UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2006.
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
Commission file number: 000-25669
IMMTECH PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1523370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One North End Avenue, New York, New York 10282
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 573-0033
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2.
Large Accelerated filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes |_| No |X|
As of August 8, 2006, 14,014,356 shares of the Registrant's common stock, par
value $0.01 per share ("Common Stock"), were outstanding.
Table Of Contents
Page(s)
PART I FINANCIAL INFORMATION...........................................2
Item 1 Condensed Consolidated Financial Statements...................2
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations...............21
Item 3 Quantitative and Qualitative Disclosures about
Market Risk.................................................24
Item 4 Controls and Procedures......................................24
PART II OTHER INFORMATION..............................................25
Item 1 Legal Proceedings............................................25
Item 1A Risk Factors.................................................25
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds.............................................26
Item 3 Defaults Upon Senior Securities..............................26
Item 4 Submission of Matters to a Vote of Security
Holders.....................................................26
Item 5 Other Information............................................27
Item 6 Exhibits.....................................................27
-i-
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
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IMMTECH PHARMACEUTICALS, INC. AND
SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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June 30, March 31,
ASSETS 2006 2006
CURRENT ASSETS:
Cash and cash equivalents $ 11,916,610 $ 14,137,867
Restricted funds on deposit 4,767,171 530,186
Other current assets 394,877 193,059
---------------- ------------------
Total current assets 17,078,658 14,861,112
PROPERTY AND EQUIPMENT - Net 3,550,715 3,555,965
OTHER ASSETS 136,942 137,341
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TOTAL $ 20,766,315 $ 18,554,418
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,747,231 $ 2,328,965
Accrued expenses 234,135 226,749
Deferred revenue 4,103,076 395,779
---------------- ------------------
Total current liabilities 7,084,442 2,951,493
Total liabilities 7,084,442 2,951,493
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STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 3,913,000
shares authorized and unissued as of June 30, 2006 and
March 31, 2006.
Series A convertible preferred stock, par value $0.01 per
share, stated value $25 per share, 320,000 shares
authorized, 58,400 shares issued and outstanding as of
June 30, 2006 and March 31, 2006; aggregate liquidation
preference of $1,477,945 as of June 30, 2006. 1,477,945 1,499,785
Series B convertible preferred stock, par value $0.01 per
share, stated value
-2-
$25 per share, 240,000 shares authorized, 13,464 shares
issued and outstanding as of June 30, 2006 and March 31,
2006; aggregate liquidation preference of $341,907 as of
June 30, 2006. 341,907 348,621
Series C convertible preferred stock, par value $0.01 per
share, stated value $25 per share, 160,000 shares
authorized, 45,536 shares issued and outstanding as of
June 30, 2006 and March 31, 2006; aggregate liquidation
preference of $1,157,639 as of June 30, 2006. 1,157,639 1,180,345
Series D convertible preferred stock, par value $0.01 per
share, stated value $25 per share, 200,000 shares
authorized, 117,200 shares issued and outstanding as of
June 30, 2006 and March 31, 2006; aggregate liquidation
preference of $2,967,085 as of June 30, 2006. 2,967,085 3,010,914
Series E convertible preferred stock, par value $0.01 per
share, stated value $25 per share, 167,000 shares
authorized, 110,600 and 156,600 shares issued and
outstanding as of June 30, 2006 and March 31, 2006,
respectively; aggregate liquidation preference of
$2,800,031 as of June 30, 2006. 2,800,031 3,975,528
Common stock, par value $0.01 per share, 100,000,000
shares authorized, 13,995,666 and 13,758,506 shares
issued and outstanding as of June 30, 2006 and March 31,
2006, respectively 139,957 137,585
Additional paid-in capital 96,378,926 94,292,235
Deficit accumulated during the developmental stage (91,581,617) (88,842,088)
Total stockholders' equity 13,681,873 15,602,925
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TOTAL $ 20,766,315 $ 18,554,418
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See notes to condensed consolidated financial statements.
-3-
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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October 15,
Three Months Ended 1984
June 30, (Inception) to
-------------------------- June 30,
2006 2005 2006
REVENUES $ 1,941,609 $ 1,478,580 $ 22,706,349
------------ ------------ -------------
EXPENSES:
Research and development 2,468,836 2,269,207 53,822,390
General and administrative 2,219,855 2,732,273 57,102,655
Equity in loss of joint venture 135,002
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Total expenses 4,688,691 5,001,480 111,060,047
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LOSS FROM OPERATIONS (2,747,082) (3,522,900) (88,353,698)
------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest income 150,361 57,587 1,094,548
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942)
Cancelled offering costs (584,707)
Gain on extinguishment of debt 1,427,765
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Other income 150,361 57,587 805,162
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NET LOSS (2,596,721) (3,465,313) (87,548,536)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (142,808) (118,822) (6,402,980)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,739,529) $ (3,584,135) $ (91,581,617)
============ ============ =============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE
-4-
TO COMMON STOCKHOLDERS:
Net loss $ (0.19) $ (0.30)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.01) (0.01)
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ (0.20) $ (0.31)
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED NET LOSS PER SHARE 13,920,324 11,390,899
============ ============
See notes to condensed consolidated financial statements.
-5-
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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October 15,
Three Months Ended 1984
June 30, (Inception) to
-------------------------- June 30,
2006 2005 2006
OPERATING ACTIVITIES:
Net loss $ (2,596,721) $ (3,465,313) $ (87,548,536)
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 676,080 37,281 28,417,607
Depreciation and amortization of property and
equipment 39,262 38,322 1,075,682
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942
Amortization of debt discounts and issuance
costs 134,503
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Other current assets (201,818) (323,002) (394,877)
Other assets 399 128 (136,942)
Accounts payable 418,266 (816,104) 3,074,766
Accrued expenses 7,386 986,442 897,148
Deferred revenue 3,707,297 (478,580) 4,103,076
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Net cash provided by (used in)
operating activities
2,050,151 (4,020,826) (51,667,394)
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INVESTING ACTIVITIES:
Purchase of property and equipment (34,012) (23,971) (1,599,467)
Restricted funds on deposit (4,236,985) 287,914 (4,767,171)
Advances to joint venture (135,002)
Proceeds from maturities of investment
securities 1,800,527
Purchases of investment securities (1,803,469)
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Net cash provided by (used in)
investing activities (4,270,997) 263,943 (6,504,582)
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FINANCING ACTIVITIES:
Advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
-6-
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 17,085,434
Payments of convertible preferred stock
dividends and for fractional shares of common
stock resulting from the conversions of
convertible preferred stock (405) (536) (5,219)
Net proceeds from issuance of common stock (6) 39,441 46,277,684
Additional capital contributed by stockholders 245,559
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Net cash provided by (used in) provided
by financing activities (411) 38,904 70,088,586
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,221,257) (3,717,979) 11,916,610
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 14,137,867 9,471,694 -
------------ ------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,916,610 $ 5,753,715 $ 11,916,610
============ ============ =============
NON-CASH FINANCING ACTIVITY - DEFERRED OFFERING
COSTS FINANCED WITH ACCOUNTS PAYABLE
See notes to condensed consolidated financial statements.
-7-
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared by Immtech Pharmaceuticals, Inc. and its subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC") and, in the opinion of management, include all
adjustments necessary for a fair statement of results for each period shown
(unless otherwise noted herein, all adjustments are of a normal recurring
nature). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted pursuant to such SEC rules and regulations. The Company believes
that the disclosures made are adequate to prevent the financial information
given from being misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's latest Annual Report on Form 10-K.
2. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech Pharmaceuticals, Inc. (a development
stage enterprise) and its subsidiaries (the "Company") are pharmaceutical
companies working to commercialize oral drugs to treat infectious diseases
by applying their proprietary aromatic cation technology platform to the
treatment of cancer, diabetes and other diseases. The Company has advanced
clinical programs that include new treatments for malaria, Pneumocystis
pneumonia ("PCP") and African sleeping sickness (trypanosomiasis), and drug
development programs for fungal infections, hepatitis C, and tuberculosis.
The Company has worldwide licensing and exclusive commercialization rights
to a large library of well-defined compounds from which a pipeline of
therapeutic products could be developed.
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-CH"), Georgia State University ("Georgia State"), Duke University
("Duke University") and Auburn University ("Auburn University")
(collectively, the "Scientific Consortium"). The Company is a development
stage enterprise and, since its inception on October 15, 1984, has engaged
in research and development programs, expanded its network of scientists
and scientific advisors and licensing technology agreements, and work to
commercialize the aromatic cation pharmaceutical technology platform (the
Company acquired its rights to the aromatic cation technology platform in
1997 and promptly thereafter commenced development of its current
programs). The Company uses the expertise and resources of strategic
partners and third parties in a number of areas, including: (i) laboratory
research, (ii) animal and human trials and (iii) manufacture of
pharmaceutical drugs.
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, 2007, if at all.
-8-
Since inception, the Company has incurred accumulated net losses of
approximately $87,549,000. Management expects the Company will continue to
incur significant losses during the next several years as the Company
continues development activities, clinical trials and commercialization
efforts. In addition, the Company has various research and development
agreements with third parties and is dependent upon such parties' abilities
to perform under these agreements. There can be no assurance that the
Company's activities will lead to the development of commercially viable
products. The Company's operations to date have consumed substantial
amounts of cash. The negative cash flow from operations is expected to
continue in the foreseeable future. The Company believes it will require
substantial additional funds to commercialize its drug candidates. The
Company's cash requirements may vary materially from those now planned when
and if the following become known: results of research and development,
results of clinical testing, responses to grant requests, formation and
development of relationships with strategic partners, changes in the focus
and direction of development programs, competitive and technological
advances, requirements in the regulatory process and other factors. Changes
in circumstances in any of the above areas may require the Company to
allocate substantially more funds than are currently available or than
management intends to raise.
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, complete the development and commercialization of drug candidates 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 Pharmaceuticals, Inc. and its wholly owned
subsidiaries. All inter-company balances and transactions have been
eliminated.
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-CH
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.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of June 30, 2006
and March 31, 2006, the Company owned approximately
-9-
28% of the issued and outstanding shares of NextEra common stock. The
Company has recognized an equity loss in NextEra to the extent of the basis
of its investment, and the investment balance is zero as of June 30, 2006
and March 31, 2006. Recognition of any investment income on the equity
method by the Company for its investment in NextEra will occur only after
NextEra has earnings in excess of previously unrecognized equity losses.
The Company does not provide, and has not provided, any financial
guarantees to NextEra.
Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to fifty years.
Leasehold improvements are amortized over the lesser of the life of the
related lease or their useful life.
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 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 carry-forwards 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
-10-
loss per share was the same as the basic net loss per share for the three
month periods ended June 30, 2006 and June 30, 2005, as none of the
Company's outstanding common stock options, warrants and the conversion
features of Series A, B, C, D and E Convertible Preferred Stock were
dilutive.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the three month periods ended June 30, 2006 and 2005,
respectively.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from these estimates.
3. STOCKHOLDERS' EQUITY
On January 7, 2004, the stockholders of the Company approved an increase in
the number of authorized common stock from 30 million to 100 million
shares. On June 14, 2004, the Company filed with the Secretary of State of
the State of Delaware an Amended and Restated Certificate of Incorporation
implementing, among other things, the approved authorized 70 million share
common stock increase from 30 million to 100 million shares of common
stock.
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 320,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series A Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share. Dividends
accrue at a rate of 6.0% per annum on the $25.00 stated value per share and
are payable semi-annually on April 15 and October 15 of each year while the
shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined.
Included in the carrying value of the Series A Convertible Preferred Stock
in the accompanying condensed consolidated balance sheets are $17,945 and
$39,785 of accrued preferred stock dividends at June 30, 2006 and March 31,
2006, respectively. Each share of Series A Convertible Preferred Stock may
be converted by the holder at any time into shares of our common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.42
conversion price (the "Conversion Price A"), subject to certain
adjustments, as defined in the Series A Certificate of Designation. On
April 15, 2006, the Company issued 5,547 shares of common stock and paid
$47 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2005, the Company issued 3,469 shares of common stock
and paid $117 in lieu of fractional common shares as dividends on the
preferred shares. During the three month periods ended June 30, 2006 and
2005 there were no conversions.
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
-11-
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, over the common stock and is pari
passu with all other outstanding series of preferred stock. 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 $5,307 and
$12,021 of accrued preferred stock dividends as of June 30, 2006 and March
31, 2006, respectively. Each share of Series B Convertible Preferred Stock
may be converted by the holder at any time into shares of common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.00
conversion price (the "Conversion Price B"), subject to certain
adjustments, as defined in the Series B Certificate of Designation. On
April 15, 2006, the Company issued 1,703 shares of common stock and paid
$31 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2005, the Company issued 1,526 shares of common stock
and paid $49 in lieu of fractional common shares as dividends on the
preferred shares. During the three month periods ended June 30, 2006 and
2005, there were no conversions.
The Company may at any time require that any or all outstanding shares of
Series B Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into which
the Series B Convertible Preferred Stock are convertible are registered
pursuant to an effective registration statement, as defined. The number of
shares of common stock to be received by the holders of the Series B
Convertible Preferred Stock upon a mandatory conversion by the Company is
determined by (i) dividing the Liquidation Price by the Conversion Price B,
provided that the closing bid price for the Company's common stock exceeds
$9.00 for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met, the
number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price B. The Conversion Price B is
subject to certain adjustments, as defined in the Series B Certificate of
Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series B Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series B Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends, over the
-12-
common stock and is pari passu with all other outstanding series of
preferred stock. 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. 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 $19,239 and $41,945
of accrued preferred stock dividends as of June 30, 2006 and March 31,
2006, respectively. Each share of Series C Convertible Preferred Stock may
be converted by the holder at any time into shares of common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.42
conversion price (the "Conversion Price C"), subject to certain
adjustments, as defined in the Series C Certificate of Designation. On
April 15, 2006, the Company issued 5,761 shares of common stock and paid
$95 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2005, the Company issued 4,625 shares of common stock
and paid $212 in lieu of fractional common shares as dividends on the
preferred shares. During the three month period ended June 30, 2006 there
were no conversions. During the three month period ended June 30, 2005,
certain preferred stockholders converted 9,116 shares of Series C
Convertible Preferred stock, including accrued dividends, for 51,622 shares
of common stock.
The Company may at any time require that any or all outstanding shares of
Series C Convertible Preferred Stock be converted into shares of the
Company's common stock, provided that the shares of common stock into which
the Series C Convertible Preferred Stock are convertible are registered
pursuant to an effective registration statement, as defined. The number of
shares of common stock to be received by the holders of the Series C
Convertible Preferred Stock upon a mandatory conversion by the Company is
determined by (i) dividing the Liquidation Price by the Conversion Price C
provided that the closing bid price for the Company's common stock exceeds
$9.00 for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met, the
number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price C. The Conversion Price C is
subject to certain adjustments, as defined in the Series C Certificate of
Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment
of the Liquidation Price to the holder of such shares, provided that the
holder does not convert the Series C Convertible Preferred Stock into
shares of common stock during the 30 day period. The Series C Convertible
Preferred Stock has a preference in liquidation equal to $25.00 per share,
plus any accrued and unpaid dividends, over the common stock and is pari
passu with all other outstanding series of preferred stock. 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.
-13-
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 $37,084 and
$80,914 of accrued preferred stock dividends as of June 30, 2006 and March
31, 2006, respectively. Each share of Series D Convertible Preferred Stock
may be converted by the holder at any time into shares of common stock at a
conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $9.00
conversion price (the "Conversion Price D"), subject to certain
adjustments, as defined in the Series D Certificate of Designation. On
April 15, 2006, the Company issued 11,134 shares of common stock and paid
$79 in lieu of fractional common shares as dividends on the preferred
shares. On April 15, 2005, the Company issued 9,219 shares of common stock
and paid $135 in lieu of fractional common shares as dividends on the
preferred shares. During the three month periods ended June 30, 2006 and
2005, there were no conversions.
The Company may at any time, require that any or all outstanding shares of
Series D Convertible Preferred Stock be converted into shares of our common
stock, provided that the shares of common stock into which the Series D
Convertible Preferred Stock are convertible are registered pursuant to an
effective registration statement, as defined. The number of shares of
common stock to be received by the holders of the Series D Convertible
Preferred Stock upon a mandatory conversion by us is determined by (i)
dividing the Liquidation Price by the Conversion Price D provided that the
closing bid price for the Company's common stock exceeds $18.00 for 20
consecutive trading days within 180 days prior to notice of conversion, as
defined, or (ii) if the requirements of (i) are not met, the number of
shares of common stock is determined by dividing 110% of the Liquidation
Price by the Conversion Price D. The Conversion Price D is subject to
certain adjustments, as defined in the Certificate of Designation.
The Series D Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends, over the
common stock and is pari passu with all other outstanding series of
preferred stock. 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.
Series E Convertible Preferred Stock -On December 13, 2005, the Company
filed a Certificate of Designation with the Secretary of State of the State
of Delaware designating 167,000 shares of the Company's 5,000,000
authorized shares of preferred stock as Series E 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 E Convertible Preferred Stock
in the accompanying condensed consolidated balance sheets are $35,031 and
$60,528 of accrued preferred stock dividends as of June 30, 2006 and March
31, 2006, respectively. Each share of Series E Convertible Preferred Stock
may be converted by the holder at any time into shares of common stock at a
conversion rate determined
-14-
by dividing the $25.00 stated value, plus any accrued and unpaid dividends
(the "Liquidation Price"), by a $7.04 conversion price (the "Conversion
Price E"), subject to certain adjustments, as defined in the Series E
Certificate of Designation. On April 15, 2006, the Company issued 8,819
shares of common stock and paid $135 in lieu of fractional common shares as
dividends on the preferred shares. During the three month period ended June
30, 2006, certain preferred stockholders converted 46,000 shares of Series
E Convertible Preferred Stock, including accrued dividends, for 163,847
shares of common stock.
The Company may at any time after December 1, 2006, require that any or all
outstanding shares of Series E Convertible Preferred Stock be converted
into shares of our common stock, provided that the shares of common stock
into which the Series E 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 E Convertible Preferred Stock upon a mandatory conversion by us is
determined by (i) dividing the Liquidation Price by the Conversion Price E
provided that the closing bid price for the Company's common stock exceeds
$10.56 for 20 out of 30 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 E. The Conversion
Price E is subject to certain adjustments, as defined in the Certificate of
Designation.
The Series E Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends, over the
common stock and is parri passu with all other outstanding series of
preferred stock. Each issued and outstanding share of Series E Convertible
Preferred Stock is entitled to 3.5511 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 E
Convertible Preferred stockholders and holders of any other outstanding
preferred stock shall vote together with the holders of common stock as a
single class.
The Company will, on December 13, 2008, at the Company's election, (i)
redeem the Series E Convertible Preferred Stock plus any accrued and unpaid
interest for cash, (ii) convert the Series E Convertible Preferred Stock
and any accrued and unpaid interest into common stock, or (iii) redeem and
convert the Series E Convertible Preferred Stock in any combination of (i)
or (ii).
Common Stock -On May 26, 2006, restricted shares in the amount of 5,000
shares of common stock were issued to Tulane University as part of the
Tulane License Agreement granting to us an exclusive license to develop,
manufacture and commercialize a group of 4 - aminoquinoline drugs for
treatment, prophylaxis and diagnosis of infectious diseases. The lead
candidate, AQ-13, is targeted as a candidate for treatment and prophylaxis
for malaria.
On May 26, 2006, restricted shares in the amount of 5,000 shares of common
stock were issued to T. Stephen Thompson as part of his retirement and
consulting agreement dated May 1, 2006.
Warrants - No warrants were exercised in the three month period ended June
30, 2006. During the three month period ended June 30, 2005, warrants to
purchase 1,800 shares of common stock were exercised, resulting in proceeds
to the Company of $11,646.
Incentive Stock Programs - 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
-15-
three month periods ended June 30, 2006 and 2005, 9,166 and 42,750 options,
respectively, previously granted under the 2000 Stock Incentive Plan
expired and were available to be reissued. During the three month periods
ended June 30, 2006 and 2005, the Company issued 56,000 and 30,000 options,
respectively, to purchase shares of common stock. Additionally, the Company
granted 5,000 restricted stock awards. As of June 30, 2006, there were a
total of 710,249 shares available for grant. The purchase price of shares
must be at least equal to the fair market value of the common stock on the
date of grant, and the maximum term of an option is 10 years. The options
generally vest over periods ranging from 0 to 4 years. During the three
month period ended June 30, 2006, 32,263 options were exercised on a
cashless basis resulting in 30,349 common shares being issued with an
exercise price of $0.47, while for the three month period ended June 30,
2005, 10,900 options were exercised with an exercise price of $2.55.
The following table summarizes information about stock options outstanding as of
June 30, 2006:
Options Outstanding Options Exercisable
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Shares Contractual Exercise Shares Contractual Exercise
Outstanding Life-Years Price Exercisable Life-Years Price
April 1, 2006 1,554,380 5.75 $9.25 1,115,167 5.75 $9.56
Granted 56,000 7.35
Exercised 0.47
(total
intrinsic
value was
$237,942).... (32,263)
Lapsed (9,166) 9.56
------------- ----------- ----------- ------------- -------------- ----------
June 30, 2006 1,568,951 6.05 $9.76 1,150,740 5.93 $9.76
============= =========== =========== ============= ============== ==========
The aggregate intrinsic value of options outstanding and exercisable at
June 30, 2006 was approximately $1,598,000 and $1,597,000, respectively.
The total unrecognized compensation cost related to all share-based
compensation plans at June 30, 2006 amounted to approximately $2,530,000
and is expected to be recognized over the next two years.
On April 1, 2006, the company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") no. 123 (revised 2004),
"Share-Based Payment," which requires that the fair value of share-based
awards be recorded in the results of operations. Under the revised
standard, awards issued prior to 2007 for which the requisite service has
not been rendered are charged to expense under the prior rules, and awards
issued after 2006 are charged to expense under the revised rules. Total
non-cash compensation expense charged against income in the period ended
June 30, 2006 for share-based plans totaled approximately $605,000. Through
March 31, 2006, the Company measured compensation cost using the intrinsic
value-based method of accounting for stock options granted to employees and
directors. The Company used the modified prospective method of adoption.
Under this method, prior years' financial results do not include the impact
of recording stock options using fair value. Had compensation cost been
determined using the fair
-16-
value-based accounting method in the three month period ended June 30,
2005, pro forma net income and earnings per share ("EPS") amounts would
have been as follows:
Three Months Ended June 30,
---------------------------
2005
Net loss attributable to common shareholders - as reported $(3,584,834)
Add: stock-based compensation expense included in reported
net loss 0
Deduct: total stock-based compensation expense determined
under fair value method for all awards (1,022,828)
-----------
Net loss attributable to common stockholders - pro forma $(4,606,963)
===========
Basic and diluted net loss per share attributable to common
stockholders - as reported $ (0.31)
===========
Basic and diluted net loss per share attributable to common
stockholders - pro forma $ (0.40)
===========
The weighted average fair value of an option granted in the three month
periods ended June 30, 2006 and 2005 was $7.35 and $11.86, respectively.
The fair value of an option grant was estimated using the Black-Scholes
option pricing model with the following assumptions:
Three Months Ended June 30,
2006 2005
Risk free interest rate 4.89% 4.12%
Average life of options (years) 6.0 10.0
Volatility 69% 92%
Dividend yield -0- -0-
The average risk-free interest rate is based on yields on ten-year zero
coupons - U.S. Treasury strips in effect as of the grant date. The average
life of the options is based upon historical data. We determined expected
volatility in the Black-Scholes model based upon two year historical data
at the end of each month for the three months ended June 30, 2005, and
implied volatility based upon exchange traded options for our common stock
for the three months ended June 30, 2006. Implied volatility better
reflects future market conditions and better indicates expected volatility
than purely historical volatility. There is no dividend yield.
4. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenue under various collaborative research agreements.
Under the terms of these arrangements, the Company generally has agreed to
perform best efforts research and development and, in exchange, the Company
may receive advanced cash funding, an allowance for management overhead,
and may also earn additional fees for the attainment of certain milestones.
-17-
The Company initially acquired its rights to the aromatic cation technology
platform developed by a consortium of universities consisting of UNC-CH,
Georgia State University, Duke University and Auburn University pursuant to
an agreement, dated January 15, 1997 (as amended, the "Consortium
Agreement") among the Company, UNC-CH and a third-party (to which each of
the other members of the scientific consortium shortly thereafter joined)
(the "original licensee"). The Consortium Agreement commits the parties to
collectively research, develop, finance the research and development of,
manufacture and market both the technology and compounds owned by the
scientific consortium and previously licensed or optioned to the original
licensee and licensed to the Company in accordance with the Consortium
Agreement (the "Current Compounds"), and all technology and compounds
developed by the scientific consortium after January 15, 1997, through use
of Company-sponsored research funding or National Cooperative Drug
Development grant funding made available to the scientific consortium (the
"Future Compounds" and, collectively with the Current Compounds, the
"Compounds").
The Consortium Agreement contemplated that upon the completion of our
initial public offering ("IPO") of shares of its common stock with gross
proceeds of at least $10,000,000 by April 30, 1999, the Company, with
respect to the Current Compounds, and UNC-CH, (on behalf of the Scientific
Consortium), with respect to Current Compounds and Future Compounds, would
enter into license agreements for the intellectual property rights relating
to the Compounds pursuant to which the Company would pay royalties and
other payments based on revenues received for the sale of products based on
the Compounds.
The Company completed an IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000 thereby earning a worldwide license and exclusive
rights to commercially use, manufacture, have manufactured, promote, sell,
distribute, or otherwise dispose of any products based directly or
indirectly on all of the Current Compounds and Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to the original
licensee or persons designated by the original licensee.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium
whereby the Company received the exclusive license to commercialize the
aromatic cation technology platform and compounds developed or invented by
one or more of the Consortium scientists after January 15, 1997 and which
also incorporated into such License Agreement the Company's existing
license with the Scientific Consortium with regard to the Current
Compounds. Also pursuant to the Consortium Agreement, the original licensee
transferred to the Company the worldwide license and exclusive right to
commercially use, manufacture, have manufactured, promote, sell, distribute
or otherwise dispose of any and all products based directly or indirectly
on aromatic cations developed by the Scientific Consortium on or prior to
January 15, 1997 and previously licensed (together with related technology
and patents) to the third-party.
The Consortium Agreement provides that the Company is required to pay to
UNC-CH 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-CH submits an invoice to the Company
for payment of patent-related fees related to current compounds or future
compounds incurred prior to the invoice date. The Company is also required
to make milestone payments in the form of the issuance of 100,000 shares of
its common stock to the Consortium when it files its first initial New Drug
Application ("NDA") or an
-18-
Abbreviated New Drug Application ("ANDA") based on Consortium technology.
The Company is also required to pay to UNC-CH 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-CH (on behalf of Duke
University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and
defend patents so long as the Company chooses to retain the license to such
patents.
During the three month periods ended June 30, 2006 and 2005, the Company
expensed approximately $237,000 and $211,000, respectively, of payments to
UNC-CH and certain other Scientific Consortium universities for patent
related costs and other contracted research. Included in accounts payable
as of June 30, 2006 and March 31, 2006, were approximately $660,000, and
$601,000, respectively, due to UNC and certain other Scientific Consortium
universities.
In November 2000, The Bill & Melinda Gates Foundation ("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-CH entered into a clinical research subcontract agreement with
the Company, whereby the Company was to receive up to $9,800,000, subject
to certain terms and conditions, over a five year period to conduct certain
clinical and research studies related to the Foundation grant.
In April 2003, the Foundation awarded a supplemental grant of approximately
$2,700,000 to UNC-CH for the expansion of phase IIB/III clinical trials to
treat human Trypanosomiasis (African sleeping sickness) and improved
manufacturing processes. The Company has received, pursuant to the clinical
research subcontract with UNC-CH, 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. In March 2006, the Company amended
and restated the clinical research subcontract with UNC-CH and UNC-CH in
turn obtained an expanded funding commitment for the Company of
approximately $13.6 million from the Foundation. Under the amended and
restated agreement, the Company received on May 24, 2006 the first payment
of approximately $5,649,000 of the five year approximately $13,601,000
contract.
Approximately $829,000 and $852,000 was utilized for clinical and research
purposes conducted and expensed during the three months ended June 30, 2006
and 2005, respectively. The Company has recognized revenues of
approximately $1,759,000 and $852,000 during the three months ended June
30, 2006 and 2005, respectively. The remaining amount (approximately
$3,890,000 as of June 30, 2006) has been deferred and will be recognized as
revenue over the term of the agreement as the services are performed.
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,
-19-
pursuant to which the Company, with the support of MMV and UNC-CH, pursuant
to which the Company, with the support of MMV and UNC-CH, conducted a proof
of concept study of the dicationic first drug candidate pafuramidine for
the treatment of malaria.
Under the terms of the Testing Agreement, MMV committed to pay for human
clinical trials and, subject to certain milestones, regulatory preparation
and filing costs for the approvals to market pafuramidine to treat malaria.
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-CH is
refunded to MMV at face value. The Company and MMV agreed to terminate the
Testing Agreement effective as of February 10, 2006. The Company has
received approximately $5,636,000 under this contract.
The Company recognized revenues of approximately $182,000 and $627,000
during the three month periods ended June 30, 2006 and 2005, respectively,
for expenses incurred related to activities within the scope of the Testing
Agreement. At June 30, 2006, the Company has approximately $213,000
recorded as deferred revenue with respect to this agreement.
As discussed elsewhere in the document, the Company received notification
of an award by the Arbitral Tribunal on June 9, 2006 finding that Neurochem
has breached the testing agreement and awarded the Company approximately
$1.9 million in damages and attorney's fees and costs, subject to review
and corrections by both parties within 30 days of the notification date. In
July the Company requested certain corrections to the award. The Company is
awaiting final resolution from the tribunal prior to recording the award in
the Company's consolidated financial statements.
* * * * * *
-20-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
----------------------
Forward Looking Statements
--------------------------
Certain statements contained in this quarterly report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "may", "intends", "plans", "believes", "anticipates" or
"expects" or similar words and may include statements concerning our strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this quarterly
report, the following: (i) we are in an early stage of product development, (ii)
the possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our product candidates not
to be viable, (v) uncertainties as to the requirement that a drug product be
found to be safe and effective after extensive clinical trials and the
possibility that the results of such trials, if completed, will not establish
the safety or efficacy of our drug product candidates, (vi) risks relating to
requirements for approvals by governmental agencies, such as the Food and Drug
Administration, before products can be marketed and the possibility that such
approvals will not be obtained in a timely manner or at all or will be
conditioned in a manner that would impair our ability to market our product
candidates successfully, (vii) the risk that our patents could be invalidated or
narrowed in scope by judicial actions or that our technology could infringe upon
the patent or other intellectual property rights of third parties, (viii) the
possibility that we will not be able to raise adequate capital to fund our
operations through the process of commercializing a successful product or that
future financing will be completed on unfavorable terms, (ix) the possibility
that any products successfully developed by us will not achieve market
acceptance and (x) other risks and uncertainties that may not be described
herein. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Results of Operations
---------------------
With the exception of certain research funding agreements and certain grants, we
have not generated any revenue from operations. For the period from inception
(October 15, 1984) to June 30, 2006, we incurred cumulative net losses of
approximately $87,549,000. 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 foundations and other collaborators under arrangements
that may be entered into in the future;
o grants from the United States government and other governments and
entities; and
o the issuance of securities or borrowing of funds.
The timing and amounts of grant and payment revenues, if any, will likely
fluctuate sharply and depend upon the achievement of specified milestones, and
results of operations for any period may be unrelated to the results of
operations for any other period.
-21-
Three Month Period Ended June 30, 2006 Compared with the Three Month Period
Ended June 30, 2005.
Revenues under collaborative research and development agreements were
approximately $1,942,000 and $1,479,000 for the three month periods ended June
30, 2006 and June 30, 2005, respectively. For the three month period ended June
30, 2006, we recognized revenues of approximately $1,759,000 related to a
clinical research subcontract agreement between us and The University of North
Carolina at Chapel Hill ("UNC-CH") and approximately $183,000 related to a grant
from Medicines for Malaria Venture ("MMV") to fund clinical studies and
licensure of DB289 for treatment of malaria which has since lapsed, while for
the three month period ended June 30, 2005, revenues recognized of approximately
$852,000 related to the abovementioned UNC-CH clinical research subcontract and
$627,000 related to the abovementioned MMV grant for treatment of malaria.
The clinical research subcontract agreement relates to a grant from a
philanthropic foundation (the "Foundation") to UNC-CH to develop new drugs to
treat trypanosomiasis (African sleeping sickness) and leishmaniasis. MMV also
receives funding from the Foundation. Grant and research and development
agreement revenue is recognized as completed under the terms of the respective
agreements, according to Company estimates. Grant and research and development
funds received prior to completion under the terms of the respective agreements
are recorded as deferred revenues.
Interest income for the three month period ended June 30, 2006 was approximately
$150,000. Interest income during the three month period ended June 30, 2005 was
approximately $58,000. The increase is primarily due to an increase in funds
invested from the prior corresponding quarter. There were no interest expenses
during the three month periods ended June 30, 2006 and June 30, 2005.
Research and development expenses increased to approximately $2,469,000 from
$2,269,000 for the three month periods ended June 30, 2006 and June 30, 2005,
respectively. Expenses relating to the MMV testing agreement and the UNC
subcontract, respectively, decreased from approximately $624,000 and $849,000 in
the three month period ended June 30, 2005 to approximately $182,000 and
$825,000 in the three month period ended June 30, 2006. Additionally, contract
services relating to trials for treatment of pneumocystis pneumonia increased
from approximately $385,000 to approximately $1,125,000 in the same periods.
Non-cash options expense under research and development increased from
approximately $11,000 in the three month period ended June 30, 2005 to
approximately $177,000 in the three month period ended June 30, 2006. Adopting
SFAS 123(R) accounted for approximately $143,000 of the $177,000 in the three
month period ended June 30, 2006. Other research and development expenses
decreased approximately $240,000 from the three month period ended June 30, 2005
to the three month period ended June 30, 2006.
General and administrative expenses decreased to approximately $2,220,000 from
approximately $2,732,000 during the three month periods ended June 30, 2006, and
June 30, 2005, respectively. The decrease was largely due to decreased legal
fees, primarily concerning legal proceedings with Neurochem (see Part II, Item
1), which decreased from approximately $1,400,000 in the three month period
ended June 30, 2005, to approximately $182,000 in the three month period ended
June 30, 2006. Patent fees remained fairly constant over the three month periods
ended June 30, 2005 and 2006, with charges of approximately $165,000 and
$163,000, respectively. Payroll and related costs also remained relatively
constant having decreased from approximately $391,000 in the three month period
ended June 30, 2005 to approximately $384,000 in the three month period ended
June 30, 2006. Non-cash general and administrative expenses increased from
approximately $26,000 in the three month period ended June 30, 2005 to
approximately $499,000 in the three month period ended June 30, 2006. Adopting
SFAS 123 (R) accounted for approximately $413,000 of the $499,000 in the three
month period ended June 30, 2006. Other general and administrative costs
increased by approximately $242,000 over the same periods.
-22-
Our net loss decreased to approximately $2,597,000 from approximately $3,465,000
during the three month periods ended June 30, 2006 and June 30, 2005,
respectively. The decrease was primarily attributable to the decrease in legal
costs offset by the adoption of SFAS 123(R).
Liquidity and Capital Resources
As of June 30, 2006, cash and cash equivalents were approximately $11,917,000.
We spent approximately $34,000 on equipment purchases during the three month
period ended June 30, 2006, compared to $24,000 for equipment expenditures
during the same period in the previous year. No significant purchases of
equipment are anticipated by us during the year ending March 31, 2007.
We periodically receive cash from the exercise of common stock options and
warrants. During the three month period ended June 30, 2006, we did not receive
any proceeds for the exercise of options or warrants. During the three month
period ended June 30, 2005, we received approximately $27,000 from the exercise
of options. Warrant holders exercised warrants to purchase 1,800 shares of
common stock resulting in gross proceeds to us of approximately $12,000.
We believe our existing unrestricted cash and cash equivalents and the grants we
have received or have been awarded and are awaiting disbursement of, will be
sufficient to meet our planned expenditures through at least August 2007,
although there can be no assurance we will not require additional funds.
Through June 30, 2006, we 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
$70,089,000;
o payments from research agreements, foundation grants and SBIR grants
and STTR program grants of approximately $22,706,000; and
o the use of stock, options and warrants in lieu of cash compensation.
Our cash resources have been used to finance, develop and begin
commercialization of drug product candidates, including sponsored research,
conduct of human clinical trials, capital expenditures, expenses associated with
development of product candidates pursuant to an agreement, dated January 15,
1997, (the "Consortium Agreement"), among us and UNC (to which each of Duke
University, Auburn University and Georgia State University agreed shortly
thereafter to become a party, and all of which, collectively with UNC, are
referred to as the "Consortium") and, as contemplated by the Consortium
Agreement, under a license agreement dated January 28, 2002 ("Consortium License
Agreement") with the Consortium, and general and administrative expenses. Over
the next several years we expect to incur substantial additional research and
development costs, including costs related to research in pre-clinical
(laboratory) and human clinical trials, administrative expenses to support our
research and development operations and marketing expenses to launch the sale of
any commercialized product that may be developed.
Our future working capital requirements will depend upon numerous factors,
including the progress of research, development and commercialization programs
(which may vary as product candidates are added or abandoned), results of
pre-clinical testing and human clinical trials, achievement of regulatory
-23-
milestones, third party collaborators fulfilling their obligations to us, the
timing and cost of seeking regulatory approvals, the level of resources that we
devote to the engagement or development of manufacturing capabilities including
the build-out of our subsidiary's facility in China, our ability to maintain
existing and to establish new collaborative arrangements with others to provide
funding to support these activities, and other factors. In any event, we will
require substantial additional funds in addition to our existing resources to
develop product candidates and to otherwise meet our business objectives.
Management's plans for the remainder of the fiscal year, in addition to normal
operations, include continuing their efforts to create joint ventures, obtain
additional grants and to develop and enter into research, development and/or
commercialization agreements with others. Subject to management's strategic
development plan, we are going to continue financing efforts by raising
additional capital through equity or debt issuance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
-----------------------------------------------------------
The exposure of market risk associated with risk-sensitive instruments is not
material, as our operations are conducted primarily in U.S. dollars and we
invest primarily in short-term government obligations and other cash
equivalents. We intend to develop policies and procedures to manage market risk
in the future if and when circumstances require.
Item 4. Controls and Procedures.
------------------------
Disclosures and Procedures
We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Our Chief Executive Officer and Chief
Financial Officer are responsible for establishing and maintaining these
procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of our disclosure controls and
procedures, which took place as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer believe that these procedures are effective to ensure that we are able
to collect, process and disclose the information we are required to disclose in
the reports we file with the SEC within the required time periods.
Internal Controls
We maintain a system of internal controls designed to provide reasonable
assurance that: (1) transactions are executed in accordance with management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit preparation of financial statements in conformity with generally
accepted accounting principles and (ii) maintain accountability for assets.
Access to assets is permitted only in accordance with management's general or
specific authorization and the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Changes in Internal Controls
We have not made any material changes in our internal control over financial
reporting during the quarter ended June 30, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
-24-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
------------------
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging that Neurochem misappropriated the Company's trade
secrets by filing a series of patent applications relating to compounds
synthesized and developed by the scientific 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 amyloid diseases. 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.
Since the filing of the complaint, Neurochem had aggressively sought to have an
International Chamber of Commerce ("ICC") arbitration panel hear this dispute,
as opposed to the federal district court in which the action was originally
filed. The Company agreed to have a three member ICC arbitration panel (the
"Arbitration Panel") hear and rule on the dispute on the expectation that the
Arbitration Panel would reach a more timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005. Final papers
were filed by both parties on November 2, 2005. The ICC tribunal closed the
hearing on April 17, 2006. On June 9, 2006, the International Court of
Arbitration of the ICC notified the parties that (i) the Arbitral Tribunal found
that Neurochem breached the testing agreement and awarded Immtech approximately
$1.9 million in damages and attorneys' fees and costs, and (ii) denied all of
Neurochem's claims against Immtech.
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. In 2005, one of the counts in the case was
dismissed upon the Company's motion for summary judgment. The Company has filed
pre-trial motions regarding the evidence to be introduced at the trial of the
remaining counts, including a motion to preclude disclosure of evidence of Von
der Ruhr's alleged damages. Those pre-trial motions are pending. The case is
likely to be set for trial sometime in 2006 or 2007.
Item 1A. Risk Factors
------------
There are no material changes in risk factors previously disclosed in Item 1A to
Part I of our Form 10-K for the fiscal year ended March 31, 2006.
-25-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
------------------------------------------------------------
Recent Sales of Unregistered Securities.
----------------------------------------
All such shares of common stock herein described as issuances below were
made pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Restricted Stock
On May 26, 2006, restricted stock in the amount of 5,000 common shares
was issued to Tulane University under the terms of the license agreement for
rights to AQ-13. On May 26, 2006 restricted stock in the amount of 5,000 common
shares was issued to an individual for services rendered.
Option Exercise
On April 12, 2006, options to purchase 32,263 shares with an exercise price of
$0.47 per share were exercised on a cashless basis. Common shares in the amount
of 30,349 were issued along with a check for $6 in lieu of fractional shares.
Conversion of Preferred Stock to Common Stock.
During May 2006 certain holders of Series E Convertible Preferred Stock, $0.01
par value ("Series E Stock") converted an aggregate of 46,000 shares of Series E
Preferred Stock into an aggregate of 163,847 shares of our common stock.
Preferred Stock Dividend Payment.
On April 15, 2006, we issued 32,964 shares of common stock as payment of a
dividend earned on outstanding preferred stock to the holders thereof: holders
of Series A Stock earned 5,547 shares of common stock on 58,400 outstanding
shares; holders of Series B Stock earned 1,703 shares of common stock on 13,464
outstanding shares; holders of Series C Stock earned 5,761 shares of common
stock on 45,536 outstanding shares; holders of Series D Stock earned 11,134
shares of common stock on 117,200 outstanding shares; and holders of Series E
Stock earned 8,819 shares of common stock on 156,600 outstanding shares. We also
paid holders of our outstanding preferred stock $387 in cash in lieu of
fractional shares.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 5. Other Information.
------------------
None
Item 6. Exhibits.
---------
Exhibits
--------
-26-
Exhibit Index
-------------
3.1 (5) Amended and Restated Certificate of Incorporation
of the Company, dated June 14, 2004
3.2 (6) Certificate of Correction to Certificate of
Incorporation dated December 14, 2005.
3.3 (7) Certificate of Amendment (Name Change) to
Certificate of Incorporation dated March 22, 2006.
3.4 (1) Certificate of Designation for Series A
Convertible Preferred Stock Private Placement,
dated February 14, 2002
3.5 (2) Certificate of Designation for Series B
Convertible Preferred Stock Private Placement,
dated September 25, 2002
3.6 (3) Certificate of Designation for Series C
Convertible Preferred Stock Private Placement,
dated June 6, 2003
3.7 (4) Certificate of Designation for Series D
Convertible Preferred Stock Private Placement,
dated January 15, 2004
3.8 (6) Certificate of Designation for Series E
Convertible Preferred Stock Private Placement,
dated December 13, 2005
3.9 (7) Amended and Restated Bylaws of the Company
effective as of March 22, 2006.
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
-27-
(1) Incorporated by Reference to our Form 8-K (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002.
(2) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on September 25, 2002.
(3) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 10, 2003.
(4) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on January 21, 2004.
(5) Incorporated by Reference to our Form 10-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 14, 2004.
(6) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 14, 2005.
(7) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on March 23, 2006.
-28-
SIGNATURES
Pursuant to 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 PHARMACEUTICALS, INC.
Date: August 9, 2006 By: /s/ Eric L. Sorkin
------------------
Eric L. Sorkin
President and Chief Executive Officer
Date: August 9, 2006 By: /s/ Gary C. Parks
-----------------
Gary C. Parks
Treasurer, Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)