005 (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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REGARDING COMPLIANCE WITH THE SARBANES-OXLEY ACT
OF 2002......................................................................F-2
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2004
AND 2005, FOR THE YEARS ENDED MARCH 31, 2003, 2004 AND
2005, AND FOR THE PERIOD FROM OCTOBER 15, 1984
(DATE OF INCEPTION) TO MARCH 31, 2005 (UNAUDITED):
Balance Sheets...............................................................F-4
Statements of Operations.....................................................F-6
Statements of Stockholders' Equity (Deficiency in Assets)..................F-7-9
Statements of Cash Flows....................................................F-10
Notes to Financial Statements............................................F-11-41
F-ii
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, 2004 and 2005, 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, 2005. 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, 2004
and 2005, and the results of its operations and its cash flows for each of the
three years in the period ended March 31, 2005, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of March 31, 2005, based on the
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated June 9, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 9, 2005
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Immtech International, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Immtech
International, Inc. (a development stage enterprise) and subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
March 31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the 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
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F-2
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of March 31, 2005, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2005 of the Company and our
report dated June 9, 2005, expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
June 9, 2005
F-3
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND 2005
--------------------------------------------------------------------------------
ASSETS 2004 2005
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 6,745,283 $ 9,471,694
Restricted funds on deposit 2,154,928 2,044,079
Other current assets 59,979 88,103
----------- -----------
Total current assets 8,960,190 11,603,876
PROPERTY AND EQUIPMENT - Net 3,610,214 3,655,604
OTHER ASSETS 15,477 16,594
----------- -----------
TOTAL ASSETS $12,585,881 $15,276,074
=========== ===========
See notes to consolidated financial statements.
F-4
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2005
------------------------------------------------- ----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 970,308 $2,046,620
Accrued expenses 22,382 173,699
Deferred revenue 1,831,093 1,314,786
----------- -----------
Total current liabilities 2,823,783 3,535,105
DEFERRED RENTAL OBLIGATION 14,413
----------- -----------
Total liabilities 2,838,196 3,535,105
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per
share, 4,080,000 shares authorized and
unissued as of March 31, 2004 and 2005
Series A convertible preferred stock, par
value $0.01 per share, stated value
$25 per share, 320,000 shares authorized,
80,800 and 60,400 shares issued and
outstanding as of March 31, 2004 and 2005,
respectively; aggregate liquidation
preference of $2,075,250 and $1,551,165
as of March 31, 2004 and 2005, respectively 2,075,250 1,551,165
Series B convertible preferred stock, par
value $0.01 per share, stated value
$25 per share, 240,000 shares authorized,
19,925 shares issued and outstanding as of
March 31, 2004 and 2005; aggregated liquidation
preference of $516,093 as of March 31,
2004 and 2005 516,093 516,093
Series C convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
160,000 shares authorized, 72,304 and 60,452
shares outstanding as of March 31, 2004, and
2005, respectively; aggregate liquidation
preference of $1,874,186 and $1,566,976 as of
March 31, 2004 and 2005, respectively 1,874,186 1,566,976
Series D convertible preferred stock, par value
$0.01 per share, stated value $25 per share,
200,000 shares authorized, 200,000 and 160,280
shares outstanding as of March 31, 2004 and 2005,
respectively; aggregate liquidation preference
of $5,056,712 and $4,117,657 as of March 31, 2004
and 2005, respectively 5,056,712 4,117,657
Common stock, par value $0.01 per share,
100,000,000 shares authorized, 9,835,286
and 11,332,366 shares issued and outstanding as
of March 31, 2004 and 2005, respectively 98,353 113,324
Additional paid-in capital 58,666,489 76,428,132
Deficit accumulated during the developmental stage (58,539,398) (72,552,378)
----------- -----------
Total stockholders' equity 9,747,685 11,740,969
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,585,881 $15,276,074
=========== ===========
See notes to consolidated financial statements.
F-5
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2003, 2004 AND 2005 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2005 (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Years Ended March 31, (Inception)
--------------------------------------------- to March 31,
2003 2004 2005 2005
REVENUES $ 1,608,849 $ 2,416,180 $ 5,930,696 $ 17,189,698
EXPENSES:
Research and development 2,570,370 3,292,737 7,309,102 41,673,370
General and administrative 3,731,398 11,989,670 12,190,228 45,251,782
Equity in loss of joint venture 135,002
----------- ------------ ------------ ------------
Total expenses 6,301,768 15,282,407 19,499,330 87,060,154
----------- ------------ ------------ ------------
LOSS FROM OPERATIONS (4,692,919) (12,866,227) (13,568,634) (69,870,456)
OTHER INCOME (EXPENSE):
Interest income 13,850 20,414 135,470 733,462
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 13,850 20,414 135,470 444,076
----------- ------------ ------------ ------------
NET LOSS (4,679,069) (12,845,813) (13,433,164) (69,426,380)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (451,869) (3,526,277) (579,816) (5,495,897)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(5,130,938) $(16,372,090) $(14,012,980) $(72,552,378)
=========== ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $ (0.71) $ (1.43) $ (1.27)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.07) (0.39) (0.05)
----------- ------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (0.78) $ (1.82) $ (1.32)
=========== ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 6,565,495 8,977,817 10,606,917
See notes to consolidated financial statements.
F-6
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) YEARS
ENDED MARCH 31, 2003, 2004 AND 2005 AND THE PERIOD OCTOBER 15, 1984 (DATE OF
INCEPTION) TO MARCH 31, 2005 (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
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
Deficit
Common Stock Accumulated
-------------------------- Additional During the
Issued and Paid-in Development
Outstanding Amount Capital Stage
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 $ (209,569)
-------------
Balance, March 31, 1986 198,611 1,986 294,354 (209,569)
Issuance of common stock 42,901 429 285,987
Net loss (47,486)
-------------
Balance, March 31, 1987 241,512 2,415 580,341 (257,055)
Issuance of common stock 4,210 42 28,959
Net loss (294,416)
-------------
Balance, March 31, 1988 245,722 2,457 609,300 (551,471)
Issuance of common stock 62,792 628 569,372
Provision for compensation 489,975
Net loss (986,746)
-------------
Balance, March 31, 1989 308,514 3,085 1,668,647 (1,538,217)
Issuance of common stock 16,478 165 171,059
Provision for compensation 320,980
Net loss (850,935)
-------------
Balance, March 31, 1990 324,992 3,250 2,160,686 (2,389,152)
Issuance of common stock 218 2 1,183
Provision for compensation 6,400
Net loss (163,693)
-------------
Balance, March 31, 1991 325,210 3,252 2,168,269 (2,552,845)
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 (1,479,782)
-------------
Balance, March 31, 1992 343,329 3,433 3,176,456 (4,032,627)
Issuance of common stock 195,790 1,958 66,839
Provision for compensation 191,502
Net loss (1,220,079)
-------------
Balance, March 31, 1993 539,119 5,391 3,434,797 (5,252,706)
Issuance of common stock 107,262 1,073 40,602
Provision for compensation 43,505
Net loss (2,246,426)
-------------
Balance, March 31, 1994 646,381 6,464 3,518,904 (7,499,132)
Net loss (1,661,677)
-------------
Balance, March 31, 1995 646,381 6,464 3,518,904 (9,160,809)
Issuance of common stock for compensation 16,131 161 7,339
Net loss (1,005,962)
-------------
Balance, March 31, 1996 662,512 6,625 3,526,243 (10,166,771)
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 (1,618,543)
-------------
Balance, March 31, 1997 675,498 6,755 3,720,414 (11,785,314)
Exercise of options 68,167 682 28,862
Provision for compensation - employees 50,680
Provision for compensation - nonemployees 201,696
Accumulated Total
Other Stockholders'
Comprehensive Equity
Income (Deficiency in
(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)
--------------
Balance, March 31, 1986 86,771
Issuance of common stock 286,416
Net loss (47,486)
--------------
Balance, March 31, 1987 325,701
Issuance of common stock 29,001
Net loss (294,416)
--------------
Balance, March 31, 1988 60,286
Issuance of common stock 570,000
Provision for compensation 489,975
Net loss (986,746)
--------------
Balance, March 31, 1989 133,515
Issuance of common stock 171,224
Provision for compensation 320,980
Net loss (850,935)
--------------
Balance, March 31, 1990 (225,216)
Issuance of common stock 1,185
Provision for compensation 6,400
Net loss (163,693)
--------------
Balance, March 31, 1991 (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)
--------------
Balance, March 31, 1992 (852,738)
Issuance of common stock 68,797
Provision for compensation 191,502
Net loss (1,220,079)
--------------
Balance, March 31, 1993 (1,812,518)
Issuance of common stock 41,675
Provision for compensation 43,505
Net loss (2,246,426)
--------------
Balance, March 31, 1994 (3,973,764)
Net loss (1,661,677)
--------------
Balance, March 31, 1995 (5,635,441)
Issuance of common stock for compensation 7,500
Net loss (1,005,962)
--------------
Balance, March 31, 1996 (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)
--------------
Balance, March 31, 1997 (8,058,145)
Exercise of options 29,544
Provision for compensation - employees 50,680
Provision for compensation - nonemployees 201,696
F-7
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
------------------------------ ---------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
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
Series C Convertible Series D Convertible
Preferred Stock Preferred Stock
--------------------------- ---------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
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
Deficit
Common Stock Accumulated
-------------------------- Additional During the
Issued and Paid-in Development
Outstanding Amount Capital Stage
Contributed capital - common stockholders 231,734
Net loss (1,477,132)
-----------
Balance, March 31, 1998 743,665 7,437 4,233,386 (13,262,446)
Issuance of common stock under
private placement offering 575,000 5,750 824,907
Exercise of options 40,650 406 12,944
Provision for compensation - nonemployees 2,426,000
Issuance of common stock to Criticare 86,207 862 133,621
Conversion of Criticare debt to common stock 180,756 1,808 856,485
Conversion of debt to common stock 424,222 4,242 657,555
Conversion of redeemable preferred
stock to common stock 1,195,017 11,950 1,852,300 3,713,334
Net loss (1,929,003)
-----------
Balance, March 31, 1999 3,245,517 32,455 10,997,198 (11,478,115)
Comprehensive loss:
Net loss (11,433,926)
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under initial public
offering, less offering costs of $513,000 1,150,000 11,500 9,161,110
Exercise of options and warrants 247,420 2,474 424,348
Provision for compensation - nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 611,250 6,113 6,106,387
Issuance of common stock for accrued interest 28,147 281 281,189
----------- --------- ------------
Balance, March 31, 2000 5,282,334 52,823 27,480,070 (22,912,041)
Comprehensive loss:
Net loss (9,863,284)
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale
Reclassification adjustment for
loss included in net loss
Comprehensive loss
Issuance of common stock under
private placement offering 584,250 5,843 4,299,806
Exercise of options 88,661 886 41,922
Provision for compensation - nonemployees 1,739,294
Contributed capital - common stockholder 13,825
------------
Balance, March 31, 2001 5,955,245 59,552 33,574,917 (32,775,325)
Net loss (3,323,110)
Issuance of Series A convertible preferred stock
under private placement offerings, less cash
offering costs of $153,985 754,550 (908,535)
Issuance of common stock as offering
costs under private placement offerings 60,000 600 (600)
Accrual of preferred stock dividends (29,400)
Exercise of options 51,214 512 18,972
Provision for compensation - nonemployees 332,005
------------
Balance, March 31, 2002 6,066,459 60,664 34,679,844 (37,036,370)
Net loss (4,679,069)
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792 90,640 (149,432)
Issuance of common stock for services provided
Accumulated Total
Other Stockholders'
Comprehensive Equity
Income (Deficiency in
(Loss) Assets)
Contributed capital - common stockholders 231,734
Net loss (1,477,132)
-------------
Balance, March 31, 1998 (9,021,623)
Issuance of common stock under
private placement offering 830,657
Exercise of options 13,350
Provision for compensation - nonemployees 2,426,000
Issuance of common stock to Criticare 134,483
Conversion of Criticare debt to common stock 858,293
Conversion of debt to common stock 661,797
Conversion of redeemable preferred
stock to common stock 5,577,584
Net loss (1,929,003)
-------------
Balance, March 31, 1999 (448,462)
-------------
Comprehensive loss:
Net loss (11,433,926)
Other comprehensive loss:
Unrealized loss on investment
securities available for sale $(1,178) (1,178)
-------------
Comprehensive loss (11,435,104)
Issuance of common stock under initial public
offering, less offering costs of $513,000 9,172,610
Exercise of options and warrants 426,822
Provision for compensation - nonemployees 509,838
Issuance of common stock for
compensation - nonemployees 6,112,500
Issuance of common stock for accrued interest 281,470
-------------
Balance, March 31, 2000 (1,178) 4,619,674
-------------
Comprehensive loss:
Net loss (9,863,284)
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale (1,764) (1,764)
Reclassification adjustment for
loss included in net loss 2,942 2,942
-------------
Comprehensive loss (9,862,106)
Issuance of common stock under
private placement offering 4,305,649
Exercise of options 42,808
Provision for compensation - nonemployees 1,739,294
Contributed capital - common stockholder 13,825
-------------
Balance, March 31, 2001 859,144
Net loss (3,323,110)
Issuance of Series A convertible preferred stock
under private placement offerings, less cash
offering costs of $153,985 3,848,515
Issuance of common stock as offering
costs under private placement offerings
Accrual of preferred stock dividends
Exercise of options 19,484
Provision for compensation - nonemployees 332,005
Balance, March 31, 2002 1,736,038
Net loss (4,679,069)
Issuance of Series B convertible preferred stock
under private placement offerings, less cash
offering costs of $58,792 1,859,333
Issuance of common stock for services provided
F-8
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
------------------------------ ---------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
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
Net loss
Conversion of convertible preferred
stock to common stock (20,400) (521,960)
Accrual of preferred stock dividends 112,758 39,849
Payment of preferred stock dividend (114,883) (39,849)
Exercise of warrants
Extension of warrants
Issuance of common stock for secondary offering,
less offering costs of $337,803
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2005 60,400 $ 1,551,165 19,925 $ 516,093
Series C Convertible Series D Convertible
Preferred Stock Preferred Stock
--------------------------- ---------------------------
Issued and Issued and
Outstanding Amount Outstanding Amount
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
Net loss
Conversion of convertible preferred
stock to common stock (11,852) (301,463) (39,720) (1,016,645)
Accrual of preferred stock dividends 130,988 296,220
Payment of preferred stock dividend (136,735) (218,630)
Exercise of warrants
Extension of warrants
Issuance of common stock for secondary offering,
less offering costs of $337,803
Exercise of options
Provision for compensation - nonemployees
Balance, March 31, 2005 60,452 1,566,976 160,280 $ 4,117,657
Deficit
Common Stock Accumulated
-------------------------- Additional During the
Issued and Paid-in Development
Outstanding Amount Capital Stage
in connection with private placement offerings 290,000 2,900 942,200
Conversion of convertible preferred
stock to common stock 228,448 2,285 950,758
Accrual of preferred stock dividends (302,437)
Payment of preferred stock dividends 45,529 456 160,657
Issuance of common stock for land-use
rights acquisition 1,260,000 12,600 2,986,200
Issuance of common stock and warrants
for services 8,333 83 89,042
Exercise of options 217 2 126
Provision for compensation - nonemployees 243,150
-------------
Balance, March 31, 2003 7,898,986 78,990 40,142,617 (42,167,308)
Net loss (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) (565,088) (1,120,277)
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919 1,544,368 (1,973,287)
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 (432,713)
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 (58,539,398)
Net loss (13,433,164)
Conversion of convertible preferred
stock to common stock 295,813 2,959 1,837,011
Accrual of preferred stock dividends (579,816)
Payment of preferred stock dividend 42,878 429 507,934
Exercise of warrants 235,390 2,354 1,893,482
Extension of warrants 4,841,245
Issuance of common stock for secondary offering,
less offering costs of $337,803 899,999 8,999 8,324,687
Exercise of options 23,000 230 21,870
Provision for compensation - nonemployees 335,412
Balance, March 31, 2005 11,332,366 113,324 $ 76,428,130 $ (72,552,378)
Accumulated Total
Other Stockholders'
Comprehensive Equity
Income (Deficiency in
(Loss) Assets)
in connection with private placement offerings 945,100
Conversion of convertible preferred
stock to common stock (24)
Accrual of preferred stock dividends
Payment of preferred stock dividends (310)
Issuance of common stock for land-use
rights acquisition 2,998,800
Issuance of common stock and warrants
for services 89,125
Exercise of options 128
Provision for compensation - nonemployees 243,150
Balance, March 31, 2003 3,192,271
Net loss (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) 1,448,435
Issuance of Series D convertible preferred stock
under private placement offerings, less cash
offering costs of $428,919 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
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 9,747,685
Net loss (13,433,164)
Conversion of convertible preferred
stock to common stock (97)
Accrual of preferred stock dividends
Payment of preferred stock dividend (1,735)
Exercise of warrants 1,895,836
Extension of warrants 4,841,245
Issuance of common stock for secondary offering,
less offering costs of $337,803 8,333,687
Exercise of options 22,100
Provision for compensation - nonemployees 335,412
Balance, March 31, 2005 $ 11,740,969
See notes to consolidated financial statements. (Concluded)
F-9
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2003, 2004 AND 2005
AND THE PERIOD OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2005
(UNAUDITED)
October 15,
1984
(Inception)
Years Ended March 31, to March 31,
----------------------------------------------
2003 2004 2005 2005
OPERATING ACTIVITIES:
Net loss $ (4,679,069) $(12,845,813) $(13,433,164) $(69,426,380)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation recorded related to issuance of common
stock, common stock options and warrants 1,277,375 7,501,352 5,176,655 27,537,982
Depreciation and amortization of property and
equipment 93,420 115,261 128,706 881,147
Deferred rental obligation (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 (2,137,547) 585,019 110,849 (2,044,079)
Other current assets (93,644) 73,546 (28,124) (88,103)
Other assets 4,371 (1,117) (16,594)
Accounts payable (4,741) 428,427 1,076,312 2,374,155
Accrued expenses 564 17,561 151,317 836,712
Deferred revenue 1,990,636 (722,978) (516,307) 1,314,786
------------ ------------ ------------ ------------
Net cash used in operating activities (3,559,372) (4,849,620) (7,349,286) (39,785,692)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (225,528) (417,012) (174,095) (1,509,821)
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 (225,528) (417,012) (174,095) (1,647,765)
------------ ------------ ------------ ------------
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 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) (1,832) (3,565)
Net proceeds from issuance of common stock 128 4,484,758 10,251,624 31,053,665
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------
Net cash provided by financing activities 1,859,127 11,899,875 10,249,792 50,905,151
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,925,773) 6,633,243 2,726,411 9,471,694
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,037,813 112,040 6,745,283
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,040 $ 6,745,283 $ 9,471,694 $ 9,471,694
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION (Note 11)
See notes to consolidated financial statements.
F-10
IMMTECH INTERNATIONAL, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2003, 2004 AND
2005.
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (a development stage
enterprise) and its subsidiaries (the "Company") are pharmaceutical
companies advancing the development and commercialization of oral drugs to
treat infectious diseases and extending its proprietary aromatic cation
technology platform to the treatment of cancer, diabetes and other
diseases. The Company has advanced clinical programs that include new
treatments for malaria, Pneumocystis pneumonia ("PCP") and African
sleeping sickness (trypanosomiasis), and drug development programs for
fungal infections and tuberculosis. The Company has worldwide licensing
and exclusive commercialization rights to an aromatic cationic
pharmaceutical technology platform and is developing drugs intended for
commercial use based on that technology. The Company's development
programs include treatments for malaria, fungal infections, tuberculosis,
Pneumocystis pneumonia ("PCP") and tropical diseases, including African
sleeping sickness (trypanosomiasis).
The Company holds worldwide patents and patent applications, and licenses
and rights to license technology, primarily from a scientific consortium
that has granted to the Company exclusive rights to commercialize products
from, and license rights to the technology. The scientific consortium
includes scientists from The University of North Carolina at Chapel Hill
("UNC"), Georgia State University ("Georgia State"), Duke University
("Duke University") and Auburn University ("Auburn University")
(collectively, the "Scientific Consortium"). The Company is a development
stage enterprise and, since its inception on October 15, 1984, has engaged
in research and development programs, expanded its network of scientists
and scientific advisors and licensing technology agreements, and advanced
the commercialization of the aromatic cation pharmaceutical technology
platform (the Company acquired its rights to the aromatic cation
technology platform in 1997 and promptly thereafter commenced development
of its current programs). The Company uses the expertise and resources of
strategic partners and third parties in a number of areas, including: (i)
laboratory research, (ii) preclinical 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, 2006, if at all.
Since inception, the Company has incurred accumulated net losses of
approximately $69,426,000 million. Management expects the Company will
continue to incur significant losses during the next several years as the
Company continues research and development activities and clinical trial
and commercialization efforts. In addition, the Company has
F-11
various research and development agreements with third parties and is
dependent upon such parties' abilities to perform under these agreements.
There can be no assurance that the Company's continued research will lead
to the development of commercially viable products. The Company's
operations to date have consumed substantial amounts of cash. The negative
cash flow from operations is expected to continue in the foreseeable
future. The Company believes it will require substantial additional funds
to commercialize its product candidates. The Company's cash requirements
may vary materially from those now planned because of the results of
research and development, results of preclinical and clinical testing,
responses to grant requests, relationships with strategic partners,
changes in the focus and direction in research and development programs,
competitive and technological advances, the regulatory process and other
factors. Changes in circumstances in any of the above areas may require
the Company to allocate substantially more funds than are currently
available or than management intends to raise.
Management believes the Company's existing unrestricted cash and cash
equivalents, and the grants received or awarded and awaiting disbursement
of, will be sufficient to meet the Company's planned expenditures through
at least the next twelve months, although there can be no assurance the
Company will not require additional funds. Management may seek to satisfy
future funding requirements through public or private offerings of
securities, by collaborative or other arrangements with pharmaceutical or
biotechnology companies or from other sources or by issuance of debt.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to generate sufficient revenues for profitable
operations. Management's plans for the forthcoming year, in addition to
normal operations, include continuing financing efforts, obtaining
additional research grants and entering into research and development
agreements with other entities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Immtech International, Inc. and its wholly owned
subsidiaries. All 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 banks which are restricted for use in
accordance with (i) a clinical research subcontract agreement with UNC and
(ii) a malaria drug development agreement with 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.
F-12
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of March 31, 2004
and 2005, 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, 2004 and 2005. Recognition
of any investment income on the equity method by the Company for its
investment in NextEra will occur only after NextEra has earnings in excess
of previously unrecognized equity losses.
Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the
estimated useful lives of the respective assets, ranging from three to
fifty years.
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 ("PRC") for a period of 50 years which was being amortized over
that period on a straight-line basis prior to the Super Insight
transaction described in Note 2 below; the former land use rights were
exchanged for land-use rights in two floors in a building in the Futian
Bonded Zone, Shenzhen, PRC.
Long-Lived Assets - The Company periodically evaluates the carrying value
of its property and equipment. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If the sum of the expected future
undiscounted cash flows is less than the carrying amount of an asset, a
loss is recognized for the asset which is measured by the difference
between the fair value and the carrying value of the asset.
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 the Company's behalf.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will
F-13
result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are
expected to affect taxable income. In addition, a valuation allowance is
recognized if it is more likely than not that some or all of the deferred
income tax assets will not be realized. A valuation allowance is used to
offset the related net deferred income tax assets due to uncertainties of
realizing the benefits of certain net operating loss and tax credit
carryforwards and other deferred income tax assets.
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with Statement of Financial Accounting Standard ("SFAS") No.
128, "Earnings Per Share." Basic net income (loss) and diluted net loss
per share are computed by dividing net income (loss) attributable to
common stockholders by the weighted average number of common shares
outstanding. Diluted net income per share, when applicable, is computed by
dividing net income attributable to common stockholders by the weighted
average number of common shares outstanding increased by the number of
potential dilutive common shares based on the treasury stock method.
Diluted net loss per share was the same as the basic net loss per share
for the years ended March 31, 2003, 2004 and 2005, as none of the
Company's outstanding common stock options, warrants and the conversion
features of Series A, B, C and D Convertible Preferred Stock were
dilutive.
Stock-Based Compensation - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment"
("SFAS 123R"), which requires compensation costs related to share-based
payment transactions to be recognized in the financial statements. With
limited exceptions, the amount of the compensation cost is to be measured
based on the grant-date fair value of the equity or liability instruments
issued. In addition, liability awards are to be measured each reporting
period. Compensation cost is to be recognized over the period that an
employee provides service in exchange for the award. SFAS 123R replaces
FASB Statement No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS 123R is effective for all interim or
annual periods beginning after the Company's next fiscal year ending March
31, 2006. The Company has not yet adopted this pronouncement and is
evaluating the impact that the adoption of SFAS 123R will have on its
consolidated financial position, results of operations and cash flows. The
Company continues to adhere to the disclosure-only provisions of SFAS No.
123, and applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock option plans.
During the years ended March 31, 2003, 2004 and 2005, the Company issued
203,000, 277,000 and 371,000 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, 2003,
2004, and 2005, 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:
F-14
2003 2004 2005
------------- ------------- -------------
Net loss attributable to common stockholders - as
reported $ (5,130,938) $ (16,372,090) $ (14,012,980)
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 (295,177) (1,205,881) (3,414,407)
------------- ------------- -------------
Net loss attributable to common stockholders - pro
forma $ (5,426,115) $ (17,577,971) $ (17,427,387)
============= ============= =============
Basic and diluted net loss per share attributable
to common stockholders - as reported $ (0.78) $ (1.82) $ (1.32)
============= ============= =============
Basic and diluted net loss per share attributable
to common stockholders - pro forma $ (0.83) $ (1.96) $ (1.64)
============= ============= =============
The weighted average assumptions used for grants during the year ended
March 31, 2003 were: 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 weighted average assumptions used for grants
during the year ended March 31, 2004 were: 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 weighted average assumptions
used for grants during the year ended March 31, 2005 were: 1) expected
dividend yield of 0%, 2) risk-free interest rate of 4.5%, 3) expected
volatility of 112%, 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 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,
2003, 2004 and 2005 was $2.15, $18.23 and $10.13, respectively. For
purposes of pro forma disclosure, the estimated fair value of the options
is expensed ratably 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, 2004 and
2005 based on the short-term nature of the instruments.
Segment Reporting - The Company is a development stage pharmaceutical
company that operates as one segment.
F-15
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the years ended March 31, 2003, 2004, and 2005.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ materially from those estimates.
2. EXCHANGE OF LAND-USE RIGHTS
On November 28, 2003, the Company entered into a share purchase agreement
and deed of indemnity (the "Share Purchase Agreement") related to the
purchase of shares of Super Insight Limited ("Super Insight") and an
allonge ("Allonge") to the Share Purchase Agreement as related to the
purchase of shares of Super Insight and Immtech Hong Kong Limited 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 Super Insight and
its wholly owned subsidiary, 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 paid
$400,000 in cash.
Immtech Life Science has land-use rights through May 2051 for two floors
of a newly-constructed building located in the Futian Bonded Zone,
Shenzhen, in the PRC.
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 primary assets of both Lenton and Super
Insight were land-use rights in China. 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, INITIAL PUBLIC OFFERING AND
SECONDARY 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 into 604,978 shares of common stock and approximately
$203,000 in cash (see Note 10); (ii) the Company's Series A Redeemable
Preferred stockholders converted 1,794,550 shares of Series A Redeemable
Preferred Stock into 578,954 shares of common stock (see Note 10) and
(iii) the Company's Series B Redeemable Preferred stockholders converted
1,600,000 shares of Series B Redeemable Preferred Stock into 616,063
shares of common stock (see Note 10).
F-16
Contemporaneously with the completion of the Recapitalization, the Company
issued and sold 575,000 shares of common stock at $1.74 per share, or
$1,000,000 in the aggregate, to certain accredited investors pursuant to
private placements. 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 $0.10 per share for services and expense
reimbursed. RADE Management Corporation ("RADE") received warrants to
purchase 225,000 shares of the Company's common stock at $0.10 per share,
which was subsequently amended on April 22, 1999 to increase the exercise
price from $0.10 per share to $6.47 per share, for RADE's services in the
Recapitalization. RADE subleases an office facility to the Company for
which the Company pays rent directly to RADE's landlord on RADE's behalf
(see Note 9). During the years ended March 31, 2003, 2004, and 2005, the
Company paid approximately $106,000, $121,000 and $124,000 respectively,
for the use of the office facility.
On April 26, 1999, the Company issued 1,150,000 shares of common stock in
an initial public stock offering resulting in net proceeds of
approximately $9,173,000. Costs incurred of approximately $513,000 and
warrants to purchase 100,000 shares of common stock issued to the
underwriters for their services in the initial public offering were netted
from the proceeds of the offering (see Note 7).
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 five-year
warrants to purchase 400,250 shares of the Company's common stock at an
exercise price of $6.00 per share (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
five-year warrants to purchase 191,812 shares of the Company's common
stock at an exercise price of $6.125 per share (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 $288,000 of cash offering costs) through the issuance of
125,352 shares of Series C Convertible Preferred Stock. Total cash and
non-cash offering costs with respect to the issuance of the Series C
Convertible Preferred Stock was approximately $1,685,000 (see Note 7).
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
F-17
stock at an exercise price of $16.00 per share. The warrants expire five
years from the date of grant (see Note 7).
In July 2004, the Company completed a secondary public offering of its
common stock which raised approximately $8,334,000 of additional equity
capital (net of approximately $338,000 of cash offering costs) through the
issuance of 899,999 shares of the Company's common stock which were sold
to the public at $10.25 per share (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. Pursuant to a research and funding agreement with
NextEra, Franklin provided $1,350,000 to NextEra to fund the scale-up of
manufacturing for and initiation of certain clinical trials of NextEra's
product candidates and the Company contributed its rmCRP technology and
use of laboratory facilities. 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, 2003, 2004 and 2005. The Company does not provide, and has not
provided, any financial guarantees to NextEra.
As of March 31, 2004 and 2005, 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. 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, 2004 and 2005, the Company's net investment in NextEra is
zero.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2004 and
2005:
2004 2005
---------- ----------
Research and laboratory equipment $ 477,609 $ 497,328
Furniture and office equipment 169,069 302,251
Leasehold improvements 3,587,519 3,601,353
---------- ----------
Property and equipment - at cost 4,234,197 4,400,932
Less accumulated depreciation and amortization 623,983 745,328
---------- ----------
Property and equipment - net $3,610,214 $3,655,604
========== ==========
F-18
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.
The Company has no significant deferred income tax liabilities.
Significant components of the Company's deferred income tax assets are as
follows:
March 31,
---------------------------
2004 2005
------------ ------------
Deferred income tax assets:
Federal net operating loss carryforwards $ 14,566,000 $ 20,548,000
State net operating loss carryforwards 1,972,000 2,772,000
Federal income tax credit carryforwards 750,000 1,060,000
Deferred revenue 710,000 510,000
------------ ------------
Total deferred income tax assets 17,998,000 24,890,000
------------ ------------
Valuation allowance (17,998,000) (24,890,000)
------------ ------------
Net deferred income taxes recognized in the
accompanying balance sheets $ 0 $ 0
============ ============
As of March 31, 2005, the Company had federal net operating loss
carryforwards of approximately $60,440,000 which expire from 2006 through
2025. The Company also has approximately $57,760,000 of state net
operating loss carryforwards as of March 31, 2005, which expire from 2009
through 2025, 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, 2005, the Company had federal
income tax credit carryforwards of approximately $1,060,000 which expire
from 2008 through 2025.
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,
-------------------------
2003 2004 2005
Federal statutory income tax rate (34.0)% (34.0)% (34.0)%
State income taxes (4.8) (4.8) (4.8)
F-19
Years Ended March 31,
-------------------------
2003 2004 2005
Non-deductible compensation and expenses 9.0 0.0 0.0
Benefit of federal and state net operating loss and tax
credit carryforwards and other deferred income tax
assets not recognized 29.8 38.8 38.8
----- ----- -----
Effective income tax rate 0.0% 0.0% 0.0%
----- ----- -----
7. STOCKHOLDERS' EQUITY
On January 7, 2004, the stockholders of the Company approved an increase
in the number of authorized common stock from 30 million to 100 million
shares. On June 14, 2004, the Company filed with the Secretary of State of
the State of Delaware an Amended and Restated Certificate of Incorporation
implementing, among other things, the approved authorized 70 million share
common stock increase from 30 million to 100 million shares of common
stock.
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15, and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series A Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $41,166 and $55,250 of accrued preferred stock dividends at March 31,
2005 and 2004, respectively. Each share of Series A Convertible Preferred
Stock may be converted by the holder at any time into shares of common
stock at a conversion rate determined by dividing the $25.00 stated value,
plus any accrued and unpaid dividends (the "Liquidation Price"), by a
$4.42 conversion price (the "Conversion Price A"), subject to certain
adjustments, as defined in the Series A 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, 2004, the
Company issued 6,026 shares of common stock and paid $136 in lieu of
fractional common shares as dividends on the preferred shares and on April
15, 2004, the Company issued 2,961 shares of common stock and paid $352 in
lieu of fractional common shares as dividends on the preferred shares. 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
F-20
of fractional common shares as dividends on the preferred shares. During
the years ended March 31, 2005, 2004 and 2003 certain preferred
stockholders converted 20,400, 62,000, and 17,300 shares of Series A
Convertible Preferred Stock, including accrued dividends, for 116,364,
353,667 and 99,105 shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares of
Series A Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series A Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series A Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price A, provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price A. The
Conversion Price is subject to certain adjustments, as defined in the
Series A Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series A Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series A Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share
of Series A Convertible Preferred Stock shall be entitled to 5.6561 votes
(subject to adjustment) with respect to any and all matters presented to
the Company's stockholders for their action or consideration. Except as
provided by law or by the provisions establishing any other series of
preferred stock, Series A Convertible Preferred stockholders and holders
of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
Series B Convertible Preferred Stock - On September 25, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 240,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 8.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series B Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $17,968 and $17,968 of accrued preferred stock dividends as of March
31, 2005 and 2004, respectively. Each share of Series B Convertible
Preferred Stock may be converted by the holder at any time into shares of
common stock at a conversion rate determined by dividing the $25.00 stated
value, plus any accrued and unpaid dividends (the "Liquidation Price"), by
a $4.00 conversion price (the "Conversion Price B"), subject to certain
adjustments, as defined in the Series B
F-21
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, 2004, the Company issued 2,213 shares of common
stock and paid $34 in lieu of fractional common shares as dividends on the
preferred shares and on April 15, 2004, the Company issued 974 shares of
common stock and paid $107 in lieu of fractional common shares as
dividends on the preferred shares. 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 year ended March 31, 2005 there were no conversions while for
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 at any time require that any or all outstanding shares of
Series B Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series B Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series B Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price B, provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price B. The
Conversion Price B is subject to certain adjustments, as defined in the
Series B Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series B Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series B Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends. Each issued and outstanding share
of Series B Convertible Preferred Stock shall be entitled to 6.25 votes
(subject to adjustment) with respect to any and all matters presented to
the Company's stockholders for their action or consideration. Except as
provided by law or by the provisions establishing any other series of
preferred stock, Series B Convertible Preferred stockholders and holders
of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
Series C Convertible Preferred Stock - On June 6, 2003, 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.
F-22
Dividends accrue at a rate of 8.0% per annum on the $25.00 stated value
per share and are payable semi-annually on April 15 and October 15 of each
year while the shares are outstanding. The Company has the option to pay
the dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series C Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $55,676 and $66,586 of accrued preferred stock dividends as of March
31, 2005 and 2004, respectively. Each share of Series C Convertible
Preferred Stock may be converted by the holder at any time into shares of
common stock at a conversion rate determined by dividing the $25.00 stated
value, plus any accrued and unpaid dividends (the "Liquidation Price"), by
a $4.42 conversion price (the "Conversion Price C"), subject to certain
adjustments, as defined in the Series C Certificate of Designation. 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 non-cash
offering costs with respect to the issuance of the Series C Convertible
Preferred Stock were 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,
2004, the Company issued 7,161 shares of common stock and paid $86 in lieu
of fractional common shares as dividends on the preferred shares and on
April 15, 2004, the Company issued 3,534 shares of common stock and paid
$397 in lieu of fractional common shares as dividends on the preferred
shares. 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 years ended March 31, 2005 and 2004,
certain preferred stockholders converted 11,852 and 53,048 shares of
Series C Convertible Preferred Stock, including accrued dividends, for
67,454 and 301,299 shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares of
Series C Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into
which the Series C Convertible Preferred Stock are convertible are
registered pursuant to an effective registration statement, as defined.
The number of shares of common stock to be received by the holders of the
Series C Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the
Conversion Price C provided that the closing bid price for the Company's
common stock exceeds $9.00 for 20 consecutive trading days within 180 days
prior to notice of conversion, as defined, or (ii) if the requirements of
(i) are not met, the number of shares of common stock is determined by
dividing 110% of the Liquidation Price by the Conversion Price C. The
Conversion Price C is subject to certain adjustments, as defined in the
Series C Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series C Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series C Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per
F-23
share, plus any accrued and unpaid dividends. Each issued and outstanding
share of Series C Convertible Preferred Stock shall be entitled to 5.6561
votes (subject to adjustment) with respect to any and all matters
presented to the Company's stockholders for their action or consideration.
Except as provided by law or by the provisions establishing any other
series of preferred stock, Series C Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with
the holders of common stock as a single class.
Series D Convertible Preferred Stock - On January 15, 2004, the Company
filed a Certificate of Designation with the Secretary of State of the
State of Delaware designating 200,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series D Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share
and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the
dividend either in cash or in equivalent shares of common stock, as
defined. Included in the carrying value of the Series D Convertible
Preferred Stock in the accompanying condensed consolidated balance sheets
are $110,657 and $56,712 of accrued preferred stock dividends as of March
31, 2005 and 2004, respectively. Each share of Series D Convertible
Preferred Stock may be converted by the holder at any time into shares of
common stock at a conversion rate determined by dividing the $25.00 stated
value, plus any accrued and unpaid dividends (the "Liquidation Price"), by
a $9.00 conversion price (the "Conversion Price D"), subject to certain
adjustments, as defined in the Series D Certificate of Designation. 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). On October 15,
2004, the Company issued 16,669 shares of common stock and paid $173 in
lieu of fractional common shares as dividends on the preferred shares and
on April 15, 2004, the Company issued 3,340 shares of common stock and
paid $447 in lieu of fractional common shares as dividends on the
preferred shares. During the year ended March 31, 2004 there were no
conversions. During the year ended March 31, 2005 certain preferred
stockholders converted 39,720 shares of Series D Convertible Preferred
Stock, including accrued dividends, for 111,995 shares of common stock.
The Company may at any time require that any or all outstanding shares of
Series D Convertible Preferred Stock be converted into shares of 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 adjustments, as defined in the Certificate of
Designation.
F-24
The Series D Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends. Each
issued and outstanding share of Series D Convertible Preferred Stock shall
be entitled to 2.7778 votes (subject to adjustment) with respect to any
and all matters presented to the Company's stockholders for their action
or consideration. Except as provided by law or by the provisions
establishing any other series of preferred stock, Series D Convertible
Preferred stockholders and holders of any other outstanding preferred
stock shall vote together with the holders of common stock as a single
class.
In connection with the Series D Preferred Stock offering, the Company
entered into a Finder's Agreement with Ace Noble Holdings Limited (the
"Finder") on January 14, 2004 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.
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 on
the date 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 if 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 the
Company's common stock reaches certain milestones. 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-25
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.
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 issued to Fulcrum, ratably over
the term in monthly installments, 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 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 issued in connection with the issuance of the Series C
Convertible Preferred Stock.
On July 25, 2003, the Company entered into a consulting agreement with
Fulcrum to identify and negotiate with stock exchanges to list the
Company's common stock and to assist the Company to prepare applications
to list the common stock on a stock exchange. On August 11, 2003, the
Company's common stock was listed on the American Stock Exchange. Pursuant
to the agreements, the Company issued 100,000 shares of its common stock
to Fulcrum which resulted 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 issued.
In September 2003, the Company entered into a second Finder's Agreement
with Wyndham to identify potential strategic partners and assist the
Company in private placements of debt or equity securities with proceeds
to the Company of not less than $20 million through December 2003. The
Company advanced to Wyndham a refundable retainer fee of $160,000 against
a cash fee for Wyndham's services equal to 8.0% of funds received by the
Company from investors introduced by Wyndham. The private placements
contemplated in September 2003 were not completed by December 2003 or at
all. The Company requested, but Wyndham did not return, the retainer fee.
The
F-26
Company has written off the retainer fee 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 Mr.
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 his 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 issued.
On July 30, 2004, the Company completed a secondary public offering of its
common stock wherein the Company sold 899,999 shares of common stock
resulting in net proceeds to the Company of approximately $8,334,000. The
shares were sold to the public at $10.25 per share.
Common Stock Options - On October 12, 2000, the Company's stockholders
ratified the board's approval of the Company's 2000 Stock Incentive Plan
pursuant to which the Company's board of directors is empowered to grant
equity incentives to certain employees and other non-employees who have
been engaged to assist the Company in various research and administrative
capacities. The 2000 Stock Incentive Plan provided for the issuance of up
to 350,000 shares of common stock in the form of incentive stock options,
non-qualified stock options and common stock awards. At the stockholders
meeting held November 15, 2002, the stockholders approved the first
amendment to the 2000 Stock Incentive Plan which increased the number of
shares of common stock reserved for issuance thereunder from 350,000
shares to 1,100,000 shares. At the stockholders' meeting held November 12,
2004, the stockholders approved the second amendment to the 2000 Stock
Incentive Plan which increased the number of shares of common stock
reserved for issuance from 1,100,000 shares to 2,200,000 shares. Options
granted under the 2000 Stock Incentive Plan that expire are available to
be reissued. During the year ended March 31, 2005, no options previously
granted under the 2000 Stock Incentive Plan expired and were available to
be reissued.
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, 2005, there were a total
of 1,049,250 shares available for grant.
Compensatory Options Granted - During the year ended March 31, 2003, the
Company issued options to purchase 22,000 shares of common stock to
non-employees (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 non-employees and
recognized expense of approximately $267,000 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, 2005, the Company issued
options to purchase 20,000 shares of
F-27
common stock to non-employees and recognized expense of approximately
$335,000 related to such options and certain other options issued in prior
years which vest over a four-year service period The expense was
determined based on the estimated fair value of the options using the
Black-Scholes 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, 2003, 2004 and 2005 for the
Company's stock options is summarized as follows:
Stock Options Price Weighted Average
Number of Shares Range Exercise Price
---------------- ------------------- ----------------
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
Granted 391,000 8.15 - 14.24 10.34
Exercised (23,517) 0.46 - 4.42 1.30
Expired
---------------- ------------------- ----------------
Outstanding as of March 31, 2005 1,330,057 $ 0.34 - 21.66 $ 9.26
================ =================== ================
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
Exercisable as of March 31, 2005 874,360 0.34 - 21.66 8.42
The following table summarizes information about stock options outstanding
as of March 31, 2005:
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------
Weighted Average
Remaining
Range of Exercise Contractual Weighted Average Weighted Average
Prices Shares Outstanding Life-Years Exercise Price Shares Exercisable Exercise Price
--------------------- --------------------- ----------------- ----------------- ------------------- ----------------
$0.34 - 0.46 134,117 2.31 $ 0.44 134,117 $ 0.44
1.74 - 2.55 257,190 6.11 2.37 206,777 2.33
4.75 68,000 2.43 4.75 64,500 4.75
6.08 -11.50 544,750 5.73 10.03 267,445 10.35
Options Outstanding Options Exercisable
--------------------------------------------------------- -------------------------------------
13.07 -21.66 326,000 8.22 17.99 201,521 18.57
--------------------- ----------------- ----------------- ------------------- ----------------
1,330,057 5.56 $ 9.26 874,360 $ 8.42
===================== ================= ================= =================== ================
F-28
Warrants - 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 without exercise 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 200,000 shares underlying the warrants
did not vest. The Company recorded a general and administrative expense of
$866,000 during the year ended March 31, 2001. The expense was determined
based on the estimated fair value of the 100,000 issued and vested
warrants. 41,200 shares underlying the warrants were exercised on August
11, 2003 and 58,800 were exercised on August 21, 2003, all at $12.06 per
share.
On March 15, 2001, the Company entered into a one-year agreement with The
Kriegsman Group ("Kriegsman") for assistance by Kriegsman with respect to
financial consulting, planning, structuring, business strategy, public
relations and promotions. This agreement was terminated by the Company,
effective September 14, 2001. As compensation for the 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 exercisable 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 vested
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 for cash on August 20, 2003.
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 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, 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.
Warrant 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. The remaining warrants did not vest and were cancelled. The
vested warrant expires on February 14, 2007. The Company may, upon 30
days' notice, redeem vested warrant 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 the vested
F-29
warrant during such notice period. In addition, Yorkshire received 60,000
shares of the Company's common stock in consideration for identifying
investors and raising funds in connection with the closing of the private
placement and a retainer fee of $10,000 per month for consulting services
during the term of the agreement.
In February 2002, the Company, in connection with the Series A Convertible
Preferred Stock private placement, 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 to the purchasers of the Series A Convertible
Preferred Stock. The warrants expire in February 2007. The warrants are
not detachable and the 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 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 $0.10 per
share of common stock underlying the warrants. During the 20-day notice
period, if the warrants are then exercisable as a result of the conversion
or redemption of the Series A Convertible Preferred Stock, such warrant
holder may then exercise all or a portion of the warrant by tendering the
appropriate exercise price. The warrants contain certain anti-dilution
provisions.
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 to the purchaser of the Series B Convertible
Preferred Stock (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, 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 anti-dilution provisions.
In September 2002, in connection with the Series B Convertible Preferred
Stock private placement offering, the Company issued to the purchaser of
the Series B Convertible Preferred Stock 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. The Company may, upon 20 days' notice, redeem any unexercised
portion of any warrants for a redemption fee of $0.10 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
F-30
amount recorded of $149,432 was determined by applying the relative fair
value method in relation to the estimated fair value of Series B
Convertible Preferred Stock resulting in a $149,432 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 condensed consolidated 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 an immediately exercisable five year warrant to purchase 600,000
shares of common stock from the Company at $6.08 per share. 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 the Series D Convertible Preferred
Stock private placement, the Company issued to the purchasers of Series D
Convertible Preferred Stock 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. The
Company may, upon 20 days' notice, redeem any unexercised portion of any
warrants for a redemption fee of $0.10 per share of common stock
underlying the warrants provided that the closing bid price of the
Company's common stock exceeds $18.00 for 20 consecutive trading days
within 180 days prior to the notice of conversion. 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.
On July 20, 2004, the Company's board of directors approved a four-year
exercise extension to warrants to purchase 225,000 shares of the Company's
common stock which
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were originally issued to RADE Management Corporation ("RADE") on July 24,
1998. The expiration date for these warrants, which have an exercise price
of $6.47 per share, was extended from July 24, 2004 to July 24, 2008; the
Company therefor recorded a non-cash charge during the year ended March
31, 2005 of $1,032,000, determined using the Black-Scholes option pricing
model. Additionally, the Company's board of directors approved a four-year
exercise extension to warrants to purchase 750,000 shares of the Company's
common stock which were originally issued to RADE on October 12, 1998; the
Company therefor recorded a non-cash charge during the year ended March
31, 2005 of $3,498,000, determined using the Black-Scholes option pricing
model.. The expiration date for these warrants, which have an exercise
price of $6.47 per share, was extended from October 12, 2004 to October
12, 2008.
In connection with secondary public offering completed on July 30, 2004,
the underwriter (Jeffries & Company, Inc.) was granted a warrant to
purchase 80,100 shares of common stock at an exercise price of $12.81 per
share. The warrant is exercisable for five years from the date of grant
and has anti-dilution protection for recapitalizations.
On March 18, 2005, the Company's board of directors approved an exercise
extension from March 21, 2005 to December 23, 2005 on warrants to purchase
125,000 shares of the Company's common stock at $15.00 per share which
were originally issued to Fulcrum on March 21, 2003; the Company therefore
recorded a non-cash charge during the year ended March 31, 2005 of
$300,000, determined using the Black-Scholes option pricing model.
The activity during the years ended March 31, 2003, 2004 and 2005 for the
Company's warrants to purchase shares of common stock is summarized as
follows:
Weighted Average
Number of Shares Warrants Price Range Exercise Price
-------------------- ------------------------ --------------------
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
Granted 80,100 6.00 - 16.00 12.81
Cancelled (75,000) 16.00 16.00
Exercised (252,400) 6.00 - 16.00 8.87
-------------------- ------------------------ --------------------
Outstanding as of March 31, 2005 2,740,410 $6.00 - 16.00 $ 7.51
==================== ======================== ====================
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
Exercisable as of March 31, 2005 2,730,410 6.00 - 16.00 7.53
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The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2005:
Exercise Price Per Share Warrants Outstanding Expiration Date
----------------------------- ------------------------ -----------------
$ 6.00 233,000 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 7/24/08
6.47 750,000 10/12/08
12.81 80,100 7/30/09
15.00 125,000 12/23/05
16.00 200,000 1/22/09
----------------
Total Warrants Outstanding 2,740,410
================
8. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenue under various collaborative research agreements.
Under the terms of these arrangements, the Company has generally agreed to
perform best efforts research and development and, in exchange, the
Company may receive advance cash funding, an allowance for management
overhead, and may also earn additional fees for the attainment of certain
milestones.
The Company initially acquired its rights to the aromatic cation
technology platform developed by a consortium of universities consisting
of UNC, Georgia State University, Duke University and Auburn University
(the "Scientific Consortium") pursuant to an agreement, dated January 15,
1997 (as amended, the "Consortium Agreement") among the Company, UNC and a
third-party (to which each of the other members of the Scientific
Consortium agreed shortly thereafter to become a party) (the "original
licensee"). The Consortium Agreement commits the parties to collectively
research, develop, finance the research and development of, manufacture
and market both the technology and compounds owned by the Scientific
Consortium and previously licensed or optioned to the original licensee
and licensed to the Company in accordance with the Consortium Agreement
(the "Current Compounds"), and all technology and compounds developed by
the Scientific Consortium after January 15, 1997, through use of
Company-sponsored research funding or National Cooperative Drug
Development grant funding
F-33
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, with respect to the Current Compounds, and UNC, (on behalf of the
Scientific Consortium), with respect to Current Compounds and Future
Compounds, would enter into license agreements for the intellectual
property rights relating to the Compounds pursuant to which the Company
would pay royalties and other payments based on revenues received for the
sale of products based on the Compounds.
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000 thereby earning a worldwide license and exclusive
rights to commercially use, manufacture, have manufactured, promote, sell,
distribute, or otherwise dispose of any products based directly or
indirectly on all of the Current Compounds and Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to the original
licensee or persons designated by the original licensee.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium
whereby the Company received the exclusive license to commercialize the
aromatic cation technology platform and compounds developed or invented by
one or more of the Consortium scientists after January 15, 1997, and which
also incorporated into such License Agreement the Company's existing
license with the Scientific Consortium with regard to the Current
Compounds. Also pursuant to the Consortium Agreement, the original
licensee transferred to the Company the worldwide license and exclusive
right to commercially use, manufacture, have manufactured, promote, sell,
distribute or otherwise dispose of any and all products based directly or
indirectly on aromatic cations developed by the Scientific Consortium on
or prior to January 15, 1997 and previously licensed (together with
related technology and patents) to the third-party.
The 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 year ended March 31, 2003, the
Company expensed grant payments to UNC of $100,000. Such payments were
expensed as research and development costs. There were no grant payments
to UNC during the years ended March 31, 2004 and 2005.
The Consortium Agreement provides that the Company is required to pay to
UNC on behalf of the Scientific Consortium reimbursement of patent and
patent-related fees, certain milestone payments and royalty payments based
on revenue derived from the Scientific Consortium's aromatic cation
technology platform. Each month on behalf of the inventor scientist or
university, as the case may be, UNC submits an invoice to the
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Company for payment of patent-related fees related to current compounds or
future compounds incurred prior to the invoice date. The Company is also
required to make milestone payments in the form of the issuance of 100,000
shares of its common stock to the Consortium when it files its first
initial New Drug Application ("NDA") or an Abbreviated New Drug
Application ("ANDA") based on Consortium technology. We are also required
to pay to UNC on behalf of the Scientific Consortium (other than Duke
University) (i) royalty payments of up to 5% of our net worldwide sales of
"current products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively) and
(ii) a percentage of any fees we receive under sublicensing arrangements.
With respect to products or licensing arrangements emanating from Duke
University technology, the Company is required to negotiate in good faith
with UNC (on behalf of Duke University) royalty, milestone or other fees
at the time of such event, consistent with the terms of the Consortium
Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and
defend patents so long as the Company chooses to retain the license to
such patents.
In August 2001, the Company was awarded a Small Business Innovation
Research ("SBIR") grant from the National Institutes of Health ("NIH") of
approximately $144,000 as a three year grant to continue research on
"Novel Procedures for Treatment of Opportunistic Infections." During the
year ended March 31, 2003, the Company recognized revenues of
approximately $70,000 from this grant and expensed payments of
approximately $70,000 to UNC and certain other Scientific Consortium
universities for contracted research related to this grant. During the
years ended March 31, 2004 and 2005, no revenues or expenses were recorded
related to this grant.
In July 2004, the Company was awarded an SBIR grant from the NIH of
$107,000 as a grant to research on "Aromatic Dication Prodrugs for CNS
Trypanosomiasis." During the year ended March 31, 2005, the Company
recognized revenues and expenses of approximately $63,000 from this grant.
Approximately $33,000 of these expenses were paid to UNC and other
Scientific Consortium universities for contracted research related to this
grant.
During the years ended March 31, 2003, 2004 and 2005, the Company expensed
approximately $333,000, $630,000, and $730,000, 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 $503,000, $630,000 and $763,000 during the years ended March
31, 2003, 2004 and 2005, respectively. Included in accounts payable as of
March 31, 2004 and 2005, was approximately $132,000 and $136,000,
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
F-35
clinical research subcontract agreement with the Company, whereby the
Company is to receive up to $9,800,000, subject to certain terms and
conditions, over a five year period to conduct certain clinical and
research studies related to the Gates Foundation Grant.
In April 2003, the Gates Foundation awarded a $2,713,124 supplemental
grant to UNC for the expansion of Phase IIB/III clinical trials to treat
human Trypanosomiasis (African sleeping sickness) and improved
manufacturing processes. The Company is to receive, pursuant to the
clinical research subcontract with UNC, inclusive of its portion of the
supplemental grant, a total amount of funding of approximately
$11,700,000. Grant funds paid in advance of the Company's delivery of
services are treated as restricted funds and must be segregated from other
funds and used only for the purposes specified. As of March 31, 2005,
approximately $11,700,000, relating to the clinical research subcontract,
had been received by the Company. The Company and its research partners
are working with their funding sources to develop next steps and to
increase funding to advance the development of a treatment for African
sleeping sickness.
During the years ended March 31, 2003, 2004 and 2005, the Company received
installment payments under this grant of approximately $3,380,000,
$1,025,000 and $2,995,000, respectively, and approximately $1,389,000,
$2,114,000 and $3,592,000 was utilized for clinical and research purposes
conducted and expensed during the years ended March 31, 2003, 2004 and
2005, respectively. The Company recognized revenues of approximately
$1,389,000, $2,114,000 and $3,592,000 during the years ended March 31,
2003, 2004 and 2005, respectively, for services performed under the
agreement. The remaining amount (approximately $1,465,000 and $869,000 as
of March 31, 2004 and 2005, 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 Company recognized
expense of approximately $498,000, $425,000 and $898,000 during the years
ended March 31, 2003, 2004 and 2005, 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.
F-36
On November 26, 2003, the Company entered into a testing agreement
("Testing Agreement") with Medicines for Malaria Venture ("MMV"), a
foundation established in Switzerland, and UNC, pursuant to which the
Company, with the support of MMV and UNC, is conducting a proof of concept
study of the dicationic drug candidate DB289, including Phase II and Phase
III human clinical trials, and will pursue drug development activities of
DB289 alone, or in combination with other anti-malaria drugs, with the
goal of obtaining marketing approval of a product for the treatment of
malaria.
Under the terms of the Testing Agreement, MMV has committed to advance
funds to Immtech to pay for human clinical trials and regulatory
preparation and filing costs for the approvals to market DB289 to treat
malaria by at least one internationally accepted regulatory agency and one
malaria-endemic country. The funding under the Testing Agreement is for
the performance of specific research and is not subject to maximum funding
amounts. The term of the funding is three years and is subject to annual
renewals. The Company has forecasted such costs to be approximately $8.2
million over the three years. In return for MMV's funding, the Company is
required, when selling malaria drugs derived from this research into
"malaria-endemic countries," as defined, to sell such drugs at affordable
prices. An affordable price is defined in the Testing Agreement to mean a
price not to be less than the cost to manufacture and deliver the drugs
plus administrative overhead costs (not to exceed 10% of the cost to
manufacture) and a modest profit. There are no price constraints on
product sales into non-malaria-endemic countries. The Company must,
however, pay to MMV a royalty not to exceed 7% of net sales, as defined,
on product sales into non-malaria-endemic countries, until the amount
funded under the Testing Agreement and amounts funded under a related
discovery agreement between MMV and UNC is refunded to MMV at face value.
The Company recognized revenues of approximately $302,000 and $2,275,000
during the years ended March 31, 2004 and 2005, respectively, for expenses
incurred related to activities within the scope of the Testing Agreement.
At March 31, 2004 and 2005, the Company has approximately $366,000 and
$446,000, respectively, recorded as deferred revenue with respect to this
agreement.
9. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In October 2004, the Company entered into an amendment
to the lease of its main office and research facility under an operating
lease that requires lease payments starting in March 2005 of approximately
$8,200 per month through March 2008 and $8,600 from April 2008 through
March 2010. 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 consultant who previously provided services
to the Company, on a month-to-month basis, for approximately $10,100 per
month. Total rent expense was approximately $285,000, $310,000 and
$305,000 for all leases during the years ended March 31, 2003, 2004, and
2005, respectively.
As of March 31, 2005, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
F-37
Year Ending
March 31, Lease Payments
----------- ------------------
2006 $ 98,000
2007 98,000
2008 98,000
2009 103,000
2010 99,000
------------------
Total $ 496,000
==================
Other Contingencies - In August 2003 the Company filed a lawsuit against
Neurochem, Inc. ("Neurochem") alleging that Neurochem misappropriated the
Company's trade secrets by filing a series of patent applications relating
to compounds synthesized and developed by the Consortium, with whom
Immtech has an exclusive licensing agreement. The misappropriated
intellectual property was provided to Neurochem pursuant to a testing
agreement 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 immediately advise Immtech if any invention was
discovered and to cooperate with Immtech and its counsel in filing any
patent applications.
In its complaint, the Company also alleges, among other things, that
Neurochem fraudulently induced the Company into signing the testing
agreement, and breached numerous provisions of the testing agreement,
thereby blocking the development of the Consortium's compounds for the
treatment of Alzheimer's disease. By engaging in these acts, the Company
alleges that Neurochem has prevented the public from obtaining the
potential benefit of new drugs for the treatment of Alzheimer's disease,
which would compete with Neurochem's Alzhemed drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear
this dispute, as opposed to the federal district court in which the action
was originally filed. The Company has agreed to have a three member ICC
arbitration panel (the "Arbitration Panel") hear and rule on the dispute
on the expectation that the Arbitration Panel will reach a more timely and
economical resolution. In this regard, the ICC hearing is scheduled from
September 7, 2005 through September 16, 2005, and the Company anticipates
a resolution of this matter by the end of the calendar year.
The Company has filed with the Arbitration Panel a document that
identifies the issues to be considered and provided a preliminary estimate
of $18 to $42 million in damages that it is seeking. Neurochem, Inc. and
Neurochem (International) Limited also filed with the Arbitration Panel a
document that identified the issues they deem the Arbitration Panel
F-38
should consider and provided a preliminary estimate of $3.5 million in
damages that they are seeking based on their counterclaims.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors. The Von der Ruhr Plaintiff's complaint alleged that (i) the
Company refused to authorize the Company's transfer agent to remove the
restrictive legends from the stock certificates of the Von der Ruhr
Plaintiffs, (ii) the Company refused to honor the Von der Ruhr Plaintiffs'
exercise of certain stock options and (iii) the Company refused to honor
an agreement regarding certain technology. The Von der Ruhr Plaintiffs
also allege that certain officers and directors interfered with the Von
der Ruhr Plaintiffs' contracts with the Company. The complaint sought
unspecified monetary damages and punitive damages, in addition to
equitable relief and costs. In a filing made in late February, 2005, the
Von der Ruhr Plaintiffs specified damages of approximately $44.5 million
in damages, which includes $42 million related to the alleged technology
agreement claim, which the Company believes is meritless. The Company has
filed a motion for summary judgment with the Court seeking to have several
of the counts of the complaint, including the one related to the alleged
technology agreement, dismissed and will continue to vigorously defend
against this proceeding.
The Company is involved in various other claims and litigation incidental
to its operations. In the opinion of management, ultimate resolution of
these actions and those above will not have a material effect on the
Company's financial statements and, therefore, has not recoded any
reserve.
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-39
$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 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.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years
ended March 31, 2003, 2004 and 2005.
Non-Cash Transactions
During the years ended March 31, 2003, 2004 and 2005, the Company issued
common stock, common stock options and warrants or modified existing
arrangements as compensation for services and also engaged in certain
other non-cash investing and financing activities. The amounts of these
transactions are summarized as follows:
F-40
Year Ended March 31,
------------------------------------------------------
2003 2004 2005
--------------- -------------------- ---------------
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 243,150 267,500 $ 335,412
Expense related to issuance/extension of warrants to
purchase common stock as compensation for services 51,835 3,342,244 4,841,245
Issuance of common stock for offering costs 1,397,000
Convertible preferred stock dividends recorded 302,437 432,713 579,816
Issuance of common stock as payment of convertible
preferred stock dividends 161,113 330,640 508,362
Issuance of common stock for conversions of
convertible preferred stock 953,043 3,850,205 1,839,971
Exchange of ownership interests:
Value of land-use rights exchanged
Land-use rights (3,443,867)
Minority interest 296,193
Value of land-use rights 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
------------
Subsequent Events
The Company received on April 25, 2005 an advance payment of $1,000,000,
aggregating to approximately $4,023,000 to date, for the advancement of clinical
trials of DB289 in the treatment of malaria. The funds were received from The
Medicines for Malaria Venture ("MMV") pursuant to a Testing Agreement dated
November 26, 2003 among the Company, MMV and The University of North Carolina at
Chapel Hill.
* * * * * *
F-41