Securities and Exchange Commission
Washington, D.C. 20549
(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, 2000.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
Commission file number 000-25669
IMMTECH INTERNATIONAL, INC.
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(Name of Small Business as specified in its Charter)
Delaware 39-1523370
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (847) 573-0033
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Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 per share
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
As of October 31, 2000, 5,367,769 shares of the Registrant's Common Stock
were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes |_| No |X|
-1-
PART I.
Item 1. Financial Statements
IMMTECH INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEETS (UNAUDITED)
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September 30, March 31,
------------ ------------
2000 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 987,980 $ 4,596,319
Investment securities available for sale 1,359,811
Other current assets 11,200
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Total current assets 987,980 5,967,330
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PROPERTY AND EQUIPMENT:
Research and laboratory equipment 401,740 399,198
Furniture and office equipment 144,167 112,036
Leasehold improvements 28,525 9,797
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Total - at cost 574,432 521,031
Less accumulated depreciation and amortization 334,933 283,741
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Property and equipment - net 239,499 237,290
DEFERRED OFFERING COSTS 203,513
OTHER ASSETS 19,848 19,848
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TOTAL $ 1,450,840 $ 6,224,468
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,143,743 $ 1,531,011
Other accrued liabilities 87,315 33,904
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Total current liabilities 1,231,058 1,564,915
DEFERRED RENTAL OBLIGATION 36,696 39,879
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Total liabilities 1,267,754 1,604,794
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STOCKHOLDERS' EQUITY:
Preferred stock
Common stock 53,677 52,823
Additional paid-in capital 27,769,515 27,480,070
Deficit accumulated during the developmental stage (27,640,106) (22,912,041)
Net unrealized loss on investment securities available for sale (1,178)
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Total stockholders' equity 183,086 4,619,674
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TOTAL $ 1,450,840 $ 6,224,468
============ ============
See notes to condensed financial statements.
-2
IMMTECH INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
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October 15,
Three Months Ended Six Months Ended 1984
September 30, September 30, (Inception) to
-------------------------- -------------------------- September 30,
2000 1999 2000 1999 2000
REVENUES $ 203,380 $ 56,102 $ 338,958 $ 61,890 $ 2,695,875
----------- ----------- ----------- ----------- ------------
EXPENSES:
Research and development 1,710,759 696,941 3,887,877 7,311,655 21,736,385
General and administrative 718,705 414,272 1,314,701 764,206 11,592,870
Equity in loss of joint venture 135,002
----------- ----------- ----------- ----------- ------------
Total expenses 2,429,464 1,111,213 5,202,578 8,075,861 33,464,257
----------- ----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (2,226,084) (1,055,111) (4,863,620) (8,013,971) (30,768,382)
----------- ----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income 41,548 97,395 138,497 162,237 463,056
Interest expense (1,129,502)
Loss on sales of investment securities net (2,942) (2,942)
----------- ----------- ----------- ----------- ------------
Other income (expense) net 41,548 97,395 135,555 162,237 (669,388)
----------- ----------- ----------- ----------- ------------
LOSS BEFORE EXTRAORDINARY ITEM (2,184,536) (957,716) (4,728,065) (7,851,734) (31,437,770)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT 1,427,765
----------- ----------- ----------- ----------- ------------
NET LOSS (2,184,536) (957,716) (4,728,065) (7,851,734) (30,010,005)
REDEEMABLE PREFERRED STOCK
CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
----------- ----------- ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(2,184,536) $ (957,716) $(4,728,065) $(7,851,734) $(27,640,106)
=========== =========== =========== =========== ============
NET LOSS PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ (0.41) $ (0.19) $ (0.88) $ (1.63)
=========== =========== =========== ===========
SHARES USED IN COMPUTING NET
LOSS PER SHARE TO COMMON
STOCKHOLDERS 5,367,769 5,169,339 5,356,009 4,818,871
=========== =========== =========== ===========
See notes to condensed financial statements.
-3-
IMMTECH INTERNATIONAL, INC.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
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October 15,
1984
Three Months Ended Six Months Ended (Inception) to
September 30, September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999 2000
OPERATING ACTIVITIES:
Net loss $ (2,184,536) $ (957,716) $ (4,728,065) $ (7,851,734) $(30,010,005)
Adjustments to reconcile net loss to net
cash used in operating activities:
Compensation recorded related to issuance of common
stock or common stock options 85,152 113,650 134,668 6,329,927 11,645,969
Depreciation and amortization of property and equipment 25,108 6,908 51,191 13,688 406,442
Deferred rental obligation (1,592) (3,184) 36,695
Equity in loss of joint venture 135,002
Loss on sales of investment securities net 2,942 2,942
Amortization of debt discounts and issuance costs 134,503
Extraordinary gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Other current assets (29,402) 11,200 (36,902)
Accounts payable (438,935) (145,045) (387,268) (433,657) 1,472,883
Accrued interest 663,013
Other accrued liabilities 42,865 193,552 53,411 177,073 87,315
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (2,471,938) (818,053) (4,865,105) (1,801,605) (16,853,006)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities (199,996) (1,803,469)
Proceeds from sales and maturities of investment securities 1,558,043 1,800,527
Purchases of property and equipment (22,451) (2,323) (53,401) (47,449) (619,418)
Investment in and advances to joint venture (135,002)
Increase in other assets (19,848)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (22,451) (2,323) 1,304,646 (47,449) (777,210)
------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments of) advances from stockholders and affiliates (50,000) 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (110,000) (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Proceeds from issuance of preferred stock 3,330,000
Net proceeds from issuance of common stock 347,393 41,808 10,061,313 12,175,092
Additional capital contributed by stockholders 13,825 13,825 245,559
Payments for offering costs deferred (103,513) (103,513) (287,583)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by financing activities (89,688) 347,393 (47,880) 9,901,313 18,618,196
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,584,077) (472,983) (3,608,339) 8,052,259 987,980
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,572,057 8,525,242 4,596,319
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 987,980 $ 8,052,259 $ 987,980 $ 8,052,259 $ 987,980
============ ============ ============ ============ ============
See notes to condensed financial statements.
-4-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by
Immtech International, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments necessary for a fair
statement of results for each period shown. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The
Company believes that the disclosures made are adequate to prevent the
financial information given from being misleading. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's previously filed
Form 10-KSB.
2. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - The Company is a biopharmaceutical company
focusing on the discovery and development of therapeutic products for the
treatment of opportunistic diseases and cancer in patients with
compromised immune responses. The Company has two separate platform
technologies for developing drugs, one based on developing a new class of
molecules as pharmaceuticals and a second for developing a series of
biological proteins that work in conjunction with the immune system.
The Company was incorporated in 1984. The Company is in the development
stage and has directed its efforts toward research and development, hiring
scientific and management personnel, arranging for facilities and
conducting clinical trials. The Company has no products currently
available for sale, and none are expected to be commercially available for
several years.
Risks and Uncertainties - The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.
Since inception, the Company has incurred accumulated losses of
approximately $27,640,000. Management of the Company expects the Company
to continue to incur significant losses during the next several years as
the Company expands its research and development activities and clinical
trial efforts. In addition, the Company has various research and
development agreements with various entities that are thinly capitalized
and are dependent upon their ability to raise additional funds to continue
their research and development activities. The Company does not have any
therapeutic products currently available for sale, and none are expected
to be commercially available for several years, if at all. There can be no
assurance that the Company's continued research will lead to the
development of commercially viable products. The Company's operations to
date have consumed substantial amounts of cash. The negative cash flow
from operations is expected to continue and to accelerate in the
foreseeable future. The Company will require substantial funds to conduct
research and development, preclinical and clinical testing and to
manufacture (or have manufactured) and market (or have marketed) its
product candidates. On April 26, 1999, the Company completed an initial
public offering which raised approximately
-5-
$9,173,000 of additional equity capital. The net proceeds from the initial
public offering are not sufficient to fund the Company's operations
through the commercialization of one or more products yielding sufficient
revenues to support the Company's operations; therefore, the Company will
need to raise additional funds. The Company believes its existing working
capital, the grants the Company has received or is in the process of
receiving and the pending private placement offering are sufficient to
meet the Company's planned expenditures through May 2001, although there
can be no assurance the Company will not require additional funds. These
factors, among others, indicate that the Company may be unable to continue
as a going concern. The accompanying financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to obtain profitable operations. Management's
plans for the forthcoming year include continuing their efforts to obtain
additional equity financing and research grants, and enter into various
research and development agreements with other entities.
Cash Equivalents - The Company considers all investments with maturities
of three months or less to be cash equivalents. Cash equivalents consist
of an investment in a money market mutual fund and corporate debt
instruments, recorded at cost, which approximate fair value.
Investment Securities - The Company classifies its investment in debt
securities as available for sale. Securities available for sale are
recorded at fair value, with unrealized gains (losses) recorded as a
separate component of stockholders' equity. Gains (losses) on the sale of
investment securities are recorded on the specific identification method.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method (see Note 3).
Property and Equipment - Property and equipment are recorded at cost and
depreciation and amortization are provided using primarily the
straight-line method over estimated useful lives ranging from three to
seven years.
The Company periodically evaluates the carrying value of its property and
equipment in accordance with 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." Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of an
asset, a loss is recognized for the difference between the fair value and
carrying value of the asset.
Deferred Offering Costs - Costs incurred with respect to efforts to raise
from $3 to 8 million in a private placement common stock offering in
process as of September 30, 2000 have been deferred pending the completion
of the offering. The offering is expected to be completed by December 15,
2000, and the costs will be netted with the proceeds of the offering.
Revenue Recognition - Revenue under grants and research and development
agreements is recognized based on the Company's estimates of the stage of
completion under the terms of the respective agreements.
Research and Development Costs - All research and development costs are
charged to operations as incurred.
-6-
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to
the periods in which the differences are expected to affect taxable
income.
Net (Loss) Income Per Share - Net (loss) income per share is calculated in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." Diluted net (loss) income per share was the
same as the basic net (loss) income per share as the stock options and
warrants were antidilutive for the three months ended September 30, 2000
and 1999 and the six months ended September 30, 2000 and 1999.
Segment Reporting - The Company is a development stage biopharmaceutical
company that operates as one segment.
Comprehensive Income (Loss) - Comprehensive loss for the six months ended
September 30, 2000 is as follows:
Net loss $(4,728,065)
-----------
Other comprehensive income:
Unrealized loss on investment securities available for sale (1,764)
Reclassification adjustment for loss included in net loss 2,942
-----------
Total other comprehensive income 1,178
-----------
Comprehensive loss $(4,726,887)
===========
There was no difference between comprehensive loss and net loss for the
three months ended September 30, 2000 and September 30, 1999 and the six
months ended September 30, 1999.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Approved Accounting Standard Not Adopted - In 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is in the process of
evaluating the accounting and reporting requirements of SFAS No. 133, as
amended by SFAS No. 137, and does not believe the adoption of SFAS No. 133
will have a significant effect on the Company's financial statements. This
statement is required to be adopted no later than the year ended March 31,
2002.
Reclassifications - Certain amounts previously reported have been
reclassified to conform with the current presentation.
3. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and
related diseases. The Company and Franklin have a research and funding
agreement with
-7-
NextEra in which Franklin has provided funding of $1,350,000 to NextEra
through March 31, 2000 to fund the scale-up of manufacturing and
initiation of Phase I clinical trials. The Company contributed its rmCRP
technology as well as use of its current laboratory facilities for 330,000
common shares of NextEra. During the year ended March 31, 2000, the
Company advanced $135,000 to NextEra to fund its operations.
NextEra funded the operation of the Company's primary facility, including
certain salaries related to work on rmCRP, rent and overhead associated
with the project from July 1998 through December 1999. Since January 1,
2000, NextEra has funded only their own compensation expenses, as they
stopped funding the Company's primary facility and any associated
overhead. In addition, NextEra has funded and is required to fund the cost
of maintaining and defending the patents that are part of the intellectual
property transferred to NextEra by the Company.
NextEra has incurred accumulated losses of approximately $1,819,000 since
inception (July 8, 1998) through September 30, 2000. NextEra is expected
to continue to incur significant losses during the next several years. In
addition, as of September 30, 2000, NextEra's current liabilities exceeded
its current assets by approximately $1,527,000 and NextEra had a
stockholders' deficiency of approximately $1,503,000.
As of September 30, 2000 and March 31, 2000, the Company owned
approximately 44% of the issued and outstanding shares of NextEra common
stock.
On April 27, 2000, Franklin filed a complaint against the Company in the
United States District Court for the Southern District of Ohio, Eastern
Division. The complaint alleges fraud, negligent misrepresentation and
breach of the implied covenant of good faith and fair dealing in
connection with the research and funding agreement entered into between
Franklin, the Company and NextEra. NextEra is not a party to the lawsuit.
The complaint seeks compensatory damages in excess of $800,000,
unquantified punitive damages, attorneys' fees, costs and expenses. The
Company was served with the complaint on August 23, 2000 and has filed
responsive pleadings. The Company believes the complaint lacks merit and
intends to vigorously defend this action. The Company is currently in
negotiations with Franklin and its designees to resolve the underlying
issues, including the possible restructuring of the joint venture and
relationship with NextEra to better position NextEra in its fund raising
efforts.
NextEra's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to obtain profitable operations. NextEra's
financial plans for the forthcoming year include the continuing efforts to
obtain additional equity financing.
The Company has recognized an equity loss in NextEra to the extent of the
basis of its investment. Recognition of any investment income on the
equity method by the Company for its investment in NextEra will occur only
after NextEra has earnings in excess of previously unrecognized equity
losses.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The Company had no investment securities available for sale as of June 30,
2000 and during the three months ended September 30, 2000. Proceeds from
the sales of investment securities during the three months ended June 30,
2000 and the six months ended September 30, 2000 were $1,565,105. Gross
gains and gross losses of $212 and $3,154, respectively, were realized on
such sales during the three months ended June 30, 2000 and the six months
ended September 30, 2000.
-8-
The amortized cost and carrying value (fair value) of investment
securities available for sale as of March 31, 2000 is summarized as
follows:
March 31, 2000
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Corporate debt securities $ 933,759 $119 $(1,142) $ 932,736
Asset backed securities 427,230 (155) 427,075
---------- ---- ------- ----------
Total $1,360,989 $119 $(1,297) $1,359,811
========== ==== ======= ==========
As of March 31, 2000, the net unrealized losses on investment securities
available for sale were $1,178.
5. STOCK OPTIONS, WARRANTS AND COMMON STOCK
On April 26, 1999, the Company issued 1,150,000 shares of common stock
through an initial public stock offering resulting in net proceeds of
approximately $9,173,000. Costs incurred of approximately $513,000 as of
March 31, 1999, including approximately $329,000 of costs that were unpaid
and included in accounts payable as of such date, with respect to the
offering were deferred pending the completion of the offering and netted
with the proceeds of the offering. The underwriters received warrants to
purchase 100,000 additional shares of common stock at $16.00 per share.
The warrants expire April 30, 2003.
The Company had 5,367,769 shares and 5,282,334 shares of common stock
outstanding as of September 30, 2000 and March 31, 2000, respectively.
The Company has granted common stock options to individuals who have
contributed to the Company. The options contain various provisions
regarding vesting periods, expiration dates, stockholder approval
requirements and contingencies on the approval of an increase in the stock
option pool by the Board of Directors. The options vest over periods
ranging from 0 to 4 years and generally expire in ten years. As of
September 30, 2000, there were 2,581 employee stock options available for
grant.
During the three months ended September 30, 2000, the Company did not
issue any options to nonemployees and recognized expense of approximately
$85,000 related to certain options issued during the year ended March 31,
1999 which vest over a four year service period. During the six months
ended September 30, 2000, the Company did not issue any options to
nonemployees and recognized expense of approximately $135,000 related to
certain options issued during the year ended March 31, 1999 which vest
over a four year services period. During the six months ended September
30, 1999, the Company issued 2,176 options to nonemployees and recognized
expense of approximately $37,000 related to such options and approximately
$67,000 of expense related to certain options issued during the year ended
March 31, 1999 which vest over a four year service period. The expense was
determined based on the estimated fair value of the options issued.
-9-
The activity during the six months ended September 30, 2000 for the
Company's stock options is summarized as follows:
Weighted
Number of Stock Options Average
Shares Price Range Exercise Price
Outstanding as of April 1, 2000 416,048 $ 0.31-1.74 $ 0.63
Exercised (85,435) 0.31-0.59 0.49
Expired (27,655) 0.59 0.59
------------ ----------- ------------
Outstanding as of September 30, 2000 302,958 $0.31-$1.74 $ 0.67
============ =========== ============
Exercisable as of September 30, 2000 275,276 $0.31-$1.74 $ 0.69
============ =========== ============
The Board of Directors previously approved the issuance of options to
purchase 127,750 common stock to certain employees and other nonemployees
who have been engaged to assist the Company in various research capacities
at a price of $11.50 per share, subject to shareholder approval. At the
Company's annual shareholders' meeting held on October 12, 2000, the
options to purchase 127,750 shares of common stock were approved as part
of a new stock incentive plan which provides for the issuance of up to
350,000 shares of common stock. These options are not included in the
summarized information preceding this paragraph.
On July 31, 2000, the Company entered into an agreement with the
principals of Stonegate Securities, Inc. ("Stonegate") for assistance to
be provided by Stonegate in connection with raising additional equity
capital. As consideration for services to be performed under the
agreement, Stonegate will be entitled to receive warrants to purchase up
to 200,000 shares of the Company's common stock at a price of $12.06 per
share. The warrants vest at various dates through March 15, 2001,
contingent upon the completion of certain events. As of September 30,
2000, Stonegate had vested in warrants to purchase 100,000 shares of the
Company's common stock. The warrants expire on July 31, 2005.
The following table summarizes information about common stock warrants
outstanding as of September 30, 2000:
Warrants
Exercise Price Outstanding Expiration Date
$6.47 per share 225,000 July 24, 2004
$6.47 per share 750,000 October 12, 2004
$12.06 per share 200,000 July 31, 2005
$16.00 per share 100,000 April 30, 2003
$20.52 per share (see Note 6) 850,000 April 30, 2009
---------
Total warrants outstanding 2,125,000
=========
During the three months ended June 30, 1999 and September 30, 1999,
certain warrant holders exercised warrants to purchase 1,400 and 67,900
shares of common stock at $5.00 per share, respectively. The warrants,
which were issued during the year ended March 31, 1997, had an August 29,
1999 expiration date. Warrants to purchase 22,100 shares of common stock
expired as of such date. In addition, on May 17, 1999, warrants to
purchase 75,000 shares of common stock were exercised at $.10 per share.
-10-
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for its employee stock option plans. There were no options issued to
employees during the three months ended September 30, 2000 and 1999, and
the six months ended September 30, 2000 and 1999.
6. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional
fees for the attainment of certain milestones. The Company may receive
royalties on the sales of such products. The other parties generally
receive exclusive marketing and distribution rights for certain products
for set time periods in specific geographic areas.
The Company initially acquired its rights to the platform technology and
dicationic compounds developed by a consortium of universities including
The University of North Carolina at Chapel Hill ("UNC"), Duke University,
Auburn University and Georgia State University (the "Consortium") pursuant
to an agreement, dated January 15, 1997 (as amended in May 1998, the
"Consortium Agreement") among the Consortium, Pharm-Eco Laboratories, Inc.
("Pharm-Eco"), and on behalf of itself and the other academic institutions
in the Consortium. The Consortium Agreement commits each party to the
agreement to research, develop, finance the research and development of,
manufacture and market the technology and compounds owned by the
Consortium and then licensed or optioned to Pharm-Eco (the "Current
Compounds") and licensed to the Company pursuant to the Consortium
Agreement, and all technology and compounds developed by the Consortium
after the date thereof through use of Company-sponsored research funding
or National Cooperative Drug Development grant funding made available to
the Consortium (the "Future Compounds" and, collectively with the Current
Compounds, the "Compounds").
The Consortium Agreement contemplates that the Company and Pharm-Eco, with
respect to the Current Compounds, and the Company and UNC, with respect to
Future Compounds, will enter into more comprehensive license or
assignments of the intellectual property rights held by Pharm-Eco and the
Consortium.
Under the Consortium Agreement, the Company agreed to use its best efforts
to complete an initial public offering ("IPO") of shares of its common
stock with gross proceeds of at least $10,000,000 or an alternative form
of financing ("Alternative Financing") to raise at least $4,000,000 by
April 30, 1999. As a result of the closing of the IPO, the Company: (i)
used $5,000,000 to develop the Compounds; (ii) issued an aggregate of
611,250 shares of common stock to Pharm-Eco or persons designated by
Pharm-Eco, which number includes 137,500 shares issued to the Consortium;
the Company has recorded research and development costs of $6,112,500
during the three months ended June 30, 1999, based on the estimated fair
value of the 611,250 shares issued; (iii) may be required to issue
warrants to purchase an aggregate of 850,000 shares of common stock to
Pharm-Eco or persons designated by Pharm-Eco with a ten-year term from the
date of issuance, at an exercise price equal to the weighted average
market price of the Company's common stock during the first 20 days of
trading on the over-the-counter market ($20.52 per share), which warrants
are exercisable upon the occurrence of certain events and subject to
redemption by the Company; and (iv) may be required to issue an aggregate
of 150,000 shares of common stock collectively to Pharm-Eco or persons
designated by Pharm-Eco, which number of shares includes 100,000 shares of
common stock to be issued to the Consortium, upon the filing by the
Company of a new drug application or an abbreviated new drug application
with the Food and Drug Administration with respect to any product covered
by the Agreement under current Compounds. In addition, the Company
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will pay UNC an aggregate royalty of 5% of net sales of Current Products
and Future Products, except that the royalty rate payable on any Compound
developed at Duke University will be determined by negotiation at the time
such Compound is developed. In the event that the Company sublicenses its
rights with respect to the Compounds, the Company will pay UNC, in
addition to the royalty described above, 2.5% of all signing, milestone
and other non-royalty payments made to the Company pursuant to the
sublicense agreement and will pay to Pharm-Eco 2.5% of all signing,
milestone and other nonroyalty payments made to the Company pursuant to
the sublicense agreement.
The Company entered into an agreement with Pharm-Eco to use reasonable
efforts to form a joint venture to produce Good Manufacturing Practices
("GMP")-quality dicationic drugs and products for clinical testing and for
early commercialization. Pharm-Eco was unable to manufacture certain
required compounds and the Company subsequently engaged alternate
suppliers who successfully manufactured the compounds.
Since the gross proceeds of the April 26, 1999 initial public offering
were more than $10,000,000, both Pharm-Eco and UNC will grant an exclusive
worldwide license to use, manufacture, have manufactured, promote, sell,
distribute, or otherwise dispose of any products based directly or
indirectly on all of the Current Compounds and Future Compounds.
The Company is required to make quarterly research grants in the amount of
$100,000 to UNC through April 30, 2002 and pay all costs to maintain and
defend all patents and patent applications relating to any Compounds or
products. During the three months ended September 30, 2000 and 1999, the
Company expensed grant payments to UNC of $100,000 and $100,000,
respectively. During the six months ended September 30, 2000 and 1999, the
Company expensed grant payments to UNC of $200,000 and $450,000,
respectively. Such payments were expensed as research and development
costs.
In August 1999, the Company received a Small Business Innovation Research
("SBIR") Grant for approximately $598,000 from the National Institutes of
Health ("NIH") to research various infections. During the three months
ended September 30, 2000 and the six months ended September 30, 2000, the
Company recognized revenue of approximately $100,000 and $236,000,
respectively, from this grant and expensed payments to the Consortium for
approximately $13,000 and $51,000, respectively, for contracted research
related to such grant. During the three months and six months ended
September 30, 1999, the Company recognized revenue of approximately
$56,000 for contracted research related to this grant and expensed payment
of $56,000 to Pharm-Eco for their research. During the three months ended
June 30, 1999 and the six months ended September 30, 1999, the Company
recognized revenue of approximately $6,000 for research related to a
specific research grant from the NIH and expensed payments to the
Consortium of approximately $6,000 for contracted research related to such
grant. There is no additional funding available to the Company under these
grants.
In August 2000, the Company received two additional SBIR research grants
from the NIH aggregating approximately $831,000. During the three months
ended September 30, 2000, the Company recognized revenue of approximately
$103,000 from these grants. There were no payments to the Consortium
relating to these grants.
* * * * * *
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
Immtech International, Inc. ("Immtech" or the "Company") is a
pharmaceutical company focused on the discovery and commercialization of
therapeutics for the treatment of patients afflicted with infectious diseases
and cancer. The Company has a pharmaceutical program for developing drugs with a
specific research focus on new drugs to treat fungal diseases and tuberculosis.
The pharmaceutical program is based on a technology platform for the design of a
class of pharmaceutical compounds referred to as dications. Dicationic compounds
have two positively charged ends held together by a neutrally charged chemical
linker group. The unique structure of the compounds with positive charges on the
ends (shaped like molecular barbells) allows them to bind to the negatively
charged surface in the minor groove of the organism's DNA (like a band-aid),
preventing life sustaining enzymes from attaching to the DNA's active sites.
Once a site is occupied by one of the Company's compounds, the necessary enzyme
cannot bind to the DNA, preventing the organism from dividing, stopping the
spread of the related disease by inhibiting or killing the growth of the target
organism. This will accelerate the body's return to normal health. The Company
believes that pharmaceutical dications can be designed to inhibit the growth of
a wide variety of infectious organisms which cause fungal, parasitic, bacterial
and viral diseases. Separately, Immtech has formed a joint venture company to
finance and manage a biological program for developing drugs based on biological
proteins that work in conjunction with the body's immune system. These
biological proteins are derivatives of C-Reactive Protein ("CRP"), which occurs
naturally in the body and which the Company believes can be used to control the
structural environment around cancerous tumors and to reprogram cancerous cells
to stop growing uncontrollably and revert to normal cell behavior.
With the exception of certain research funding agreements and certain
grants, the Company has not generated any revenue from operations. For the
period from inception (October 15, 1984) to September 30, 2000, the Company
incurred cumulative net losses of approximately $27,640,000. The Company has
incurred additional losses since such date and expects to incur additional
operating losses for the foreseeable future. The Company expects that its
revenue sources for at least the next several years will be limited to research
grants from Small Business Technology Transfer Program ("STTR") grants and Small
Business Innovation Research ("SBIR") grants and payments from other
collaborators under arrangements that may be entered into in the future. The
timing and amounts of such revenues, if any, will likely fluctuate sharply and
depend upon the achievement of specified milestones, and results of operations
for any period may be unrelated to the results of operations for any other
period.
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RESULTS OF OPERATIONS
Six Months Ended September 30, 2000 Compared with Six Months Ended
September 30, 1999.
Revenues under collaborative research and development agreements were
approximately $339,000 and $62,000 in the six months ended September 30, 2000
and 1999 respectively. For the six months ended September 30, 2000 and 1999, all
revenues were from grant revenues from the National Institutes of Health
("NIH").
Interest income for the six months ended September 30, 2000 and 1999,
respectively, was approximately $138,000 and $162,000. Interest is generated on
the invested funds remaining from the proceeds of the initial public offering on
April 26, 1999 (the "IPO"). There was no interest expense for the six months
ended September 30, 2000 and September 30, 1999.
Research and development expenses decreased to approximately $3,888,000 in
the six months ended September 30, 2000 from approximately $7,312,000 in the six
months ended September 30, 1999. Research and development expenses for the six
months ended September 30, 1999 included a non-cash expense of approximately
$6,113,000 related to the issuance of 611,250 shares of common stock pursuant to
an agreement with Pharm-Eco Laboratories, Inc. ("Pharm-Eco") and the University
of North Carolina at Chapel Hill ("UNC"), acting on behalf of a consortium of
universities including UNC, Duke University, Auburn University and Georgia State
University (the "Consortium"). Research and development expenses for the period
ended September 30, 1999 exclusive of the non-cash charge were approximately
$1,199,000 compared to approximately $3,888,000 of expenses for the six month
period ended September 30, 2000. The increase is due primarily to increased
direct spending on product development on the Company's lead pharmaceutical
compounds, preparing for clinical trials.
General and administrative expenses increased in the six months ended
September 30, 2000 to approximately $1,315,000 from approximately $764,000 in
the six months ended September 1999. The increase was primarily due to expenses
of approximately $340,000 for activities related to promoting the Company and
exploring various alternatives to raising additional capital and other costs
associated with our New York office which opened in July 1999 for the purpose of
corporate development and investor relation activities, the hiring of additional
employees and increased legal fees relating to patents and other matters as
discussed in Part II item 1.
The Company incurred a net loss attributable to common stockholders of
approximately $4,728,000 for the six months ended September 30, 2000 as compared
with a net loss of approximately $7,852,000 for the six months ended September
30, 1999.
Three Months Ended September 30, 2000 Compared with Three Months Ended
September 30, 1999.
Revenues under collaborative research and development agreements were
approximately $203,000 and $56,000 for the three months ended September 30, 2000
and 1999, respectively. For the three months ended September 30, 2000, there
were grant revenues of approximately $203,000 from certain SBIR grants from the
NIH while for the three months ended September 30, 1999 the grant revenue from
two NIH grants was approximately $56,000.
Interest income for the three months ended September 30, 2000 was
approximately $42,000. Interest is primarily generated on the invested funds
remaining from the proceeds of the initial public offering on April 26, 1999
(the "IPO"). Interest income in the three months ended September 30, 1999 was
approximately $97,000. There was no interest expense for the three months ended
September 30, 2000 and September 30, 1999.
Research and development expenses increased to approximately $1,711,000 in
the three months ended September 30, 2000 from approximately $697,000 in the
three months ended September 30, 1999. The increase is due primarily to
increased direct spending on product development on the Company's lead
pharmaceutical compounds in anticipation of the start of clinical trials.
General and administrative expenses increased for the three months ended
September 30, 2000 to approximately $719,000 from approximately $414,000 for the
three months ended September 30, 1999. The increase was primarily due to an
increase in legal fees from approximately $44,000 in the three months ended
September 30, 1999 to approximately $276,000 in the three months ended September
30, 2000 relating to patents and other matters as discussed in Part II item 1.
The Company incurred a net loss of approximately $2,185,000 for the three
months ended September 30, 2000 as compared with a net loss of approximately
$958,000 for the three months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 2000, the Company financed its
operations from (i) the net proceeds from the issuance of debt and equity
securities and cash contributed from stockholders, which in the aggregate,
raised approximately $19,381,000 (ii) payments from research agreements and SBIR
grants and STTR grants of approximately $2,696,000 and (iii) issuance of stock,
options and warrants in lieu of cash compensation.
The Company's cash resources have been used to finance research and
development, including sponsored research, capital expenditures, expenses
associated with the efforts of the Consortium and general and administrative
expenses. Over the next several years, the Company expects to incur substantial
additional research and development costs, including costs related to
early-stage research in preclinical and clinical trials, increased
administrative expenses to support its research and development operations and
increased capital expenditures for expanded research capacity, various equipment
needs and facility improvements or relocation.
The Company is a party to sponsored research agreements with UNC which
requires it to make quarterly research payments of $100,000 through April 30,
2002.
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The Company believes its existing resources, the grants the Company has
received or is in the process of receiving and the pending private placement
offering to be sufficient to meet the Company's planned expenditures through May
2001, although there can be no assurance the Company will not require additional
funds. The Company's working capital requirements will depend upon numerous
factors, including the progress of the Company's research and development
programs (which may vary as product candidates are added or abandoned),
preclinical testing and clinical trials, achievement of regulatory milestones,
the Company's corporate partners fulfilling their obligations to the Company,
the timing and cost of seeking regulatory approvals, the level of resources that
the Company devotes to the development of manufacturing, the ability of the
Company to maintain existing and establish new collaborative arrangements with
other companies to provide funding to the Company to support these activities
and other factors. In any event, the Company will require substantial funds in
addition to the present existing working capital to develop its product
candidates and otherwise to meet its business objectives.
The Company is in the process of raising between $3 and $8 million in a
private placement common stock offering expected to be completed by December 15,
2000. Currently there is $3.3 million in escrow towards this offering.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become due
and, ultimately, to obtain profitable operations. Management's plans for the
forthcoming year include continuing their efforts to obtain additional equity
financing and research grants, and enter into various research and development
agreements with other entities.
SPECIAL NOTE--FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, including, without
limitation, statements containing the words "believe," "anticipates," "expects"
and words of similar import, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
the Company's need for substantial additional funds and its access to capital
markets, the lack of any Company products currently available for sale, the
early stages of experiments and the uncertainties involved in clinical trials,
the Company's history of operating losses, the dependence of the Company on
third party relationships for the manufacture of its products and the
performance of its clinical trials, the Company's limited manufacturing
capability, existing government regulations and changes in, or the failure to
comply with, government regulations; competition; the ability to attract and
retain qualified personnel and the Company's dependence on key personnel; the
ability to protect technology, patents and proprietary information; and other
factors referenced in this report. Given these uncertainties, readers of this
report and investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
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such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
Part II
Item 1. Legal Proceedings
Immtech International, Inc. (the "Company"), is a party to a legal
proceeding (the "Proceeding") in the Court of Chancery of the State of Delaware,
in and for New Castle County, which was commenced on August 18, 2000. The party
which initiated the Proceeding is Pharm-Eco Laboratories, Inc., a California
corporation ("Pharm-Eco"). Pharm-Eco amended its complaint on August 21, 2000,
to add two individuals, David. J. Wade ("Wade") and Richard Gabriel ("Gabriel"),
as co-plaintiffs. Each of Wade and Gabriel are senior executives of, and
indirect beneficial owners of Pharm-Eco.
Among other relief, Pharm-Eco seeks a declaration from the court that the
shares of the Company's common stock that Pharm-Eco was issued in July, 1999
(collectively, the "Shares"), are freely tradable pursuant to Rule 144 of the
Securities Act of 1933, as amended ("Rule 144"). The Shares were issued to
Pharm-Eco pursuant to an agreement dated January 15, 1997 (the "1997
Agreement"), between the Company, Pharm-Eco, and The University of North
Carolina at Chapel Hill. The Company believes that Pharm-Eco's claims are
meritless and that the Shares are not yet tradable pursuant to Rule 144 because
Pharm-Eco has failed to comply with the 1997 Agreement by giving the Company all
of the consideration to which the Company is entitled. The Company is vigorously
defending the Proceeding, and has filed a counterclaim against Pharm-Eco and
certain other parties. A trial date for the Proceeding has been set for January,
2001.
On or about June 15, 2000, Technikrom, Inc. filed a claim against Immtech
International, Inc. with the American Arbitration Association in Chicago,
Illinois. In that proceeding, Technikrom seeks to recover $124,000 in fees,
interest and costs for certain method development services provided to Immtech
relating to the purification of a protein known as rmCRP. Immtech intends to
vigorously defend the action and has filed a Counterclaim against Technikrom for
fraudulent inducement of contract which seeks compensatory damages of at least
$224,000, plus interest and costs. Immtech has also sought a declaratory
judgment that Technikrom, inter alia, failed to use its best efforts to develop
a purification method within the time parameters set by the parties. The parties
currently are engaged in the process of selecting an arbitrator.
Except as set forth above and as described in Note 3 of the Notes to the
Condensed Financial Statements included in Part I item 1 in this form 10QSB and
the Notes to the Financial Statements included in the form 10KSB for the year
ended March 31, 2000, the Company is not aware of any impending litigation. The
Company does not believe the ultimate resolution of the aforementioned legal
proceedings will have a material effect on its financial statements.
Item 2. Recent Sales of Unregistered Securities Pursuant to Section 4(2)
None
Use of Proceeds
In April 1999, the Company sold 1,150,000 shares of common stock at $10.00
per share (which included the underwriters over-allotment of 150,000 shares)
through the IPO. The U.S. underwriter Westport Resources handled the placement
of 300,000 shares plus the over-allotment of 150,000 shares. The international
underwriter The New China Hong Kong Securities LTD placed the remaining 700,000
shares. The gross proceeds from the IPO totaled $11,500,000 and the net proceeds
totaled $9,172,610.
Substantially all of the remaining net proceeds of the IPO were used to fund the
Company's research and development efforts, including clinical and preclinical
studies. Any net proceeds not applied to the Company's research and development
efforts will be used for working capital and general corporate purposes. The
amount and timing of expenditures of the net proceeds of the IPO cannot be
precisely determined, and will depend on numerous factors, including the status
of the Company's product development efforts, the results of clinical trials and
the regulatory approval process. The Company may also use a portion of the net
proceeds to acquire complementary businesses, products or technologies, although
the Company has no agreements and is not involved in any negotiations with
respect to any such transaction. Pending such uses, the Company has chosen to
invest any available funds in short-term, interest-bearing investments.
For the 18 months during the period from the IPO through September 30,
2000, the Company has used the proceeds as follows:
Arrearage in research support $ 150,000
Debt payment $ 110,000
Research and development $5,431,954
Patent protection $ 241,350
Working capital and general corporate purposes $3,239,306
Accordingly, all of the proceeds from the IPO have been used.
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Item 6. Exhibits, and Reports on Form 8-K
(A) EXHIBITS
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as part of this report.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed during the past quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMMTECH INTERNATIONAL, INC.
Date: November 14, 2000 By: /s/ T. Stephen Thompson
------------------------------------
T. Stephen Thompson
Chief Executive Officer and
President
Date: November 14, 2000 /s/ Gary C. Parks
------------------------------------
Gary C. Parks
Treasurer, Secretary and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
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EXHIBIT INDEX
Exhibit Description
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27.1(1) Financial Data Schedule
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