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 September 30, 2002
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 No.)
incorporation or organization)
300 American Road, Morris Plains, New Jersey 07950
(Address of principal executive offices)(Zip Code)
Registrant's Telephone Number, Including Area Code: (973) 605-8200
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
--- ---
The number of shares of the Registrant's common stock outstanding as of
November 12, 2002 was 49,877,443.
IMMUNOMEDICS, INC.
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION Page No.
--------
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 2002
(unaudited) and June 30, 2002 ................................. 3
Consolidated Statements of Operations
and Comprehensive (Loss) Income for the
Three Months Ended September 30, 2002 and 2001 (unaudited) .... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2002 and 2001 (unaudited) .... 5
Notes to Unaudited Consolidated Financial Statements .......... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................. 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ............................................. 18
ITEM 4. CONTROLS AND PROCEDURES ....................................... 18
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................. 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ..................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ........... 19
ITEM 5. OTHER INFORMATION ............................................. 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .............................. 19
SIGNATURES AND CERTIFICATIONS ........................................... 20
2
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, June 30,
2002 2002
------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 13,114,141 $ 13,062,954
Marketable securities 25,195,478 31,724,789
Accounts receivable, net of allowance for doubtful accounts of
$292,551 at September 30, 2002 and $289,866 at June 30, 2002 962,832 1,106,716
Inventory 560,409 641,686
Other current assets 1,113,698 1,801,979
------------------ ------------------
Total current assets 40,946,558 48,338,124
Property and equipment, net of accumulated depreciation of $9,990,771 at
September 30, 2002 and $9,688,929 at June 30, 2002 8,379,770 6,561,901
Other long-term assets 51,157 51,157
------------------ ------------------
Total assets $ 49,377,485 $ 54,951,182
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,421,672 $ 3,618,625
Deferred revenue 5,225,728 7,475,728
Other current liabilities 2,554,043 2,201,707
------------------ -----------------
Total current liabilities 10,201,443 13,296,060
------------------ -----------------
Minority interest 541,239 559,222
Commitments and Contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, authorized 10,000,000 shares; issued
and outstanding 0 shares at September 30, 2002 and June 30, 2002 - -
Common stock, $.01 par value; authorized, 70,000,000 shares; issued and
outstanding, 49,877,443 shares at September 30, 2002 and June 30, 2002 498,774 498,774
Capital contributed in excess of par 158,956,086 158,569,476
Treasury stock, at cost, 34,725 shares (458,370) (458,370)
Accumulated deficit (120,914,336) (118,028,184)
Accumulated other comprehensive income 552,649 514,204
------------------ -----------------
Total stockholders' equity 38,634,803 41,095,900
------------------ -----------------
Total liabilities and stockholders' equity $ 49,377,485 $ 54,951,182
================== =================
See accompanying notes to unaudited consolidated financial statements.
3
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE (LOSS) INCOME
(unaudited)
Three Months Ended
September 30,
------------------------------------
2002 2001
---------------- ---------------
Revenues:
Product sales $ 809,288 $ 980,672
License fee revenues 2,397,312 2,275,465
Research and development 25,282 85,607
---------------- ---------------
Total revenues 3,231,882 3,341,744
---------------- ---------------
Costs and expenses:
Costs of goods sold 132,742 167,452
Research and development 4,738,082 2,923,565
Sales and marketing 325,335 632,117
General and administrative 1,262,965 473,991
---------------- ---------------
Total costs and expenses 6,459,124 4,197,125
---------------- ---------------
Operating loss (3,227,242) (855,381)
Interest and other income 341,090 673,241
---------------- ---------------
Net loss $ (2,886,152) $ (182,140)
================ ===============
Per Share Data (Basic and Diluted):
Net loss $ (0.06) $ 0.00
================ ===============
Weighted average number of common shares
outstanding 49,877,443 49,538,116
================ ===============
Comprehensive (loss) income:
Net loss $ (2,886,152) $ (182,140)
---------------- ---------------
Other comprehensive (loss) income, net
of tax:
Foreign currency translation
adjustments (32,657) 116,617
Unrealized gain on securities
available for sale 71,102 249,809
---------------- ---------------
Other comprehensive income 38,445 366,426
---------------- ---------------
Comprehensive (loss) income $ (2,847,707) $ 184,286
================ ===============
See accompanying notes to unaudited consolidated financial statements.
4
IMMUNOMEDICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
September 30,
--------------------------------
2002 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (2,886,152) $ (182,140)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 301,842 252,986
Provision for allowance for doubtful accounts 2,685 6,409
Amortization of bond premium 59,007 67,022
Non-cash expense relating to issuance of stock options 386,610 26,610
Deferred revenue (2,250,000) (2,250,000)
Changes in operating assets and liabilities 66,140 169,797
Other (32,657) 116,617
------------- -------------
Net cash used in operating activities (4,352,525) (1,792,699)
------------------------------------- -------------- -------------
Cash flows from investing activities:
Purchases of marketable securities (826,257) -
Proceeds from sales and maturities of marketable securities 7,367,663 6,743,273
Minority interest (17,983) -
Additions to property and equipment (2,119,711) (1,255,442)
------------- -------------
Net cash provided by investing activities 4,403,712 5,487,831
----------------------------------------- ------------- -------------
Cash flows from financing activities:
Exercise of stock options - 14,292
Payments of debt - (41,913)
------------- -------------
Net cash used in financing activities - (27,621)
------------------------------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 51,187 3,667,511
Cash and cash equivalents, beginning of period 13,062,954 8,607,901
------------- -------------
Cash and cash equivalents, end of period $ 13,114,141 $ 12,275,412
============= =============
See accompanying notes to unaudited consolidated financial statements.
5
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
Reference is made to our Annual Report on Form 10-K for the year ended
June 30, 2002, which contains, at pages 31 through 52, our audited consolidated
financial statements and the notes thereto.
1. Business Overview and Basis of Presentation
The accompanying unaudited consolidated financial statements of
Immunomedics, Inc., a Delaware corporation, 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 generally accepted
accounting principles for complete annual financial statements. With respect to
the financial information for the interim periods included in this report, 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, 2002 has been derived from our audited 2002
consolidated financial statements. Operating results for the three-month period
ended September 30, 2002 are not necessarily indicative of the results that may
be expected for the full fiscal year ending June 30, 2003, or any other period.
Certain adjustments and reclassifications were made to conform to the current
year presentation.
We have never achieved profitable operations on a quarterly or annual
basis and there is no assurance that profitable operations, even if achieved,
could be sustained on a continuing basis. Further, our ability to achieve
profitability will depend on numerous factors, including, without limitation,
the following:
o our 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 our 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 our ability to obtain additional financial resources on
commercially acceptable terms; and
o many other factors associated with the commercial development of
therapeutic and diagnostic products outside of our control.
Since inception in 1982, we have relied primarily upon the private and
public sale of equity securities to fund operations. We have also received
limited revenues from research and development alliances, and more recently from
commercial sales of two diagnostic imaging products. While we believe that our
existing resources should be sufficient to meet our 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 our
research and development activities, as well as other factors affecting our
operating expenses and capital expenditures. There can be no assurance that we
will be able to obtain additional capital when needed on acceptable terms, if at
all.
6
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
2. Summary of Significant Accounting Policies
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of
Immunomedics, Inc. and its majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Certain amounts have been reclassified to conform to the current year
presentation.
Cash Equivalents and Marketable Securities
We consider all highly liquid investments with original maturities of
three months or less, at the time of purchase, to be cash equivalents. Included
in other current assets at September 30, 2002 and June 30, 2002 is accrued
interest earned on cash equivalents and marketable securities of approximately
$322,000 and $349,000, respectively.
Our investments in cash equivalents and marketable securities are
available for sale to fund growth in operations. The portfolio at September 30,
2002 primarily consisted of corporate debt securities.
Concentration of Credit Risk
Cash, cash equivalents, and marketable securities are financial
instruments that potentially subject us to concentration of credit risk. We
invest our cash in debt instruments of financial institutions and corporations
with strong credit ratings. We have 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. We have historically held the investments
to maturity. However, we have the ability to sell these investments before
maturity and have therefore classified the investments as available-for-sale. We
have not experienced any significant losses on our 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 September 30, 2002, the inventory balance consisted of $560,000
of finished goods as compared to $642,000 as of June 30, 2002.
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. We
review 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. We assess 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. Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of has not had a material impact on our
consolidated financial position, operating results or cash flows.
7
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
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 we have 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 recognized at the time
of shipment.
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 our consolidated financial
statements and tax returns.
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 the
purpose 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 three-month
period ended September 30, 2002 and 2001. We had certain equity securities
issued and outstanding at September 30, 2002 and 2001 that were not included in
the computation of diluted earnings per share because to do so would have been
anti-dilutive for the periods presented. The common stock equivalents excluded
from the diluted per share calculation were 3,740,250 and 2,716,250 at September
30, 2002 and 2001, 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 reported period. Actual results could differ from those
estimates.
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net loss, net unrealized
(losses) gains on securities available for sale and certain foreign exchange
changes and is presented in the consolidated statements of operations and
comprehensive (loss) income.
8
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
3. Marketable 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 carried as a separate component of accumulated other
comprehensive income (loss). Immunomedics considers all of its current
investments to be available-for-sale. The amortized cost, gross unrealized
holding gains, gross unrealized holding losses and fair value of
available-for-sale securities by major security type at September 30, 2002 and
June 30, 2002 were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
- ----------------------------------------------------------------------------------------------------
September 30, 2002
U.S. Government Securities $ 1,494,000 $ 2,000 $ - $ 1,496,000
Corporate Debt Securities 23,313,000 389,000 (3,000) 23,699,000
----------- -------- ------- -----------
$24,807,000 $391,000 $(3,000) $25,195,000
=========== ======== ======= ===========
June 30, 2002
U.S. Government Securities $ 5,488,000 $ 11,000 $(1,000) $ 5,498,000
Corporate Debt Securities 25,916,000 313,000 (2,000) 26,227,000
----------- -------- ------- -----------
$31,404,000 $324,000 $(3,000) $31,725,000
=========== ======== ======= ===========
4. Inventory
Inventory consists of the following:
September 30, 2002 June 30, 2002
------------------ -------------
Finished goods $560,000 $642,000
5. Property and Equipment
Property and equipment consists of the following:
September 30, 2002 June 30, 2002
------------------ -------------
Machinery and equipment $ 4,088,000 $ 3,858,000
Leasehold improvements 12,487,000 10,610,000
Furniture and fixtures 723,000 722,000
Computer equipment 1,075,000 1,061,000
----------- -----------
18,373,000 16,251,000
Accumulated depreciation and amortization (9,993,000) (9,689,000)
----------- -----------
$ 8,380,000 $ 6,562,000
=========== ===========
9
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
6. Geographic Segment
We manage our operations as one line of business focused on the use of
monoclonal antibodies to detect and treat cancer and other serious diseases,
which we currently report as a single industry segment. We 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 our facilities as of and for the three-month periods
ended September 30, 2002 and 2001 (Total Revenues include product sales revenue,
license fee revenue and research and development revenue.):
Three Months Ended
September 30, 2002
-------------------------------
United States Europe Total
Total revenues $ 2,596,952 $ 634,930 $ 3,231,882
Net income (loss) (3,282,216) 396,064 (2,886,152)
September 30, 2001
-------------------------------
United States Europe Total
Total revenues $ 2,681,090 $ 660,654 $ 3,341,744
Net income (loss) (98,848) (83,292) (182,140)
7. Related Party Transactions
Certain of our affiliates, including members of senior management and
our Board of Directors, as well as their respective family members and other
affiliates, have relationships and agreements among themselves as well as with
us and our affiliates, that create the potential for both real, as well as
perceived, conflicts of interest. These include Dr. David M. Goldenberg, our
Chairman and Chief Scientific Officer, Ms. Cynthia L. Sullivan, our President
and Chief Executive Officer, and certain companies with which we do business,
including the Center for Molecular Medicine and Immunology ("CMMI") and our
majority-owned subsidiary, IBC Pharmaceuticals, Inc. ("IBC"). In addition, our
executive vice president, Dr. Ivan D. Horak, is married to one of our other
employees. For a description of these transactions, see our Annual Report on
Form 10-K for the fiscal year ended June 30, 2002 and the notes to the audited
financial statements contained therein.
We have reimbursed CMMI for expenses incurred on behalf of
Immunomedics, including amounts incurred pursuant to research contracts, in the
amount of approximately $21,000 and $113,000 for the three-month periods ended
September 30, 2002 and 2001, respectively. We also provide, at no cost to CMMI,
laboratory materials and supplies. However, any inventions made independently of
us at CMMI are the property of CMMI.
During the three-month periods ended September 30, 2002 and 2001, our
Board of Directors authorized grants to CMMI of $116,000 and $26,000,
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.
10
IMMUNOMEDICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
IBC reimburses Immunomedics for all of the research activities
Immunomedics conducts on IBC's behalf. For the three-month period ended
September 30, 2002 and 2001, we received reimbursements of $279,000 and
$134,000, respectively, from IBC with respect to these research activities.
For the three-month periods ended September 30, 2002 and 2001, Dr.
Goldenberg received $13,750 in compensation for his services to IBC.
8. License and Distribution Agreements
On December 17, 2000, we entered into a Development and License
Agreement (the "Amgen Agreement") with Amgen Inc. The Amgen Agreement grants
Amgen exclusive rights to continue the clinical development and
commercialization in North America and Australia of our unlabeled or "naked"
CD22 antibody compound, epratuzumab, for the treatment of patients with
non-Hodgkin's lymphoma.
The up-front payment of $18,000,000 is being recognized, beginning
February 2001, as revenue of $750,000 per month over a period of 24 months,
which is our best estimate of the period of time required for the parties to
fulfill their obligations under the agreement. Accordingly, we recognized
$2,250,000 as "License fee revenues" for the three-month periods ended September
30, 2002, and 2001. The remaining balance of $3,000,000 as of September 30, 2002
and $5,250,000 as of June 30, 2002, is recorded as "Deferred Revenue" in the
accompanying unaudited consolidated balance sheets.
Amgen is also obligated to pay a supply fee to us for materials shipped
by us to Amgen pursuant to the Amgen Agreement. The fee was originally payable
at the point in time when Amgen is capable of manufacturing epratuzumab in
quantities sufficient to satisfy its requirements for use in the conduct of all
clinical trials deemed necessary by the U.S. Food and Drug Administration for
approval of its United States biologics license application. If we fail to
comply with our supply obligations, then Amgen does not owe the supply fee. As
of September 30, 2002, Amgen was not yet capable of producing such quantities of
epratuzumab. However, Amgen has previously agreed that it shall pay us for the
materials shipped since inception of the Amgen Agreement. Accordingly, we
invoiced Amgen in December 2001 approximately $2.2 million in payment of all
shipments of materials made through December 31, 2001. Payment was received in
January 2002 and has been recorded in the accompanying consolidated financial
statements as deferred revenue to be recognized at such time as we fulfill our
supply obligations as set forth in the Amgen Agreement. During our fiscal
quarter ended September 30, 2002, we shipped an additional $502,000 worth of
materials to Amgen which were not yet billed as of such date.
Costs incurred relating to the manufacture of the materials supplied to
Amgen are recorded as research and development expense as incurred, as there is
no assurance that such amounts will be reimbursed by Amgen in the future in the
event that we fail to fully perform our obligations. The reimbursement amount
for materials supplied to Amgen represents the approximate personnel and
materials costs associated with the manufacturing of such materials. During the
three-month periods ended September 30, 2002, and 2001 we incurred $502,000 and
$519,000, respectively, of costs associated with supplying materials to Amgen as
described above.
In June, 2002, we granted a non-exclusive license to Daiichi Pure
Chemicals Co. under Immunomedics' carcinoembryonic antigen (CEA) patents, which
included an up-front payment and royalties.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are 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 to create highly targeted agents. Using these
technologies, we have built a broad pipeline of diagnostic and therapeutic
product candidates that utilize several different mechanisms of action. Our
technologies are supported by an extensive portfolio of intellectual property
that includes approximately 82 issued patents in the United States and 234 other
issued patents worldwide.
Our most advanced therapeutic product candidate, epratuzumab, is a compound that
binds to the malignant cells that comprise non-Hodgkin's B-cell lymphoma and
certain other lymphocytic leukemias. In December 2000, we granted a license to
Amgen Inc. to further develop and commercialize the unlabeled form of
epratuzumab in North America and Australia. Amgen is currently evaluating this
compound in Phase II and Phase III clinical trials for the treatment of patients
with non-Hodgkin's lymphoma. We currently maintain all other rights to
epratuzumab outside of the territories granted to Amgen, as well as all rights
to the labeled versions of the compound worldwide. Accordingly, we are
conducting clinical trials of the unlabeled and radiolabeled versions of the
compound, epratuzumab and epratuzumab-Y-90, as well as clinically developing
four other therapeutic product candidates. We also have five therapeutic product
candidates in preclinical development. We intend to consider licensing some or
all of the rights we possess in epratuzumab as well as our other product
candidates if the right opportunities arise.
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, has already been approved in the United States, Canada and the
European Union and is being marketed in the United States and Europe for the
detection of colorectal cancers. Our second diagnostic product, LeukoScan, has
been approved in Europe and is being marketed for the detection of bone
infections. We have five additional diagnostic product candidates in preclinical
or clinical development. It is our hope that some day physicians will be able to
use our therapeutic and diagnostic products in tandem in order to improve
patient care.
Research and Development
As of September 30, 2002, we employed 45 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 current
forecasts, we expect to spend between $17.0 million and $20.0 million in the
aggregate for the fiscal year ending June 30, 2003 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 have
contracted to expand our facilities at a total cost of approximately $6.3
million. See "Liquidity and Capital Resources" below. Once this project is
completed, we believe that our facilities, as expanded, will be adequate to
support our research and development activities for at least the next two years
without the need for any material capital expenditures.
12
Therapeutic Product Candidates
We are currently evaluating several therapeutic product candidates for the
treatment of various cancers. Each antibody alone has therapeutic potential and
can also have therapeutic radioisotopes (radiolabeled), chemotherapeutics or
toxins attached to it, to create unique and potentially more effective product
candidates. The attachment of various compounds to the antibodies is intended to
allow the delivery of these therapeutic agents to tumor sites more selectively
than available radiation therapy or chemotherapeutic approaches. This treatment
approach is designed to reduce the total exposure of the patient to the
therapeutic agents, which potentially minimizes debilitating side effects. We
are currently focused on potential therapeutics that are either naked antibodies
or antibodies bound to radioisotopes, such as Yttrium-90, called Y-90, or
Iodine-131, called I-131. All of our therapeutic product candidates are
"humanized," with the portion of the antibody derived from mouse DNA sequences
being less than about 10%.
We currently have six product candidates in clinical development: epratuzumab,
epratuzumab-Y-90, labetuzumab (CEA-Cide), labetuzumab-Y-90, labetuzumab-I-131
and AFP-Cide-Y-90, as well as five product candidates in preclinical
development: our humanized CD20 antibody (hCD20), ProstaCide, MelanomaCide,
MyelomaCide and LeukoCide. We have licensed the further clinical development of
our most advanced product candidate, the unlabeled form of epratuzumab, to Amgen
for North America and Australia. We also have a broad pipeline of other product
candidates that target other cancers and diseases.
Diagnostic Imaging Products
We believe that the development of diagnostic imaging products that can
complement our therapeutic pipeline will provide us with the means of diagnosing
and staging disease as well as following its progress. Our imaging products
allow localization of disease-specific antigens within the body using an
antibody fragment bound to technetium-99m, which can be visualized by standard
nuclear medicine cameras to reveal the presence, location and approximate size
of the disease sites. We are considering several options for the continued
development of some of our imaging products, including partnering, in order to
allow us to focus on the development of our therapeutic product candidates.
Two of our diagnostic imaging products, CEA-Scan and LeukoScan, are already
being marketed and we hope to bring three additional products to market over the
next several years. We currently have two product candidates in clinical
development, LymphoScan and AFP-Scan, and three product candidates in
preclinical development, ProstaScan, MelanomaScan, and MyelomaScan.
Strategic Partnering and Relationships
We have licensed the final clinical development, manufacturing and
commercialization of our lead therapeutic product candidate, epratuzumab, to
Amgen for the treatment of non-Hodgkin's lymphoma and other diseases in North
America and Australia. We have retained the right to continue the clinical
development of epratuzumab in all remaining markets as well as the right to the
clinical development of epratuzumab-Y-90 and other versions of the antibody
where a radioisotope has been attached. However, Amgen has certain rights to
second-generation CD22-antibody-based therapeutics in exchange for
pre-determined milestone, royalty and sales-bonus payments. These rights are
also limited to North America and Australia. In exchange for granting this
license, we received an upfront payment of $18.0 million from Amgen on February
1, 2001. This agreement also provides that we may receive additional milestone
payments totaling up to $65.0 million depending on the progress of the product
candidate's development. In addition, we are entitled to receive royalties under
this agreement on any future net sales of epratuzumab by Amgen and may also
receive one-time sales milestone payments. Additional
13
compensation would be payable to us under the agreement for each
second-generation product developed by Amgen, if any, using the licensed
antibody in any such product.
We conduct research on a number of our programs in collaboration with a
not-for-profit organization called The Center for Molecular Medicine and
Immunology, or CMMI, and its clinical unit, the Garden State Cancer Center. CMMI
performs contracted pilot and pre-clinical trials in scientific areas of
importance to us and also conducts basic research and pre-clinical evaluations
in a number of areas of potential interest to us. Dr. David Goldenberg, our
Chairman of the Board and Chief Scientific Officer, is the President and a
Trustee of CMMI. For the three-month period ended September 30, 2002, we
provided payments and/or services to CMMI valued at approximately $137,000.
Critical Accounting Policies
In December 2001, the U.S. Securities and Exchange Commission issued a statement
concerning certain views of the Commission regarding the appropriate amount of
disclosure by publicly held companies with respect to their critical accounting
policies. In particular, the Commission expressed its view that in order to
enhance investor understanding of financial statements, companies should explain
the effects of critical accounting policies as they are applied, the judgments
made in the application of these policies, and the likelihood of materially
different reported results if different assumptions or conditions were to
prevail.
We consider revenue recognition as a critical accounting policy. 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 we
have 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
recognized at the time of shipment.
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 September 30, 2002 Compared to 2001
Revenues
Revenues for the three-month period ended September 30, 2002 were $3,232,000, as
compared to $3,342,000 for the same period in 2001, representing a decrease of
$110,000, or 3.3%. Product sales for the three-month period ended September 30,
2002 were $809,000, as compared to $981,000 for the same period in 2001,
representing a decrease of $172,000. This was principally a result of our
continued transition in focus from the development of diagnostic imaging
products to the development of therapeutic compounds. License fee revenues for
the three-month period ended September 30, 2002 increased to $2,397,000 from
$2,275,000 for the same period in 2001, primarily due to receipt of additional
royalties. Research and development revenues for the three-month period ended
September 30, 2002 decreased from $86,000 to $25,000 for the same period of
2001, primarily due to a lower rate of funding for grants.
14
Costs and Expenses
Total operating expenses for the three-month period ended September 30, 2002
were $6,459,000, as compared to $4,197,000 for the same period in 2001,
representing an increase of $2,262,000, or 53.9%. This was primarily due to
changes in research and development expenses, sales and marketing expenses, and
general and administrative costs, all as discussed below. Research and
development expenses for the three-month period ended September 30, 2002
increased by $1,814,000 from $2,924,000 to $4,738,000 as compared to the same
period in 2001. This was primarily due to increased headcount in our research
and development departments, increased manufacturing expenses, including lab
supplies associated with producing compounds to be used in clinical trials, and
costs associated with IBC Pharmaceuticals, Inc. in the amount of $225,000, as
IBC Pharmaceuticals became a majority-owned consolidated subsidiary of
Immunomedics on June 30, 2002. Cost of goods sold for the three-month period
ended September 30, 2002 decreased slightly to $133,000 from $167,000 for the
same period in 2001, primarily due to decreased sales of in-vitro diagnostic
kits and other imaging products. Sales and marketing expenses for the
three-month period ended September 30, 2002 decreased by $307,000 to $325,000
from $632,000 for the same period of 2001, primarily due to lower staffing
levels in our European sales office and other marketing related expenses.
General and administrative costs for the three-month period ended September 30,
2002 increased by $789,000 to $1,263,000 from $474,000 for the same period of
2001. This was primarily due to the recognition of compensation expense 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. The increased number of employees, increased legal fees and other
administrative expenses also contributed to the increase as compared to the
prior year.
Interest Income
Interest and other income for the three-month period ended September 30, 2002
decreased by $332,000 from $673,000 to $341,000 for the same period in 2001,
primarily due to lower rates of return on cash available for investments.
Operating Results
Net loss for the three-month period ended September 30, 2002 was $2,886,000, or
$0.06 per share, as compared to $182,000, or less than one cent per share, for
the same period in 2001. The larger net loss in 2002 as compared to 2001
resulted primarily from reduced sales, lower interest and other income and
increased costs and expenses resulting from increased research and development
efforts, all as discussed above.
Liquidity and Capital Resources
At September 30, 2002 we had working capital of $30,745,000, which represents a
decrease of $4,297,000 from June 30, 2002. Our liquid asset position, measured
by our cash, cash equivalents and marketable securities, was $38,310,000 at
September 30, 2002, representing a decrease of $6,478,000 from June 30, 2002.
The decrease in each case resulted primarily from the funding of operating
expenses and capital expenditures.
We anticipate that working capital and cash, cash equivalents and marketable
securities will decrease during the remainder of fiscal year 2003 as a result of
planned operating expenses and capital expenditures, offset in part by projected
revenues from sales of diagnostic imaging products in the United States and
Europe. However, there can be no assurance as to the amount of revenues, if any,
these products will continue to provide.
15
In October 2001, we entered into a Distribution Agreement with Logosys Logistik
GmbH pursuant to which Logosys packages and distributes our diagnostic imaging
products, LeukoScan and CEA-Scan, within the countries comprising the European
Union and certain other countries.
We believe that our existing working capital should be sufficient to meet our
capital and liquidity requirements for at least the next twelve months.
However, we have never generated positive cash flow from operations and actual
results could differ materially from our expectation as a result of a number of
risks and uncertainties, including the risks described our Annual Report on Form
10-K for the fiscal year ended June 30, 2002. Our operating expenses and capital
requirements are affected by numerous factors and there is no assurance that
such factors will not have a negative impact on our liquidity.
We anticipate that, in addition to our current cash resources as well as
forecasted sales, licensing, royalty and other revenues, we will require a
substantial amount of additional capital in order to fund: (i) our research and
development programs; (ii) clinical trials of our product candidates; (iii)
regulatory filings for our product candidates; and (iv) obtaining patent
protection for our inventions. Accordingly, we intend to continue to engage in
discussions with commercial banks and other financial institutions regarding
both debt and equity financing opportunities. There can be no assurance that any
additional financing will be available to us on terms we find acceptable, if at
all. Even if we are able to obtain additional financing when it is needed, there
can be no assurance that the terms of such financing will not cause substantial
dilution to existing stockholders.
We intend to supplement our financial resources from time to time as market
conditions permit through the public or private sale of debt and/or equity
securities, as well as through collaborative marketing and distribution
agreements. 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
and for the construction agreements to expand our manufacturing facility. We
have identified and quantified the significant commitments in the following
table.
Payments Due by Period
(in $000's)
Contractual Obligation 2003 2004 2005 2006 2007 Thereafter Total
---------------------- ---- ---- ---- ---- ---- ---------- -----
Operating Lease (1) $409 $545 $545 $545 $552 $10,158 $12,754
Facility Expansion (2) $700 $ 700
(1) In November 2001, we renewed our operating lease for the Morris Plains
facility for an additional term of twenty years expiring in October 2021 at a
base annual rate of $545,000, which is fixed for the first five years and
increases thereafter every five years, which includes an additional 15,000
square feet.
(2) In order to support our clinical trials and anticipated future commercial
requirements, we have entered into construction agreements to expand our
manufacturing facility at a cost of approximately $6.3 million of which $5.6
million was spent through September 30, 2002. We plan to fund this project
either through our existing working capital or other financing arrangements. The
facility plan includes two distinct manufacturing suites, containing six new
bioreactors, which are intended to allow flexibility in terms of
16
the amount of therapeutic compounds that can be produced. We anticipate that the
facility will be completed sometime during the first quarter of calendar year
2003.
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.
Private Securities Litigation Reform Act of 1995
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
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 systems; 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 year ended June 30, 2002, 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. Stockholders are
cautioned not to place undue reliance on the 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 acting
on our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to in this section.
17
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.
Our holdings of financial instruments are comprised primarily of corporate debt.
All such instruments are classified as securities available-for-sale. 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 or return. Our market risk exposure
consists principally of 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 and related weighted
average interest rates by fiscal year of maturity for our investment portfolio
as of September 30, 2002:
(in $000's)
2003 2004 2005 2006 2007 Total Fair Value
---- ---- ---- ---- ---- ----- ----------
Fixed rate $6,478 $10,037 - $1,299 - $17,814 $18,182
Average interest rate 4.82% 4.19% - 6.22% - 4.57% -
Variable rate - 6,993 - - - 6,993 7,013
Average interest rate - 2.00% - - - 2.00% -
------ ------ --- ----- --- ------ -------
Total: $6,478 $17,030 - $1,299 - $24,807 $25,195
====== ====== === ===== === ====== =======
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-14(c) and 15d-14(c)) on November 11, 2002 have concluded that, based on such
evaluation, our disclosure controls and procedures were adequate and effective
to ensure that material information relating to the Company, including its
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.
(b) Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in our internal controls.
Accordingly, no corrective actions were required or undertaken.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material developments during the fiscal quarter ended September
30, 2002 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, 2002.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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 AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K
On October 1, 2002, we filed a Current Report on Form 8-K (Item 9) containing a
certification dated September 30, 2002 pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code).
On October 25, 2002, we filed a Current Report on Form 8-K (Item 4) regarding
the change in our certifying accountants for fiscal year 2003.
19
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.
(Registrant)
November 13, 2002 By: /s/ Cynthia L. Sullivan
------------------------
Cynthia L. Sullivan
President, Chief Executive Officer
and Director
(Principal Executive Officer)
November 13, 2002 By: /s/ Gerard G. Gorman
--------------------
Gerard G. Gorman
Vice President, Finance, and Chief
Financial Officer (Principal Financial
and Accounting Officer)
CERTIFICATIONS
I, Cynthia L. Sullivan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Immunomedics, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
20
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Cynthia L. Sullivan
- --------------------------------------------
Cynthia L. Sullivan
President, Chief Executive Officer and Director
I, Gerard G. Gorman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Immunomedics,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
21
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Gerard G. Gorman
- ------------------------------------
Gerard G. Gorman
Vice President, Finance, and Chief Financial Officer
22