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 March 31, 2004
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: 0-12104
IMMUNOMEDICS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1009366
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
300 AMERICAN ROAD, MORRIS PLAINS, NEW JERSEY 07950
(Address of principal executive offices) (Zip Code)
(973) 605-8200
(Registrant's Telephone Number, Including Area Code)
Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report: Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of shares of the Registrant's common stock outstanding as of
May 11, 2004 was 49,883,193.
IMMUNOMEDICS, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page No.
--------
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of March 31, 2004
(unaudited) and June 30, 2003..................................3
Consolidated Statements of Operations
and Comprehensive Income (Loss) for the
Three Months and Nine Months Ended
March 31, 2004 and 2003 (unaudited)............................4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2004 and 2003 (unaudited)..........5
Notes to Unaudited Consolidated Financial Statements...........6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................23
ITEM 4. CONTROLS AND PROCEDURES.......................................24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.............................................24
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES................................25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS...........................................25
ITEM 5. OTHER INFORMATION.............................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................26
SIGNATURES............................................................... 27
2
ITEM 1. FINANCIAL STATEMENTS
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, June 30,
2004 2003
---------------- ----------------
ASSETS (UNAUDITED)
Current Assets:
Cash and cash equivalents.................................................. $ 14,058,703 $ 13,601,627
Marketable securities...................................................... 5,492,950 10,194,813
Restricted securities...................................................... 1,275,200 1,381,466
Accounts receivable, net of allowance for doubtful accounts of $382,152
and $381,681, at March 31, 2004 and June 30, 2003,
respectively.......................................................... 1,313,284 930,134
Inventory.................................................................. 630,795 839,480
Other current assets....................................................... 1,004,519 825,372
---------------- ----------------
Total current assets....................................... 23,775,451 27,772,892
Property and equipment, net of accumulated depreciation of $12,687,607 and
$11,247,869, at March 31, 2004 and June 30, 2003,
respectively.......................................................... 11,743,353 12,298,971
Restricted securities........................................................... 4,144,400 4,994,534
Other long-term assets.......................................................... 77,788 63,157
---------------- ----------------
$ 39,740,992 $ 45,129,554
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt.......................................... $ 1,275,200 $ 1,381,466
Accounts payable........................................................... 2,698,486 1,432,175
Other current liabilities.................................................. 3,071,080 3,183,571
---------------- ----------------
Total current liabilities.................................. 7,044,766 5,997,212
---------------- ----------------
Long-term debt.................................................................. 14,144,400 4,994,534
Minority interest............................................................... 406,744 471,044
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 10,000,000 shares; no shares
issued and outstanding at March 31, 2004 and June 30, 2003............. - -
Common stock, $0.01 par value; authorized 70,000,000 shares; issued and
outstanding, 49,890,693 and 49,878,193 shares at March 31, 2004 and
June 30, 2003, respectively........................................... 498,907 498,782
Capital contributed in excess of par...................................... 159,159,949 159,037,244
Treasury stock, at cost, 34,725 shares.................................... (458,370) (458,370)
Accumulated deficit........................................................ (141,432,351) (125,902,490)
Accumulated other comprehensive income.................................... 376,947 491,598
---------------- ----------------
Total stockholders' equity................................. 18,145,082 33,666,764
---------------- ----------------
$ 39,740,992 $ 45,129,554
================ ================
See accompanying notes to unaudited consolidated financial statements.
3
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- ----------------------------
2004 2003 2004 2003
------------------------------- ----------------------------
Revenues: (UNAUDITED)
Product sales.......................................... $ 1,053,616 $ 1,088,012 $ 2,790,668 $ 2,633,113
License fee and other revenues......................... 54,043 4,518,709 460,003 9,304,487
Research and development............................... 43,749 8,428 143,749 33,710
------------- -------------- ------------- -------------
Total revenues.................................... 1,151,408 5,615,149 3,394,420 11,971,310
------------- -------------- ------------- -------------
Costs and Expenses:
Costs of goods sold.................................... 112,770 159,156 385,439 419,136
Research and development............................... 5,221,194 4,861,759 15,726,693 13,382,048
Sales and marketing.................................... 353,985 356,933 962,739 1,050,919
General and administrative............................. 961,836 768,553 2,512,260 2,896,004
------------- -------------- ------------- -------------
Total costs and expenses.......................... 6,649,785 6,146,401 19,587,131 17,748,107
------------- -------------- ------------- -------------
Operating loss.............................................. (5,498,377) (531,252) (16,192,711) (5,776,797)
Interest and other income.............................. 116,125 282,878 426,566 871,292
Interest expense....................................... (81,835) - (120,706) -
Minority interest...................................... 20,314 23,823 64,300 66,245
Foreign currency transaction gain (loss)................ 12,842 (66,906) 21,840 (122,882)
------------- -------------- ------------- -------------
Loss before income tax....................................... (5,430,931) (291,457) (15,800,711) (4,962,142)
Income tax (expense) benefit................................. (58,187) 744,756 270,850 744,756
------------- -------------- ------------- -------------
Net (loss) income............................................ $ (5,489,118) $ 453,299 $ (15,529,861) $ (4,217,386)
============= ============== ============= =============
Per share data (basic and diluted):
Net (loss) income............................................ $ (0.11) $ 0.01 $ (0.31) $ (0.08)
============= ============== ============= =============
Weighted average number of common shares outstanding......... 49,887,644 49,878,193 49,884,120 49,877,788
============= ============== ============= =============
Comprehensive (loss) income:
Net (loss) income....................................... $ (5,489,118) $ 453,299 $ (15,529,861) $ (4,217,386)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments............ (53,731) 96,094 98,660 188,943
Unrealized gain (loss) on securities available for
sale............................................. (25,210) (86,549) (213,311) (73,187)
------------- -------------- ------------- -------------
Other comprehensive income (loss)....................... (78,941) 9,545 (114,651) 115,756
------------- -------------- ------------- -------------
Comprehensive (loss) income.................................. $ (5,568,059) $ 462,844 $ (15,644,512) $ (4,101,630)
============= ============== ============= =============
See accompanying notes to unaudited consolidated financial statements.
4
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31,
-------------------------------
2004 2003
-------------- --------------
Cash flows from operating activities: (UNAUDITED)
Net loss.................................................................. $ (15,529,861) $ (4,217,386)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation................................................................... 1,439,738 1,018,678
Minority interest.............................................................. (64,300) (66,245)
Provision for allowance for doubtful accounts.................................. (32,164) 37,722
Amortization of bond premium................................................... 174,231 187,486
Non-cash expense relating to issuance of stock options......................... 79,830 439,830
Changes in operating assets and liabilities.................................... 916,401 288,736
Deferred revenue............................................................... - (7,475,728)
-------------- --------------
Net cash used in operating activities..................................... (13,016,125) (9,786,907)
-------------- --------------
Cash flows from investing activities:
Purchases of marketable securities........................................ (749,977) (9,979,667)
Proceeds from sales and maturities of marketable securities............... 6,020,698 24,403,072
Purchases of property and equipment....................................... (884,120) (6,330,088)
-------------- --------------
Net cash provided by investing activities................................. 4,386,601 8,093,337
-------------- --------------
Cash flows from financing activities:
Issuance of senior convertible notes...................................... 10,000,000 -
Exercise of stock options................................................. 43,000 1,336
Payments of debt.......................................................... (956,400) -
-------------- --------------
Net cash provided by financing activities................................. 9,086,600 1,336
-------------- --------------
Net increase (decrease) in cash and cash equivalents........................... 457,076 (1,692,234)
Cash and cash equivalents, beginning of period................................. 13,601,627 13,062,954
-------------- --------------
Cash and cash equivalents, end of period....................................... $ 14,058,703 $ 11,370,720
============== ==============
See accompanying notes to unaudited consolidated financial statements.
5
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Reference is made to the Annual Report on Form 10-K of Immunomedics, Inc.,
a Delaware corporation ("Immunomedics," the "Company," "we," "our" or "us") for
the year ended June 30, 2003, which contains our audited consolidated financial
statements and the notes thereto.
1. BUSINESS OVERVIEW AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
Immunomedics, which incorporate our majority-owned subsidiaries, have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, the statements do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete annual financial statements. With respect to
the financial information for the interim periods included in this Quarterly
Report on Form 10-Q, which is unaudited, management believes that all
adjustments necessary for a fair presentation of the results for such interim
periods have been included. The balance sheet at June 30, 2003 has been derived
from the Company's audited 2003 consolidated financial statements. Operating
results for the three and nine-month periods ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending June 30, 2004, or any other period. Certain adjustments and
reclassifications were made to conform to the current year presentation.
The Company has never achieved profitable operations on an annual basis
and there is no assurance that profitable operations, if achieved, could be
sustained on a continuing basis. Further, its ability to achieve profitability
will depend on numerous factors, including, without limitation, the following:
o the Company's ability to identify compounds with diagnostic and/or
therapeutic value, and then conduct and complete clinical trials for
such product candidates on a timely basis;
o the Company's ability to comply with all applicable federal, state
and foreign legal requirements, including, without limitation, those
promulgated by the U.S. Food and Drug Administration;
o the Company's ability to obtain additional financial resources on
commercially acceptable terms or at all; and
o many other factors associated with the commercial development of
therapeutic and diagnostic products outside of the Company's
control.
Since inception in 1982, the Company has relied primarily upon the private
and public sale of its equity securities and, more recently, of its convertible
debt securities, to fund operations. It has also received limited revenues from
research and development alliances and, more recently, from commercial sales of
two diagnostic imaging products. While the Company believes that its existing
resources should be sufficient to meet its capital and liquidity requirements
for at least the next twelve months, these resources could be expended more
rapidly for many reasons, including unexpected changes in the Company's research
and development activities, as well as other factors affecting its operating
expenses and capital expenditures. There can be no assurance that it will be
able to obtain additional capital when needed on acceptable terms, if at all.
6
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND PRESENTATION
The consolidated financial statements include the accounts of Immunomedics
and its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Minority interest is
recorded for a majority-owned subsidiary.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 reported period. Actual results could differ from those estimates.
FOREIGN CURRENCIES
For subsidiaries outside of the United States that operate in a local
currency environment, income and expense items are translated to United States
dollars at the monthly average rates of exchange prevailing during the year,
assets and liabilities are translated at the period-end exchange rates, and
equity accounts are translated at historical exchange rates. Translation
adjustments are accumulated in a separate component of stockholders' equity in
the Consolidated Balance Sheets and are included in the determination of
comprehensive income in the Consolidated Statements of Stockholders' Equity.
Transaction gains and losses are included in the determination of net income in
the Consolidated Statements of Operations and Comprehensive Income (Loss).
CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid investments with original
maturities of three months or less, at the time of purchase, to be cash
equivalents.
Immunomedics' investments in cash equivalents and marketable securities
are classified as available for sale securities. The portfolio at March 31, 2004
primarily consisted of corporate debt securities and municipal bonds.
CONCENTRATION OF CREDIT RISK
Cash, cash equivalents and marketable securities are financial instruments
that potentially subject the Company to concentration of credit risk.
Immunomedics invests its cash in debt instruments of financial institutions and
corporations with strong credit ratings. The Company has established guidelines
relative to diversification and maturities that are designed to help ensure
safety and liquidity. These guidelines are periodically reviewed to take
advantage of trends in yields and interest rates. The Company has historically
held the investments to maturity. However, the Company has the ability to sell
these investments before maturity and has therefore classified the investments
as available for sale. The Company has never experienced any significant losses
on investments.
INVENTORY
Inventory is stated at the lower of average cost (which approximates
first-in, first-out) or market, and includes materials, labor and manufacturing
overhead. As of March 31, 2004, the inventory balance consisted of approximately
$630,000 of finished goods as compared to $839,000 as of June 30, 2003.
7
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives (5-10 years) of the
respective assets. Leasehold improvements are capitalized and amortized over the
lesser of the life of the lease or the estimated useful life of the asset. The
Company reviews long-lived assets for impairment whenever events or changes in
business circumstances occur that indicate that the carrying amount of the
assets may not be recoverable. The Company assesses the recoverability of
long-lived assets held and to be used based on undiscounted cash flows, and
measures the impairment, if any, using discounted cash flows.
REVENUE RECOGNITION
Payments received under contracts to fund certain research activities are
recognized as revenue in the period in which the research activities are
performed. Payments received in advance that are related to future performance
are deferred and recognized as revenue when the research projects are performed.
Upfront, nonrefundable fees associated with license and development agreements
where the Company has continuing involvement in the agreement are recorded as
deferred revenue and recognized over the estimated service period. If the
estimated service period is subsequently modified, the period over which the
upfront fee is recognized is modified accordingly on a prospective basis.
Revenues from the achievement of research and development milestones are
recognized when the milestones are achieved.
Revenue from the sale of diagnostic products is recorded when there is
persuasive evidence that an arrangement exists, delivery has occurred, the price
is fixed and determinable and collectability is reasonably assured. Allowances,
if any, are established for uncollectible amounts, estimated product returns and
discounts.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities relate to the expected future tax
consequences of events that have been recognized in the Company's consolidated
financial statements and tax returns.
Benefits received resulting from the sale of our New Jersey state net
operating losses ("NOL") are recognized as a tax benefit when the NOL is
approved for sale by the state of New Jersey. A valuation allowance is provided
when it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
NET LOSS PER SHARE ALLOCABLE TO COMMON STOCKHOLDERS
Net loss per basic and diluted common share allocable to common
stockholders is based on the net loss for the relevant period, divided by the
weighted-average number of common shares outstanding during the period. For
purposes of the diluted net loss per common share calculations, the exercise or
conversion of all potential common shares is not included because their effect
would have been anti-dilutive, due to the net loss recorded for the nine-month
period ended March 31, 2004 and 2003. The common stock equivalents excluded from
the diluted per share calculation are 4,437,250 and 3,617,750 shares at March
31, 2004 and 2003, respectively.
8
COMPREHENSIVE INCOME (LOSS)
Comprehensive loss consists of net loss, net unrealized gains (losses) on
securities available for sale and certain foreign exchange changes and is
presented in the Consolidated Statements of Operations and Comprehensive Income
(Loss).
STOCK-BASED COMPENSATION
Immunomedics applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, in accounting for its
fixed plan stock options. As such, compensation expense would be recorded on the
date of grant only if the then-current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation, established
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of SFAS No. 123.
Had the Company determined compensation cost based on the fair value at
the grant date consistent with the provisions of SFAS No. 123, the Company's net
loss allocable to common stockholders and related per share amounts would have
been the pro forma amounts indicated below:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------------------- ----------------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss), as reported $(5,489,118) $ 453,299 $ (15,529,861) $ (4,217,386)
Add: Stock-based employee
compensation expense 26,610 26,610 79,830 79,830
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards (2,054,484) (1,971,735) (6,306,110) (5,898,329)
----------- ------------ -------------- -------------
Pro forma net loss $ (7,516,992) $ (1,491,826) $ (21,756,141) $ (10,035,885)
=========== ============ ============== =============
(Loss) earnings per share:
-as reported $(0.11) $0.01 $(0.31) $(0.08)
-pro forma $(0.15) $(0.03) $(0.44) $(0.20)
9
3. MARKETABLE SECURITIES AND RESTRICTED SECURITIES
Immunomedics utilizes SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities, to account for investments in marketable securities.
Under this accounting standard, securities for which there is not the positive
intent and ability to hold to maturity are classified as available-for-sale and
are carried at fair value. Unrealized holding gains and losses, which are deemed
to be temporary, on securities classified as available-for-sale are classified
as a separate component of accumulated other comprehensive income (loss).
Immunomedics considers all of its current investments to be available-for-sale.
Marketable securities and restricted securities at March 31, 2004 and June 30,
2003 consist of the following ($ in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
------------------------------------ --- ---------- ---------- ---------- ------ --------- -- ---- -----------
March 31, 2004
--------------
Municipal Bonds/Agency $ 7,402 $ 12 $ (12) $ 7,402
Corporate Debt Securities 3,416 94 - 3,510
----------- ---------- ---------- ----------
$ 10,818 $ 106 $ (12) $ 10,912
=========== ========== ========== ==========
June 30, 2003
-------------
Municipal Bonds $ 7,017 $ 14 $ (9) $ 7,022
Corporate Debt Securities 9,293 256 - 9,549
----------- ---------- ---------- ----------
$ 16,310 $ 270 $ (9) $ 16,571
=========== ========== =========== ==========
Restricted securities at March 31, 2004 and June 30, 2003 of approximately
$5,419,600 and $6,376,000, respectively, are included in the table above. There
is approximately $69,000 and $22,000 of unrealized losses included in cash
equivalents at March 31, 2004 and June 30, 2003, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following ($ in thousands):
March 31, 2004 June 30, 2003
-------------- -------------
Machinery and equipment $ 5,150 $ 4,613
Leasehold improvements 17,226 16,951
Furniture and fixtures 766 766
Computer equipment 1,289 1,217
----------- ---------
24,431 23,547
Accumulated depreciation and
amortization (12,688) (11,248)
----------- ---------
$ 11,743 $ 12,299
=========== =========
5. GEOGRAPHIC SEGMENT
Immunomedics manages its operations as one line of business focused on the
use of monoclonal antibodies to detect and treat cancer and other serious
diseases, which the Company currently reports as a
10
single industry segment. The Company and its subsidiaries currently market and
sell one diagnostic imaging product in the United States and two diagnostic
imaging products throughout Europe.
The following tables present financial information based on the geographic
location of its facilities for the three and nine-month periods ended March 31,
2004 and 2003 (total revenues include product sales revenue, license fee and
other revenues and research and development revenue) ($ in thousands):
THREE MONTHS ENDED
March 31, 2004
--------------
United
States Europe Total
------ ------ -----
Total revenues $225 $926 $1,151
Net income (loss) (6,014) 525 (5,489)
March 31, 2003
--------------
United
States Europe Total
------ ------ -----
Total revenues $4,679 $936 $5,615
Net income (loss) (114) 568 453
NINE MONTHS ENDED
March 31, 2004
--------------
United
States Europe Total
------ ------ -----
Total revenues $978 $2,416 $3,394
Net income (loss) (16,921) 1,391 (15,530)
Total assets 36,874 2,867 39,741
March 31, 2003
--------------
United
States Europe Total
------ ------ -----
Total revenues $9,806 $2,165 $11,971
Net income (loss) (5,449) 1,232 (4,217)
Total assets 40,359 2,838 43,197
6. RELATED PARTY TRANSACTIONS
Certain of the Company's affiliates, including members of senior
management and its Board of Directors, as well as their respective family
members and other affiliates, have relationships and agreements among themselves
as well as with the Company and its affiliates, that create the potential for
both real, as well as perceived, conflicts of interest. These include Dr. David
M. Goldenberg, the Chairman of the Board of Directors and Chief Strategic
Officer, Ms. Cynthia L. Sullivan, the President and Chief Executive Officer, and
certain companies with which the Company does business, including the Center for
Molecular Medicine and Immunology ("CMMI"). Dr. Goldenberg and Ms. Sullivan are
husband and wife. For a description of these relationships and transactions, see
the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003
and the notes to the audited financial statements contained therein.
The Company reimbursed CMMI for expenses incurred on behalf of
Immunomedics, including amounts incurred pursuant to research contracts, in the
amount of approximately $70,000
11
and $69,000 for the nine-month periods ended March 31, 2004 and 2003,
respectively. It also provides to CMMI, at no cost, laboratory materials and
supplies. However, any inventions made independently of the Company at CMMI are
the property of CMMI.
During the nine-month periods ended March 31, 2004 and 2003, the Board of
Directors authorized grants to CMMI of $306,000 and $290,000, respectively, to
support research and clinical work being performed at CMMI, such grants to be
expended in a manner deemed appropriate by the Board of Trustees of CMMI.
For each of the nine-month periods ended March 31, 2004 and 2003, Dr.
Goldenberg received $41,250 in compensation for his services to IBC
Pharmaceuticals, Inc., a Delaware corporation and a majority-owned subsidiary of
the Company ("IBC"). The Company owns approximately 74% of the capital stock of
IBC. Dr. Goldenberg owns approximately 18% of the capital stock of IBC, and the
remaining 8% of IBC is held by various third parties, some of whom are adult
members of Dr. Goldenberg's family, as to which shares Dr. Goldenberg disclaims
beneficial ownership.
7. LICENSE AND DISTRIBUTION AGREEMENTS
On December 17, 2000, the Company entered into a Development and License
Agreement (the "Amgen Agreement") with Amgen Inc. ("Amgen"), whereby Amgen
obtained exclusive rights to continue the clinical development and
commercialization in North America and Australia of the Company's unlabeled, or
"naked," CD22 antibody compound, epratuzumab, for the treatment of patients with
non-Hodgkin's lymphoma.
The Company received an up-front payment of $18,000,000 that was
recognized, beginning February 2001, as revenue of $750,000 per month over a
period of 24 months. As of February 2003, this up-front payment was fully
recognized as "License fee and other revenues." Accordingly, the Company
recognized $0 and $5,250,000 as "License fee and other revenues" for the
nine-month periods ended March 31, 2004, and 2003, respectively. Costs incurred
relating to the manufacture of the materials supplied to Amgen were recorded as
research and development expense as incurred. During the nine-month periods
ended March 31, 2004, and 2003, the Company incurred $275,000 and $1,317,000,
respectively, of costs associated with supplying materials to Amgen.
In June 2002, the Company granted a non-exclusive license to Daiichi Pure
Chemicals Co. under Immunomedics' carcinoembryonic antigen (CEA) patents. In
addition, the Company recorded a royalty of $135,000 and $184,000 for the
nine-month periods ended March 31, 2004, and 2003, respectively, as "License fee
and other revenues" under that license.
In October 2003, the Company entered into a research collaboration with
Schering AG of Berlin, Germany, involving bispecific antibody, pretargeting
technologies for cancer therapy being developed by IBC.
8. DEBT
In January 2004, the Company completed a $10,000,000 financing of
Convertible Senior Notes, which are due January 12, 2006. The notes bear
interest at a fixed annual rate of 3.25% to be paid semiannually in arrears in
cash or stock at the Company's option, beginning in July 2004. The holder of the
notes may convert the notes at any time prior to the maturity date into shares
of the Company's common stock at a conversion price of $6.09 per share.
Immunomedics has filed a registration statement
12
under the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission for registration of the notes and the shares
of common stock issuable upon conversion of the notes. The registration
statement has not yet become effective. The holder has a six-month option to
purchase up to an additional $3,000,000 of notes. Proceeds from the financing
will be used to continue the Company's development of its cancer and autoimmune
disease therapeutics and for working capital and other general corporate
purposes. At March 31, 2004, the Company's indebtedness under this financing was
$10,000,000, which will mature on January 12, 2006, unless earlier converted or
repurchased. For the nine-month period ended March 31, 2004, the Company
incurred interest expense of approximately $64,000.
In May 2003, Immunomedics completed a $6,376,000 bond financing with the
New Jersey Economic Development Authority, pursuant to which Immunomedics was
able to refinance its capital investment in a new manufacturing facility at a
rate of interest below that which would have otherwise been available. The
interest rate on the bonds was approximately 1.3% at March 31, 2004. In
connection with this financing, Immunomedics granted certain security interests
to the New Jersey Economic Development Authority with respect to its properties
and assets, and agreed to become subject to certain customary affirmative as
well as restrictive covenants, none of which it believes will affect its
business or operations in any material respect. In addition, the bonds are
subject to mandatory redemption, if the fair value of the Company's
collateralized assets falls below the outstanding loan balance. The Company's
collateral is recorded as restricted securities in the balance sheet. Restricted
securities include highly liquid, marketable securities whose carry value is
approximate fair value. At March 31, 2004, the Company's indebtedness under this
financing was approximately $5,419,600 due in equal monthly installments over
the next 51 months. For the nine-month periods ended March 31, 2004 and 2003,
the Company incurred interest expense of approximately $56,000 and $0,
respectively. Interest and principal payments are due monthly.
9. SUBSEQUENT EVENT
On April 8, 2004, pursuant to a termination agreement between Amgen and
the Company, Amgen returned all rights for epratuzumab, the humanized CD22
monoclonal antibody therapeutic the Company licensed to Amgen as part of the
Amgen Agreement in December 2000, including rights to second generation
molecules and conjugates.
As part of the transaction, the Company issued to Amgen a five-year
warrant to purchase 100,000 shares of our common stock at a price equal to
$16.00 per share with an estimated value of $220,000, which will be recorded in
the fourth quarter as an expense. If epratuzumab is approved for
commercialization in the United States for non-Hodgkin's lymphoma therapy, the
Company will be required to pay Amgen a milestone payment in the amount of
$600,000. There are no other financial obligations between the parties as a
result of the termination agreement.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Immunomedics is a biopharmaceutical company focused on the development,
manufacture and marketing of monoclonal, antibody-based products for the
detection and treatment of cancer and other serious diseases. We have developed
a number of advanced proprietary technologies that allow us to create humanized
antibodies that can be used either alone in unlabeled form, or conjugated with
radioactive isotopes, chemotherapeutics or toxins, in each case to create highly
targeted agents. Using these technologies, we have built a broad pipeline of
therapeutic product candidates that utilize several different mechanisms of
action. A portfolio of intellectual property that includes 89 issued patents in
the United States, and 294 other issued patents worldwide, is intended to
protect our product candidates and technologies.
In addition to our therapeutic discoveries, our proprietary technologies
have also enabled us to develop highly specific diagnostic imaging agents, one
of which, CEA-Scan(R), has been approved in the United States, Canada and the
European Union, where it is currently being marketed for the detection of
colorectal cancers. Our second diagnostic product, LeukoScan(R), has been
approved in Europe and Australia, where it is currently being marketed for the
detection of bone infections. We have five additional diagnostic product
candidates in pre-clinical or clinical development.
From inception in 1982 until March 31, 2004, we had an accumulated deficit
of approximately $141.4 million and have never earned a profit in any fiscal
year. In the absence of increased revenues from the sale of current or future
products and licensing activities (the amount, timing, nature or source of which
cannot be predicted), our losses will continue as we continue to conduct our
research and development activities. These activities are budgeted to expand
over time and will require further resources if we are to be successful. As a
result, our operating losses are likely to be substantial over the next several
years.
OUR BUSINESS
The development and commercialization of successful diagnostic and
therapeutic products is subject to numerous risks and uncertainties including,
without limitation, the following:
o the type of therapeutic or diagnostic compound under investigation
and nature of the disease in connection with which the compound is
being studied;
o our ability, as well as the ability of our partners, to conduct and
complete clinical trials on a timely basis;
o the time required for us to comply with all applicable federal,
state and foreign legal requirements, including, without limitation,
our receipt of the necessary approvals of the U.S. Food and Drug
Administration;
o the financial resources available to us during any particular
period; and
o many other factors associated with the commercial development of
therapeutic and diagnostic products outside of our control.
14
RESEARCH AND DEVELOPMENT
As of March 31, 2004, we employed 22 professionals in our research and
development departments. In addition to salaries and benefits, the other costs
associated with research and development include the costs associated with
producing biopharmaceutical compounds, laboratory equipment and supplies, the
costs of conducting clinical trials, legal fees and expenses associated with
pursuing patent protection, as well as facilities costs. Based on forecasts as
of March 31, 2004, we expect to spend between $19.0 and $22.0 million in the
aggregate for the fiscal year ending June 30, 2004 on research and development
operating expenses.
In order to further support our research and development efforts, as well
as prepare for future commercialization of our product candidates, we completed
a major expansion of our manufacturing facilities at a total cost of
approximately $6.4 million. See "Liquidity and Capital Resources" below. We
believe that our facilities, as expanded, will be adequate to support our
research and development activities for the next two years without the need for
any material capital expenditures.
At any one time our scientists are engaged in the research and development
of multiple therapeutic compounds. Because we do not track expenses on the basis
of each individual compound under investigation, but rather aggregate research
and development costs for accounting purposes, it is not possible for investors
to analyze and compare the expenses associated with unsuccessful research and
development efforts for any particular fiscal period with those associated with
compounds that are determined to be worthy of further development. This may make
it more difficult for investors to evaluate our business and future prospects.
THERAPEUTICS
Substantially all of our research and development efforts involve the use
of monoclonal antibodies to treat cancer and other serious diseases in one of
two ways. In the first, the antibodies are unlabeled, or "naked," and used to
treat the disease directly. In the second, the antibodies are labeled, or
conjugated, with radioisotopes, chemotherapeutic agents, toxins or other
substances. In each case the antibodies first seek out, and then bind to, a
particular target on diseased cells or on cells involved in a disease process.
EPRATUZUMAB
Our most advanced therapeutic product candidate, epratuzumab (IMMU-103),
is an unlabeled humanized antibody which targets an antigen, known as the CD22
marker, found on the surface of a certain class of lymphocytes, a type of white
blood cell. This antibody also binds to the malignant forms of these cells that
comprise non-Hodgkin's B-cell lymphoma and acute and chronic lymphocytic
leukemias. The clinical trials of IMMU-103, which involved more than 340
patients, demonstrated good safety, tolerability and anti-tumor activity.
In December 2000, we entered into a Development and License Agreement with
Amgen to license IMMU-103 in North America and Australia. Under this agreement,
Amgen was responsible for the final clinical development, manufacture and
commercialization of IMMU-103 for these markets. Amgen had conducted multiple
clinical trials in North America and Australia with IMMU-103 for the treatment
of non-Hodgkin's lymphomas with patients. In some of these trials, IMMU-103 was
administered in combination with Rituxan(R), the first therapeutic antibody
approved for treating cancer in the United States, with reported sales in excess
of $1.5 billion per year.
On November 11, 2003, we announced that we were engaged in discussions
with Amgen regarding return of North American and Australian development rights
for epratuzumab. On April 8,
15
2004, Amgen returned to us all rights for epratuzumab. As part of the
transaction, we issued to Amgen a five-year warrant to purchase 100,000 shares
of our common stock at a price equal to $16.00 per share. This warrant has an
estimated current value of approximately $220,000. If epratuzumab is approved
for commercialization in the United States for non-Hodgkin's lymphoma therapy,
the Company will be required to pay Amgen a milestone payment in the amount of
$600,000. There are no other financial obligations between the parties as a
result of the termination agreement.
We have recently also begun the evaluation of IMMU-103 in patients with
certain autoimmune diseases.
While the clinical results to date have been encouraging, we are not able
to determine when, if ever, epratuzumab will be approved for sale in the United
States or anywhere else. Even if it is approved, there can be no assurance that
it will be commercially successful or that we will ever receive revenues equal
to our financial investment in this product candidate.
We have been evaluating IMMU-102, (Y-90 eMAb) in a Phase I/II clinical
trial being conducted in the United States and Europe. This clinical trial is
examining the safety and efficacy of IMMU-102 in patients with indolent or
aggressive non-Hodgkin's lymphoma who have had a relapse of disease following
standard chemotherapy. We are encouraged by the results of these trials and we
are in the process of expanding these studies.
OTHER THERAPEUTIC PRODUCT CANDIDATES
We also have in development a solid tumor therapeutic product candidate
that targets an antigen known as carcinoembryonic antigen, or CEA. The CEA
antigen is abundant at the site of virtually all cancers of the colon and rectum
and is associated with many other solid tumors, such as breast and lung cancers.
Our humanized CEA antibody (hCEA, IMMU-100), is in clinical testing both in
unlabeled and radiolabeled forms. The unlabeled form is being tested in a Phase
I dose-escalation trial in patients with colorectal or breast cancer. A Phase II
trial has been completed in Europe for IMMU-111 (hCEA-I-131) in patients with
proven or suspected metastatic colorectal cancer who failed chemotherapy. We
believe that the initial results with IMMU-111 are encouraging. This Phase I/II
trial with IMMU-101 (hCEA-Y-90) has completed accrual in the United States and
in Europe in patients with advanced colorectal and pancreatic cancers.
We have recently begun the clinical evaluation of IMMU-105, a new
humanized antibody labeled with Y-90, for the treatment of primary liver cancer.
IMMU-105 binds to an antigen known as alpha-fetoprotein (AFP), which is commonly
produced by primary liver tumors. We also are commencing clinical trials with
IMMU-106 (anti-CD20) for the treatment of certain autoimmune diseases and
non-Hodgkin's lymphoma, and we have received approval from the U.S. Food and
Drug Administration, or FDA, to begin clinical trials with IMMU-107 (for use in
targeting anti-MUC 1 antibody) for pancreatic cancer therapy. In addition to
these three product candidates, we have several others in pre-clinical
development.
DIAGNOSTICS
In 1998, we began to transition our focus away from the development of
diagnostic imaging products in order to accelerate the development of our
therapeutic product candidates. As a result, as of March 31, 2004, research and
development into diagnostic product candidates was no longer a material portion
of our business.
16
IBC PHARMACEUTICALS, INC.
In October 2003, the Company entered into a research collaboration with
Schering AG of Berlin, Germany, involving bispecific antibody, pretargeting
technologies for cancer therapy being developed by IBC, the Company's
majority-owned subsidiary.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States, which require
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from these estimates. The following discussion highlights what we
believe to be the critical accounting policies and judgments made in the
preparation of these consolidated financial statements.
REVENUE RECOGNITION
Contract revenue from collaborative research agreements is recorded when
earned based on the performance requirements of the contract. Revenue from
non-refundable upfront license fees and certain guaranteed payments where we
continue involvement through collaborative development are deferred and
recognized as revenue over the period of continuing involvement. We estimate the
period of continuing involvement based on the best available evidential matter
available to us at each reporting period. If our estimated time frame for
continuing involvement changes, this change in estimate could impact the amount
of revenue recognized in future periods.
Revenue from product sales is recorded when there is persuasive evidence
that an arrangement exists, delivery has occurred, the price is fixed and
determinable and collectability is reasonably assured. Allowances, if any, are
established for uncollectible amounts, estimated product returns and discounts.
Since allowances are recorded based on management's estimates, actual amounts
may be different in the future.
FOREIGN CURRENCY RISKS
Since we operate in countries outside of the United States, we are exposed
to various foreign currency risks. Two specific risks arise from the nature of
the contracts we execute with our customers since from time to time contracts
are denominated in a currency different than our subsidiary's local currency.
These risks are generally applicable only to a portion of the contracts executed
by our foreign subsidiaries. The first risk occurs as revenue recognized for
products or services rendered is denominated in a currency different from the
currency in which our subsidiary's expenses are incurred. As a result, our
subsidiary's earnings can be affected by fluctuations in exchange rates.
Historically, fluctuations in exchange rates from those in effect at the time
contracts were executed have not had a material effect upon our consolidated
financial results.
The second risk results from the passage of time between the invoicing of
customers and affiliates under these contracts and the ultimate collection of
customer payments against such invoices. Because the contract is denominated in
a currency other than the subsidiary's local currency, we recognize a receivable
at the time of invoicing for the local currency equivalent of the foreign
currency invoice amount. Changes in exchange rates from the time the invoice is
prepared and payment from the customer is received will result in our receiving
either more or less in local currency than the local currency equivalent of the
invoice amount at the time the invoice was prepared and the receivable
established. This difference is recognized by us as a foreign currency
transaction gain or loss, as applicable, and is reported in other expense
(income) in our Consolidated Statements of Operations and Comprehensive Income
(Loss).
17
Finally, our consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiary's financial results into U.S. dollars for purposes of reporting our
consolidated financial results. The process by which each foreign subsidiary's
financial results are translated into U.S. dollars is as follows: income
statement accounts are translated at average exchange rates for the period;
balance sheet asset and liability accounts are translated at end of period
exchange rates; and equity accounts are translated at historical exchange rates.
Translation of the balance sheet in this manner affects the stockholders' equity
account, referred to as the cumulative translation adjustment account. This
account exists only in the foreign subsidiary's U.S. dollar balance sheet and is
necessary to keep the foreign balance sheet stated in U.S. dollars in balance.
To date, such cumulative translation adjustments have not been material to our
consolidated financial position.
STOCK-BASED COMPENSATION
We grant stock options to our employees at an exercise price equal to the
fair value of the underlying shares of common stock at the date of grant and
account for these stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. Under APB
Opinion No. 25, when stock options are issued with an exercise price equal to
the market price of the underlying stock on the date of grant, no compensation
expense is recognized in the income statement. However, for purposes of
disclosure only, we estimate the fair value of stock options through the use of
option-pricing models. In determining the values to use in our option-pricing
model, we make several subjective estimates about the characteristics of the
underlying stock and the expected timing of option exercise. Changes to these
estimates can change the fair value disclosures in our financial statements.
IMPAIRMENT OF ASSETS
We review our long-lived assets for impairment, when events or changes in
circumstances occur that indicate that the carrying value of the asset may not
be recoverable. The assessment of possible impairment is based upon our judgment
of our ability to recover the asset from the expected future undiscounted cash
flows of the related operations. Actual future cash flows may be greater or less
than estimated.
RESULTS OF OPERATIONS
Our results for any interim period, such as those described in the
following analysis, are not necessarily indicative of the results for the entire
fiscal year or any other future period.
THREE-MONTH PERIOD ENDED MARCH 31, 2004 COMPARED TO 2003
Revenues
Revenues for the three-month period ended March 31, 2004 were $1,151,000,
as compared to $5,615,000 for the same period in 2003, representing a decrease
of $4,464,000, or 80%, primarily due to a decrease in research and development
revenues, as explained below. Product sales for the three-month period ended
March 31, 2004 were $1,053,000, as compared to $1,088,000 for the same period in
2003, representing a decrease of $35,000, or 3%. License fee and other revenues
for the three-month period ended March 31, 2004 decreased to $54,000 from
$4,519,000 for the same period in 2003. This is primarily due to the full
recognition of the Amgen up-front payment by February 2003. Research and
development revenues for the three-month period ended March 31, 2004 increased
from $8,000 to $44,000 for the same period of 2003, primarily due to a grant we
received.
18
Costs and Expenses
Total cost and expenses for the three-month period ended March 31, 2004
were $6,650,000, as compared to $6,146,000 for the same period in 2003,
representing an increase of $504,000, or 8%. This increase was primarily due to
increases in research and development expenses offset in part by a decrease of
general and administrative costs, all as discussed below. Research and
development expenses for the three-month period ended March 31, 2004 increased
by $359,000 from $4,862,000 to $5,221,000 as compared to the same period in
2003. This was primarily due to increased headcount in our research and
development departments and increased manufacturing expenses, including
laboratory supplies associated with producing compounds to be used in clinical
trials. Cost of goods sold for the three-month period ended March 31, 2004
decreased to $113,000 from $159,000 for the same period in 2003 mainly due to
reduced sales. Sales and marketing expenses for the three-month period ended
March 31, 2004 were approximately the same as the third quarter of 2003. General
and administrative costs for the three-month period ended March 31, 2004
increased by $193,000 to $962,000 from $769,000 for the same period of 2003. The
increase was primarily due to increased consulting fees relating to
Sarbanes-Oxley compliance.
Interest Income
Interest and other income for the three-month period ended March 31, 2004
decreased by $167,000 to $116,000 from $283,000 for the same period in 2003,
primarily due to lower rates of return on cash and reduced amount of cash
available for investments.
Interest Expense
Interest expense for the three-month periods ended March 31, 2004 and
2003, was approximately $82,000 and $0, respectively. The interest expense for
the three-month period ended March 31, 2004 was incurred with reference to the
$6,376,000 bond financing with the New Jersey Economic Development Authority,
which was completed in May 2003, and the issuance of $10,000,000 aggregate
principal amount of convertible senior notes, which was completed in January
2004. See Note 8 to our consolidated interim financial statements included in
this Quarterly Report on Form 10-Q.
Operating Results
Net loss for the three-month period ended March 31, 2004 was $5,489,000,
or $0.11 per share, as compared to net income of $453,000, or $0.01 per share,
for the same period in 2003. The net loss in 2004 as compared to net income in
the comparable period in 2003 resulted primarily from lower license fee and
other revenues, lower interest and other income and increased research and
development costs resulting from increased research and development efforts, as
discussed above.
NINE-MONTH PERIOD ENDED MARCH 31, 2004 COMPARED TO 2003
Revenues
Revenues for the nine-month period ended March 31, 2004 were $3,394,000,
as compared to $11,971,000 for the same period in 2003, representing a decrease
of $8,577,000, or 72%, primarily due to a decrease in research and development
revenues, as explained below. Product sales for the nine-month period ended
March 31, 2004 were $2,790,000, as compared to $2,633,000 for the same period in
2003, representing an increase of $157,000, or 6%. License fee and other
revenues for the nine-month period ended March 31, 2004 decreased to $460,000
from $9,304,000 for the same period in 2003, representing a decrease of
$8,844,000. This is primarily due to the full recognition of the Amgen up-front
payment by
19
February 2003. Research and development revenues for the nine-month period ended
March 31, 2004 increased from $34,000 to $144,000 for the same period of 2003,
primarily due to an additional grant received.
Costs and Expenses
Total costs and expenses for the nine-month period ended March 31, 2004
were $19,587,000, as compared to $17,748,000 for the same period in 2003,
representing an increase of $1,839,000, or 10%. This increase was primarily due
to changes in research and development expenses and general and administrative
costs, all as discussed below. Research and development expenses for the
nine-month period ended March 31, 2004 increased by $2,345,000 from $13,382,000
to $15,727,000 as compared to the same period in 2003. This was primarily due to
increased headcount in our research and development departments and increased
manufacturing expenses, including laboratory supplies associated with producing
compounds to be used in clinical trials. Cost of goods sold for the nine-month
period ended March 31, 2004 decreased to $385,000 from $419,000 for the same
period in 2003, mainly due to reduced sales. Sales and marketing expenses for
the nine-month period ended March 31, 2004 decreased by $88,000 to $963,000 from
$1,051,000 for the same period of 2003. General and administrative costs for the
nine-month period ended March 31, 2004 decreased by $507,000 to $2,512,000 from
$2,896,000 for the same period of 2003. This was primarily due to the
recognition of compensation expense for the nine-month period ended March 31,
2003 of $360,000 associated with issuance of a fully vested option to acquire
80,000 shares of our common stock at a purchase price of $4.94 per share to Dr.
Morton Coleman, a non-employee director, in consideration for consulting
services to Immunomedics, and reduced legal fees and other general and
administrative expenses.
Interest Income
Interest and other income for the nine-month period ended March 31, 2004
decreased by $444,000 to $427,000 from $871,000 for the same period in 2003,
primarily due to lower rates of return on cash and reduced amount of cash
available for investments.
Interest Expense
Interest expense for the nine-month periods ended March 31, 2004 and 2003,
was approximately $121,000 and $0, respectively. The interest expense for the
nine-month period ended March 31, 2004 was incurred with reference to the
$6,376,000 bond financing with the New Jersey Economic Development Authority,
which was completed in May 2003, and the issuance of $10,000,000 of convertible
senior notes, which was completed in January 2004. See Note 8 to our
consolidated interim financial statements included in this Quarterly Report on
Form 10-Q.
Operating Results
Net loss for the nine-month period ended March 31, 2004 was $15,530,000,
or $0.31 per share, as compared to $4,217,000, or $0.08 per share, for the same
period in 2003. The larger net loss in 2004 as compared to 2003 resulted
primarily from lower license fee and other revenues, lower interest and other
income and increased research and development costs resulting from increased
research and development efforts, as discussed above. During the nine-month
periods ended March 31, 2004 and 2003, we recorded a tax benefit of $428,000 and
$745,000, as a result of our sale of approximately $5,313,000 and $9,246,000 of
New Jersey state net operating losses, respectively.
LIQUIDITY AND CAPITAL RESOURCES
20
At March 31, 2004, we had working capital of $16,730,000, representing a
decrease of $5,046,000 from $21,776,000 at June 30, 2003. At March 31, 2004, we
had long-term debt of $5,419,600 through the New Jersey Economic Development
Authority and $10,000,000 aggregate principal amount of convertible senior
notes. The net decrease in working capital resulted principally from the net
loss allocable to common stockholders during the nine-month period ended March
31, 2004 of $15,530,000 and capital expenditures of $884,000 offset in part by
the $10,000,000 proceeds from the convertible senior notes.
In order to support our clinical trials and anticipated future commercial
requirements, we completed the expansion of our manufacturing facility at a cost
of approximately $6.4 million. We funded this project by obtaining a loan
through the New Jersey Economic Development Authority. The expanded facility now
includes two new manufacturing suites, containing six new bioreactors, which are
intended to allow flexibility of the amount of therapeutic compounds that can be
produced.
On January 20, 2004, we completed a $10,000,000 financing of Convertible
Senior Notes, which are due January 12, 2006. The notes bear interest at a fixed
annual rate of 3.25% to be paid semiannually in arrears in cash or stock at the
Company's option. The holder of the notes may convert the notes at any time
prior to the maturity date into shares of the Company's common stock at a
conversion price of $6.09 per share. Immunomedics has filed a registration
statement under the Securities Act with the Securities and Exchange Commission
for registration of the notes and the shares of common stock issuable upon
conversion of the notes. The registration statement has not yet become
effective. The holder has a six-month option to purchase up to an additional
$3.0 million of notes. Proceeds from the financing will be used to continue the
Company's development of its cancer and autoimmune disease therapeutics and for
working capital and other general corporate purposes.
Our cash, cash equivalents and marketable securities amounted to
$19,552,000 at March 31, 2004, representing a decrease of $4,241,000 from
$23,796,000 at June 30, 2003. This decrease was primarily attributable to the
funding of operating expenses, payments of debt and capital expenditures. It is
anticipated that working capital and cash, cash equivalents and marketable
securities will decrease during fiscal year 2004 as a result of planned
operating expenses, payment of debt and capital expenditures, offset in part by
projected revenues from sales of our diagnostic imaging products in the United
States and Europe. However, there can be no assurance as to the amount of
revenues, if any, these imaging products will generate.
To date, we have not generated positive cash flow from operations,
excluding the effects of the up-front payment received from Amgen in fiscal year
2001. We believe that our existing working capital should be sufficient to meet
our capital and liquidity requirements for at least the next twelve months.
Actual results could differ materially from our expectations as a result
of a number of risks and uncertainties, including the risks described in Item 1,
"Factors That May Affect Our Business and Results of Operations," in our Annual
Report on Form 10-K for the fiscal year ended June 30, 2003 and in other
statements included herein. Our working capital and working capital requirements
are affected by numerous factors and such factors may have a negative impact on
our liquidity. Principal among these are the success of product
commercialization and marketing products, the technological advantages and
pricing of our products, the impact of the regulatory requirements applicable to
us and access to capital markets that can provide us with the resources when
necessary to fund our strategic priorities.
We expect to utilize our cash equivalents and short-term investments to
fund our operations at levels similar to those used in fiscal year 2003.
However, we do not believe that we will have adequate cash at this spending
level to complete our research and development programs. As a result, we will
require additional financial resources after we utilize our current liquid
assets in order to continue our research and development programs, clinical
trials of our product candidates and regulatory filings.
21
Additional financing may not be available to us on terms we find acceptable, if
at all, and the terms of such financing may cause substantial dilution to
existing stockholders. If adequate funds are not available, we may be required
to curtail significantly one or more of our research and development programs.
If we obtain funds through collaborative partnerships, we may be required to
relinquish rights to certain of our technologies or product candidates.
We are pursuing various financing alternatives as market conditions permit
through additional debt or equity financings and through collaborative marketing
and distribution agreements. We continue to evaluate various programs to raise
additional capital and to seek additional revenues from the licensing of our
proprietary technologies. At the present time, we are unable to determine
whether any of these future activities will be successful and, if so, the terms
and timing of any definitive agreements.
CONTRACTUAL COMMITMENTS
Our major contractual obligations relate to an operating lease for our
facility, a loan from the New Jersey Economic Development Authority used to fund
the expansion of our facility and the issuance of convertible senior notes. We
have identified and quantified the significant commitments in the following
table for the fiscal years ending June 30:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
Contractual Obligation 2004 2005 2006 2007 2008 Thereafter Total
- ---------------------- ------- -------- -------- ------- ------- ------------ --------
Operating Lease(1) $ 136 $ 545 $ 545 $ 552 $ 556 $ 9,601 $ 11,935
NJEDA Loan(2) $ 336 $ 1,334 $ 1,317 $ 1,301 $ 1,284 - $ 5,572
Convertible Senior Notes(3) - $ 325 $ 10,325 - - - $ 10,650
------- -------- -------- ------- ------- ------------ --------
TOTAL $ 472 $ 4,209 $ 14,193 $ 3,860 $ 3,848 $ 9,601 $ 28,157
(1) In November 2001, we renewed our operating lease for our Morris
Plains, New Jersey facility for an additional term of twenty years expiring in
October 2021 at a base annual rate of $545,000, which included an additional
15,000 square feet. The rent is fixed for the first five years and increases
every five years thereafter.
(2) In May 2003, we obtained a loan for $6,376,000 at a variable interest
rate through the New Jersey Economic Development Authority, repayable monthly in
60 equal installments.
(3) In January 2004, we completed a $10,000,000 financing through the
issuance of convertible senior notes due January 12, 2006. The notes bear
interest at a fixed annual rate of 3.25% to be paid semiannually in arrears in
cash or stock at the Company's option.
EFFECTS OF INFLATION
We do not believe that inflation has had a material impact on our
business, sales or operating results during the periods presented.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. Certain statements that
we may make from time to time, including, without limitation, statements
contained in this Quarterly Report on Form 10-Q, constitute "forward-looking
22
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements may be made directly in this Quarterly Report, and
they may also be made a part of this Quarterly Report by reference to other
documents filed with the Securities and Exchange Commission, which is known as
"incorporation by reference."
Words such as "may," "anticipate," "estimate," "expects," "projects,"
"intends," "plans," "believes" and words and terms of similar substance used in
connection with any discussion of future operating or financial performance,
identify forward-looking statements. All forward-looking statements are
management's present expectations of future events and are subject to a number
of risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. These risks and
uncertainties include, among other things: our inability to further identify,
develop and achieve commercial success for new products and technologies; the
possibility of delays in the research and development necessary to select drug
development candidates and delays in clinical trials; the risk that clinical
trials may not result in marketable products; the risk that we may be unable to
successfully finance and secure regulatory approval of and market our drug
candidates; our dependence upon pharmaceutical and biotechnology collaborations;
the levels and timing of payments under our collaborative agreements;
uncertainties about our ability to obtain new corporate collaborations and
acquire new technologies on satisfactory terms, if at all; the development of
competing diagnostic and therapeutic products; our ability to protect our
proprietary technologies; patent-infringement claims; risks of new, changing and
competitive technologies and regulations in the United States and
internationally; and other factors discussed under the heading "Factors That May
Affect Our Business and Results of Operations" in our Annual Report on Form 10-K
for the fiscal year ended June 30, 2003, which has been filed with the
Securities and Exchange Commission.
In light of these assumptions, risks and uncertainties, the results and
events discussed in the forward-looking statements contained in this Quarterly
Report or in any document incorporated by reference might not occur. You are
cautioned not to place undue reliance on forward-looking statements, which speak
only of the date of this Quarterly Report or the date of the document
incorporated by reference in this Quarterly Report. We are not under any
obligation, and we expressly disclaim any obligation, to update or alter any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required by applicable law. All subsequent
forward-looking statements attributable to Immunomedics or to any person
authorized to act on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our exposure to market risk of financial
instruments contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
described due to a number of factors, including uncertainties associated with
general economic conditions and conditions impacting our industry. See
"Cautionary Note Regarding Forward-Looking Statements" under Item 2 above.
Our holdings of financial instruments are comprised primarily of corporate
debt securities and municipal bonds. All such instruments are classified as
securities available for sale with the exception of approximately $5,738,000
classified on the balance sheet as restricted securities at March 31, 2004.
These municipal bonds collateralize a loan we received through the New Jersey
Economic Development Authority. We do not invest in portfolio equity securities
or commodities or use financial derivatives for trading purposes. Our debt
security portfolio represents funds held temporarily pending use in our business
and operations. We manage these funds accordingly. We seek reasonable
assuredness of the safety of principal and market liquidity by investing in
rated fixed income securities while at the same time seeking to achieve a
favorable rate of return. Our market risk exposure consists principally of
23
exposure to changes in interest rates. Our holdings also are exposed to the
risks of changes in the credit quality of issuers. We typically invest in highly
liquid debt instruments with fixed interest rates.
The table below presents the principal amounts of the restricted and
unrestricted marketable securities and the related weighted-average interest
rates by fiscal year of maturity for our investment portfolio as of March 31,
2004:
Fair
2004 2005 2006 2007 2008 Total Value
---- ---- ---- ---- ---- ----- -----
(in thousands)
Fixed rate $1,775 $2,518 $3,356 $3,190 -- $10,839 $10,912
Average interest rate 4.33% 1.60% 3.19% 1.72% -- 2.58% --
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Quarterly Report on Form 10-Q, have concluded that, based on such evaluation,
our disclosure controls and procedures were adequate and effective to ensure
that material information relating to us, including our consolidated
subsidiaries, was made known to them by others within those entities,
particularly during the period in which this Quarterly Report on Form 10-Q was
being prepared.
In designing and evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objective, and our management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.
(b) Changes in Internal Controls. There were no significant changes in our
internal control over financial reporting, identified in connection with the
evaluation of such internal control that occurred during our last fiscal
quarter, that have materially affected, or are reasonable likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Willow Bay Associates, LLC
In 2000, a now-defunct finance broker filed suit against the Company in
the United States District Court for the District of Delaware. In the case, the
plaintiff claimed that it is entitled to damages in the form of brokerage
commissions for breach of an alleged confidentiality and non-circumvention
contract. The suit against the Company was dismissed on summary judgment, but
subsequently reinstated. Trial was held in late January 2004, and post-trial
submissions were filed in March. A decision by the Court is expected by the end
of May 2004. Although it is not possible to forecast the Court's decision, based
on the Court's initial ruling of dismissal and the trial, the Company believes
that judgment will be entered in its favor. The Company further believes that
even in the event of an
24
unfavorable outcome, this lawsuit will not have a material adverse affect on the
Company's financial position and results of operations.
F. Hoffmann-LaRoche
On December 22, 2003, the Dutch Supreme Court, in a case brought by the
Company, held that Immunomedics' Dutch part of its European patent for highly
specific monoclonal antibodies against the cancer marker, carcinoembryonic
antigen (CEA), was valid. The Company's claim of infringement was not finally
decided by the Dutch Supreme Court. Among other things, the Supreme Court held
that the Court of Appeal which had ruled that Roche had infringed Immunomedics
European Patent had not given Roche sufficient opportunity to comment on an
expert opinion filed by Immunomedics in which it was stated that Roche's CEA
test kit did satisfy a criterium that is generally satisfied for specific
antibodies that bind to CEA. The Company is of the opinion that after Roche will
have had the opportunity to comment the Court of Appeal will not change its
opinion. The Company has argued that the Dutch court should enforce the European
Patent for all European countries for which the European Patent was validated,
since Roche sold the same product in each country. The Dutch Supreme Court
repeated the reasoning of the Dutch District Court that the Brussels Convention
should be interpreted to permit cross-border enforcement of European patents
where a related group of companies sells the same product in countries where
that same patent has been validated. The Dutch Supreme Court referred this issue
to the European Court of Justice (ECJ) to provide a final interpretation of the
Brussels Convention on this point.
Our patent counsel believes that the patents are valid and infringed, and
that a favorable outcome to the Company is likely, although no assurances can be
given in this regard. To the extent that Roche contests or challenges our
patents, or files appeals or further nullity actions, there can be no assurance
that significant costs for defending such patents may not be incurred.
There were no other legal proceedings nor any material developments during
the fiscal quarter ended March 31, 2004 in any of the legal proceedings
described in Item 3 of our Annual Report on Form 10-K for the fiscal year ended
June 30, 2003.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4.1 Common Stock Purchase Warrant, dated as of April 7, 2004, issued by
the Company to Amgen.*
10.1 Termination Agreement, dated as of April 7, 2004, by and between the
Company and Amgen.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302(a)
of the Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- --------------
* Certain portions of this exhibit have been omitted based upon the
Company's request for confidential treatment of the same. The omitted
portions of this exhibit have been separately filed with the Securities
and Exchange Commission on a confidential basis.
(b) Current Reports on Form 8-K.
On February 9, 2004, we furnished to the Securities and Exchange
Commission a Current Report on Form 8-K to disclose that we had publicly
disseminated a press release announcing our financial results for the three
months ended December 31, 2003.
26
SIGNATURES
Pursuant to the requirements 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.
IMMUNOMEDICS, INC.
May 13, 2004 By: /s/ Cynthia L. Sullivan
---------------------------------------------
Cynthia L. Sullivan
President and Chief Executive Officer
(Principal Executive Officer)
May 13, 2004 By: /s/ Gerard G. Gorman
---------------------------------------------
Gerard G. Gorman
Vice President, Finance, and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
27
INDEX TO EXHIBITS
-----------------
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------
4.1 -- Common Stock Purchase Warrant, dated as of April 7, 2004,
issued by the Company to Amgen Inc.*
10.1 -- Termination Agreement, dated as of April 7, 2004, by and
between the Company and Amgen Inc.*
31.1 -- Certification of Chief Executive Officer Pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1 -- Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- --------------
* Certain portions of this exhibit have been omitted based upon the Company's
request for confidential treatment of the same. The omitted portions of this
exhibit have been separately filed with the Securities and Exchange
Commission on a confidential basis.