UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended March 31, 2006.
|__| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from [__] to [__].
Commission file number 000-25669
IMMTECH PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 39-1523370
--------------------------------------- -------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
One North End Avenue
New York, New York 10282
--------------------------------------- -------------------------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code: (847) 573-0033
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
-------------------------------------------------
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
None
-------------------------------------------------
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |__| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |__| No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |__|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
Accelerated Filer |__| Accelerated Filer |X| Non-accelerated Filer |__|
Indicate by check mark if the registrant is a shell company (as defined in Rule
12b-2 of the Act. Yes |__| No |X|
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the last price at which the common
equity was last sold as of the last business day of the registrant's most
recently completed second fiscal quarter was $129,219,256.
As of June 9, 2006, the total number of shares of the registrant's common stock
outstanding was 13,995,666 shares.
Documents incorporated by reference. None.
IMMTECH PHARMACEUTICALS, INC.
TABLE OF CONTENTS
Page
PART I.
ITEM 1. BUSINESS.........................................................1
ITEM 1A. RISK FACTORS....................................................31
ITEM 2. PROPERTIES......................................................47
ITEM 3. LEGAL PROCEEDINGS...............................................47
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............48
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.........................................................48
ITEM 6. SELECTED FINANCIAL DATA.........................................52
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...........................................54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......67
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................67
ITEM 9A CONTROLS AND PROCEDURES.........................................67
ITEM 9B OTHER INFORMATION...............................................68
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............69
ITEM 11. EXECUTIVE COMPENSATION..........................................74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.....................................79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................83
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..........................83
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.....................................................84
-i-
FORWARD-LOOKING STATEMENTS
Certain statements contained in this annual report and in the documents
incorporated by reference herein constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements frequently, but not
always, use the words "may," "intends," "plans," "believes," "anticipates" or
"expects" or similar words and may include statements concerning our strategies,
goals and plans. Forward-looking statements involve a number of significant
risks and uncertainties that could cause our actual results or achievements or
other events to differ materially from those reflected in such forward-looking
statements. Such factors include, among others described in this annual report,
the following: (i) we are in an early stage of product development, (ii) the
possibility that favorable relationships with collaborators cannot be
established or, if established, will be abandoned by the collaborators before
completion of product development, (iii) the possibility that we or our
collaborators will not successfully develop any marketable products, (iv) the
possibility that advances by competitors will cause our drug candidates not to
be viable, (v) uncertainties as to the requirement that a drug product be found
to be safe and effective after extensive clinical trials and the possibility
that the results of such trials, if completed, will not establish the safety or
efficacy of our drug candidates, (vi) risks relating to requirements for
approvals by governmental agencies, such as the Food and Drug Administration,
before products can be marketed and the possibility that such approvals will not
be obtained in a timely manner or at all or will be conditioned in a manner that
would impair our ability to market our drug candidates successfully, (vii) the
risk that our patents could be invalidated or narrowed in scope by judicial
actions or that our technology could infringe upon the patent or other
intellectual property rights of third parties, (viii) the possibility that we
will not be able to raise adequate capital to fund our operations through the
process of commercializing a successful product or that future financing will be
completed on unfavorable terms, (ix) the possibility that any products
successfully developed by us will not achieve market acceptance and (x) other
risks and uncertainties that may not be described herein. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
PART I.
ITEM 1. BUSINESS
A. Business Overview
Immtech Pharmaceuticals, Inc. is dedicated to developing and
commercializing drugs for infectious diseases. We target diseases with
significant unmet medical need and well-defined endpoints that can be evaluated
in clinical trials of relatively short duration. Our first drug candidate,
pafuramidine maleate ("pafuramidine"), also known as DB289, is currently in two
Phase III clinical trials, one for the treatment of Pneumocystis pneumonia
("PCP") in patients with HIV/AIDS and the other for the treatment of African
sleeping sickness (human African trypanosomiasis). These Phase III trials are
based on Proof-of-Concept Phase II trials, which demonstrated DB289's
tolerability and efficacy to treat these serious infectious diseases. The
-1-
design and planned analyses for each of our Phase III clinical trials were
preapproved by the United States Food and Drug Administration ("FDA") under
Special Protocol Assessments. Our development program for pafuramidine maleate
for treating African sleeping sickness has been designated "fast-track" by the
FDA and is sponsored in full through grants to our scientific consortium from
The Bill and Melinda Gates Foundation (the "Foundation").
Our strategy is to develop and commercialize a pipeline of new oral drugs
to treat infectious diseases and other disorders. Infectious diseases in the
global population have increased significantly during the past 20 years and are
the most common cause of death worldwide according to the WHO. Relatively few
new drugs for the treatment of infectious diseases have been brought to market
during this period. New drugs are needed to overcome the health risks of
multi-drug resistant strains and the increasing number of new pathogens that are
causing these diseases.
We recently completed a Phase IIb clinical trial using pafuramidine to
treat malaria. The development of pafuramidine for malaria treatment through the
Phase IIb trial was sponsored by Medicines for Malaria Ventures ("MMV"). MMV
completed its sponsorship of pafuramidine during our past fiscal year.
Additionally, we are planning a Phase II malaria challenge trial to assess
the efficacy and safety of pafuramidine for malaria prophylaxis. This trial,
which we plan for late 2006, is designed to assess whether pafuramidine treats
malaria infection in the liver. In a challenge trial, healthy volunteers are
exposed to mosquitoes infected with a well-characterized strain of malaria that
is readily treated with chloroquine. The volunteers will be administered
pafuramidine or a placebo prior to being exposed to the mosquitoes and monitored
for symptoms of malaria (for more details on the challenge trial, see
"Pafuramidine for Malaria Prophylaxis" below). Subsequent studies in this
indication are currently being designed by the Company.
We have finalized the chemistry for the synthesis of the pafuramidine drug
substance and have demonstrated the process at the kilogram scale. Scale-up to
commercial production is in progress at a contract GMP manufacturing plant. The
pafuramidine tablet formulation that is in use in our current two Phase III
clinical studies will be scaled up for further clinical trials and ultimately
for commercial use.
The lead compound in our newest clinical program for malaria treatment,
AQ13, is a "4-aminoquinoline" that was initially developed by our research
partners at Tulane University. AQ13 is currently in Phase I clinical trials and
is planned for development as a combination therapy for treatment of malaria
with other compounds from Immtech's library of compounds. Immtech has an
exclusive license to develop, manufacture and commercialize a group of
4-aminoquinoline drugs for treatment, prophylaxis and diagnosis of infectious
diseases.
Approximately 20 kg of the AQ13 drug substance has been produced at a GMP
manufacturing plant. We have produced kilogram quantities of AQ13 that are
reserved for future pre-clinical and clinical studies. We are currently working
to optimize the AQ13 manufacturing process to produce larger scale batches for
future clinical and commercial needs. The development of AQ13 and combination
compounds for malaria is sponsored by MMV.
-2-
In addition to pafuramidine and AQ13, Immtech has licenses to develop and
commercialize an expanding library of compounds, some of which are in early
stages of targeting fungal infections, hepatitis C and other serious diseases.
Our initial in vitro and in vivo assessments have identified several potential
lead compound candidates for each of these indications. We continue to test
compounds to identify optimum lead candidates to move into preclinical testing
and subsequent human clinical and commercial development.
Immtech maximizes its research spending by collaborating with academia and
foundations, and designing cost effective clinical trials targeting indications
amenable to shorter duration treatments with well-defined endpoints. Our first
drug candidate, pafuramidine, and several candidates in our discovery program,
were discovered and initially evaluated by our research partners at The
University of North Carolina at Chapel Hill ("UNC-CH"), Georgia State University
("Georgia State"), Duke University and Auburn University. We have exclusive
worldwide licenses to develop and commercialize compounds discovered and
patented by scientists at these universities, and we have access to a large
library of compounds made by scientists at the above universities. We call these
scientists, and others from whom we have rights to commercialize technology
discovered or developed by them, our Consortium Scientists. Our license rights
include 150 issued domestic US and foreign patents that cover many classes of
novel chemical compounds.
A predecessor of our Company was incorporated under the laws of the State
of Wisconsin on October 15, 1984, and subsequently merged into the current
Delaware Corporation on April 1, 1993. We began the development of drugs to
treat infectious disease in 1997. Our executive offices are in New York, located
at One North End Avenue, New York, New York 10282, telephone number (212)
791-2911 or toll-free (877) 898-8038. Our common stock is listed on The American
Stock Exchange under the ticker symbol "IMM". Trading on the AMEX commenced on
August 11, 2003.
For the fiscal year ended March 31, 2006, we had revenues of approximately
$3.6 million and a net loss of approximately $15.5 million which included
non-cash compensation expenses of approximately $0.2 million related to the
vesting of common stock options and extensions of common stock warrants during
the year. Our management believes we have sufficient capital for our planned
operations through our next fiscal year. The Company is a development stage
pharmaceutical company that operates as one segment.
We file annual, quarterly and current reports, proxy statements and other
documents with the United States Securities and Exchange Commission (the "SEC"),
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). You
may read and copy any materials that we file with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Our reports, proxy statements and other documents filed
electronically with the SEC are available at the website maintained by the SEC
at http://www.sec.gov. We also make available free of charge on or through our
Internet website, http://www.immtechpharma.com, our annual, quarterly and
current reports, and, if applicable, amendments to those reports, filed or
furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably
practicable after we electronically file such reports with the SEC. Information
on our website is not a part of this report.
-3-
Generally, when we use the words "we," "our," "us," the "Company" or
"Immtech" in this report, we are referring to Immtech Pharmaceuticals, Inc. and
its subsidiaries.
B. Products and Programs
We are advancing this calendar year pafuramidine maleate ("DB289") in two
Phase III pivotal clinical trials and one Phase II clinical trial. We have
several other laboratory discovery programs in progress in which we are testing
the safety and potential effectiveness of compounds in vitro and in animal
models for various indications, including fungal diseases, tuberculosis and
hepatitis C.
1. Pafuramidine for Pneumocystis Pneumonia ("PCP") in HIV/AIDS Patients
PCP is a fungus that overgrows the air sacs in the lungs of people whose
immune systems have been significantly suppressed. PCP can cause
life-threatening pneumonia. PCP was previously known as Pneumocystis carinii
pneumonia and is now called Pneumocystis jiroveci pneumonia. PCP is one of the
most common opportunistic infections affecting HIV/AIDS patients. Other
populations susceptible to PCP include patients on chemotherapy, organ
transplant recipients, and infants with congenital immunosuppression. According
to Frost & Sullivan in a 2005 report, an estimated 1 million adults and children
are afflicted with PCP worldwide, and approximately 5 million more receive
prophylaxis.
i. Pivotal Phase III Trial
Our clinical trials of pafuramidine to treat PCP in patients with HIV/AIDS
are being conducted under an Investigational New Drug ("IND") application filed
with the FDA. Our Phase III trial is ongoing in the United States and in five
Latin American countries. This is a comparative trial versus the current
standard of care, trimethoprim-sulfamethoxazole ("TMP-SMX"). The trial's main
objectives are to show that efficacy and tolerability of pafuramidine are
similar to efficacy and tolerability of TMP-SMX.
Our Phase III pivotal clinical trial design for using pafuramidine to
treat human PCP was established under a Special Protocol Assessment filed with
the FDA. A Special Protocol Assessment means that the clinical trial's design
and analysis plan has been reviewed and agreed to by the FDA prior to the start
of the trial. The trial design is set forth below:
Clinical Trial Trial Design / Phase End Points Sites/Size
-------------- -------------------- ---------- ----------
o Pafuramidine o Phase III pivotal o Primary efficacy - o Argentina,
for treatment of o Randomized and double-blind Clinical success of Chile,
PCP o Oral pafuramidine dosed pafuramidine compared to Columbia,
twice daily (100 mg) for 14 days TMP-SMX at Day 22 Mexico, Peru,
o Compared to TMP-SMX dosed 3 o Safety and United States
times daily for 21 days tolerability of pafuramidine
o Both treatment groups are compared to TMP-SMX o Approximately
then put on TMP-SMX for PCP o Improvement in 270 patients
prophylaxis for another 21 days clinical signs and symptoms
-4-
We plan to submit a New Drug Application ("NDA") to the FDA (and similar
applications with regulatory agencies in the foreign countries listed below) for
approval of pafuramidine to treat PCP in patients with HIV/AIDS. Upon receipt of
appropriate regulatory approvals, we plan to sell pafuramidine for the treatment
of PCP in the United States, Africa, India and other countries where patients
are afflicted with the disease.
We are also considering additional studies to evaluate pafuramidine as a
potential drug for PCP prophylaxis. Patients who have completed treatment for
PCP or who have been identified to be at risk for PCP are recommended to receive
prophylaxis for as long as they remain at risk for PCP. We are currently
conducting a study in animals to assess the efficacy of pafuramidine versus
TMP-SMX in preventing PCP. Upon completion of the animal study, we plan to
initiate a pilot study of PCP prophylaxis with pafuramidine. Patients who have
completed treatment for PCP in our Phase 3 trial would be eligible to
participate in this study of PCP prophylaxis.
ii. Earlier PCP Clinical Trials
Our pivotal Phase III trial is based on Phase II clinical trial results
which we believe demonstrate an acceptable safety profile and efficacy of
pafuramidine in treating PCP in HIV/AIDS patients. In 2002, we received approval
from the FDA and the Ministry of Health in Peru to commence a pilot Phase II
clinical trial of pafuramidine to treat Pneumocystis pneumonia. All clinical
patients had AIDS and had failed or were intolerant of standard therapy for PCP
prior to enrollment in the trial. Two dosing regimens were studied in this
trial; the first 8 patients received 50 mg of pafuramidine twice per day for 21
days; subsequently 27 patients received 100 mg of pafuramidine twice per day for
21 days.
Results of the Phase II trial demonstrated that the clinical signs and
symptoms of PCP improved in all patients treated with pafuramidine, and
pafuramidine was well tolerated, with no significant adverse events reported
other than those determined by the principal investigator to not be related to
the administration of pafuramidine. No patient was given further treatment for
PCP during the trial, which included a 3 week follow-up period after completing
the 21 day pafuramidine treatment. Patients treated with the higher dosage
regimen generally showed faster symptom improvement and required a shorter time
to achieve a steady state of drug concentration in the blood. Results of this
study were presented in abstract form at the European Congress of Clinical
Microbiology and Infectious Diseases, Copenhagen, April 2005.
2. Pafuramidine for African Sleeping Sickness (Human African
Trypanosomiasis) Treatment
African sleeping sickness is a parasitic disease that is spread by tsetse
flies in sub-Saharan Africa. Doctors Without Borders estimates that the
geographical range in sub-Sahara Africa where human African sleeping sickness
occurs encompasses 36 countries, where more than 60 million people are at risk
of contracting the disease. The World Health Organization ("WHO") estimates that
there are 300,000 to 500,000 active cases of human African sleeping sickness in
central Africa. A current WHO survey reports that an "epidemic situation" for
African sleeping sickness exists in the sub-Saharan region of Africa which
includes the countries of Angola, Sudan, and the Democratic Republic of the
Congo ("DRC"). Existing treatments for
-5-
African sleeping sickness can be highly toxic and cannot be administered orally.
African sleeping sickness is fatal if not treated.
i. Pivotal Phase III Trial
Pafuramidine is currently in Phase III clinical trials for first stage
human African trypanosomiasis caused by Trypanosoma brucei gambiense (West
African form of sleeping sickness). If regulatory approval is obtained,
pafuramidine would be the first oral therapy for this disease. Pafuramidine is
expected to be available in a stable and convenient oral formulation that we
expect will allow for treatment to reach more patients than can be reached with
currently available injectable drugs.
We are conducting the Phase III study for the treatment of first stage
African sleeping sickness in six clinical sites in DRC, Angola, and Sudan. We
intend to collectively enroll approximately 250 first stage patients. First
stage means the disease has not reached the patients' central nervous system.
Approximately 150 patients have been enrolled to date. No patient has
prematurely discontinued study drug treatment due to adverse events to date. One
patient died of trypanosomiasis approximately 5 months after treatment for first
stage disease. We do not know whether the patient received pafuramidine or
pentamidine during the trial, as Immtech is blinded from this information while
the trial is ongoing. This patient initially did not report for follow-up
testing, but subsequently presented to the hospital with second stage disease
(central nervous system involvement), which did not respond to treatment with
eflornithine. Current diagnostic methods for staging trypanosomiasis make it
difficult to confirm first versus second stage disease with a high level of
certainty. It is possible that this patient was already in the second stage of
the disease at the time of original diagnosis and during the trial, as the
available diagnostic tests for trypanosomiasis may not accurately determine the
stage of the disease in all patients .
Our goal is to complete patient enrollment in the trial by the end of
2006, subject to the identification of appropriate patients, their rate of
participation in follow up evaluations, and the political situation in the
countries where the study is hosted. We expect that this study will provide the
adequate efficacy and safety data required to support regulatory approval for
the use of pafuramidine to treat first stage African sleeping sickness.
Our Phase III pivotal clinical trial design was established under a
Special Protocol Assessment with the FDA. A Special Protocol Assessment means
the clinical trial protocol and analysis plan were reviewed and agreed to by the
FDA prior to the start of the trial. The protocol allows for the inclusion of
pregnant women, nursing mothers and adolescents. The FDA has agreed to review
our trial data after patient 12 month follow up visits have been completed, and
to consider "accelerated approval" at that time. Under the FDA's accelerated
approval regulations, the FDA is authorized to approve drugs that have been
studied for their safety and effectiveness in treating serious or
life-threatening illnesses and that provide meaningful therapeutic benefit to
patients over existing treatments based upon either a surrogate endpoint that is
reasonably likely to predict clinical benefit, or on the basis of an effect on a
clinical endpoint other than patient survival (see also "Governmental
Regulation" below). Final regulatory approval for the indication requires
submission of patients' 24 month follow up data validation of the surrogate
endpoint used in the trial (12 month follow up based on clinical and
parasitological endpoints). The trial design is set forth below:
-6-
Clinical Trial Trial Design / Phase End Points Sites/Size
-------------- -------------------- ---------- ----------
o Pafuramidine o Phase III pivotal o Primary efficacy - o Democratic
for the treatment o Randomized, sponsor Clinical and parasitological Republic of the
of first stage blinded to treatment regimen cure (absence of parasite in Congo, Angola and
human African o Oral pafuramidine dosed blood, lymph nodes and CSF) Sudan
trypanosomiasis twice daily (100 mg) for 10 12 months after treatment o Approximately
days o Secondary - Clinical 250 patients,
o Compared to cure 24 months after including pregnant
intramuscular pentamidine treatment women, nursing
dosed once daily for 7 days o Safety and mothers and
tolerability of pafuramidine adolescents 12
compared to pentamidine years and older
Our clinical trials of pafuramidine to treat African sleeping sickness are
being conducted under an IND application filed with the FDA. The trials are
financially supported by a grant to UNC-CH from the Foundation under a Clinical
Research Sub-contract (defined in "Funding for African Sleeping Sickness
Research and Clinical Trials" below). On April 23, 2004, the FDA granted
fast-track drug development designation to use pafuramidine to treat human
African sleeping sickness.
We plan to submit a NDA to the FDA (or similar applications with
regulatory agencies in foreign countries) for accelerated approval of
pafuramidine to treat African sleeping sickness, if we meet the designated end
points in our Phase III pivotal trial as outlined above. Additional studies,
including a clinical Phase IV trial may also be required. (See "Governmental
Regulation" in this section below)
If our NDA for pafuramidine to treat African sleeping sickness receives
approval from the FDA or another recognized government regulatory agency
(pursuant to accelerated approval or otherwise), we intend to apply to the WHO
to have pafuramidine listed as a WHO Recommended Drug, and eventually to be
included on their Essential Medicines List. We believe inclusion of pafuramidine
as a WHO Recommended Drug will enable us to sell pafuramidine to treat African
sleeping sickness, while continuing to perform any required post-approval
studies. The WHO generally accepts marketing approvals from regulatory agencies
in the United States, European Union and Japan, as well as other countries with
established regulatory agencies. In addition to becoming a WHO Recommended drug,
the distribution of pharmaceutical drugs in sub-Saharan Africa requires
individual approval from each country where the drugs are sold. We anticipate a
six to nine month lead time to manufacture, receive export clearance and deliver
our first drug shipment after receipt of a purchase order pursuant to the above
plan, although there could be delays that result in longer lead times.
ii. Earlier Phase II African Sleeping Sickness Clinical Trials
In September 2002, we completed an open-label, non-controlled Phase IIa
study of pafuramidine in the DRC to treat African sleeping sickness. Initial
results showed that the compound was well tolerated with no significant adverse
side-effects and 93% of the patients (27 of 29) treated were cleared of the
African sleeping sickness parasite (blood and lymph node samples taken 2 days
after completion of treatment were parasite free). Clearance of the parasite at
the end of treatment testing was the primary endpoint for this study. Patients
evaluated at
-7-
three and six months after treatment remained parasite free; subsequently,
however, five relapses were detected. Follow-up testing for this trial was
completed in March 2005, with 76% of the patients at 24 months after treatment
(the secondary endpoint for the study) remaining clear of the African sleeping
sickness parasite.
In April 2003, we commenced the first phase of a multi-phase, multi-site
Phase II/III randomized, open-label, clinical trial to treat African sleeping
sickness with pafuramidine, initially designed to enroll 350 people. The first
phase of the study included the testing of 81 patients who were administered
twice daily dosing of 100 mg of pafuramidine for five days. Half the patients in
this phase of the study received pafuramidine and half the patients received
pentamidine intramuscular injections (current standard first line therapy). The
clinical trial was conducted in two sites, Maluku and Vanga, in the DRC. Patient
monitoring included electrocardiograms, blood sampling for clinical chemistry
and hematology parameters, and measures of treatment outcome, including the
clearance of parasites from blood, lymph nodes and cerebrospinal fluid (CSF, a
fluid that surrounds the brain and spinal cord); for purposes of this paragraph,
"cure rate". In February 2004 treatment of the first 81 patients was completed.
The results from the initial 81 patients continued to show pafuramidine to be
well tolerated with a favorable safety profile. Five patients treated with
pafuramidine for 5 days did not clear the parasite from their lymph nodes and
received additional treatment. The patients have subsequently completed the 24
month follow-up testing; the "cure rate" for pafuramidine administered for 5
days was 85% and the "cure rate" for pentamidine was 98%.
Based on the data from the 5-day treatment study with pafuramidine, 30
patients were enrolled into the second phase of the trial and were administered
pafuramidine 100 mg twice daily for 10 days in an open-label design. All 30
patients cleared the African sleeping sickness parasite at the end of the
treatment period and those returning for testing at the 3-month follow-up, which
is the primary endpoint for the trial, remained disease free. No untoward
adverse events were reported. Based on these results, we began the Phase III
clinical trial in July of 2005. Subsequently, 3 relapses have been reported,
with a current "cure rate" of 90%. Patients will continue to be followed through
the 24 month follow up evaluations, which will be completed in fourth quarter
2006.
Results of the Phase II studies were presented in abstract form at the
international meeting of Medicine and Health in the Tropics, Marseille, France,
September 2005.
iii. Funding for African Sleeping Sickness Research and Clinical Trials
Our development of pafuramidine for treating African sleeping sickness has
been supported financially by a grant to UNC-CH (our university consortium drug
development partner) from the Foundation. To date, the Foundation has granted to
UNC-CH approximately $40 million for the development of pafuramidine to treat
this disease; pursuant to the Clinical Research Subcontract, Immtech has
received approximately $17.3 million of such funds. This total includes a grant
to UNC-CH for $22.6 million in 2006 to complete the Phase III clinical program
and commercial development of pafuramidine to treat African sleeping sickness,
initiate an expanded access clinical program (expanded access is an FDA
mechanism designed to make promising products available as early in the drug
evaluation process as possible to patients who do not have other therapeutic
options), develop a pediatric formulation for use by infants and
-8-
children, and test pafuramidine in a pilot program for the East African form of
sleeping sickness caused by Trypanosoma brucei rhodesiense.
In November 2000, the Foundation awarded a $15.1 million grant to a
research group led by UNC-CH to develop new drugs to treat human African
sleeping sickness and leishmaniasis. The research group led by UNC-CH includes
Immtech and, in addition to UNC-CH, five other universities and research centers
around the world that collectively employ scientists and physicians considered
to be the foremost experts in one or both of these diseases.
On March 29, 2001, we entered into a clinical research subcontract
("Clinical Research Subcontract") with UNC-CH to advance the work funded by the
Foundation's $15.1 million grant. Under the terms of the Clinical Research
Subcontract, we are responsible for the oversight of Phase II and Phase III
clinical trials of the drug candidate pafuramidine for African sleeping
sickness. The terms of the Clinical Research Subcontract require us to segregate
the Clinical Research Subcontract funds from our other funds and to use the
proceeds only for developing a drug to treat African sleeping sickness.
In June 2003, the Foundation awarded an additional $2.7 million grant to
the UNC-CH led research group to (i) expand the Phase IIb trial of pafuramidine
to treat African sleeping sickness into the pivotal multi-phase, multi-site
Phase II/III randomized clinical trial described above, (ii) implement an
improved method of synthesizing pafuramidine to reduce drug manufacturing costs
and (iii) improve the formulation of pafuramidine to facilitate increased drug
absorption into blood circulation. Under the Clinical Research Agreement,
approximately $1.0 million of the additional grant was paid to us in June 2003
and approximately $1.4 million was paid to us on March 14, 2005 (approximately
$1.4 million of the $3.0 million March 14, 2005 payment described below was
attributable to our services under the additional grant).
Effective March 28, 2006, we amended and restated the Clinical Research
Subcontract to continue the ongoing Phase III clinical trial of pafuramidine to
treat African sleeping sickness and to prepare the drug for commercialization,
conduct an expanded access trial, develop a pediatric formulation for infants
and children, and test pafuramidine in a pilot study of the East African form of
sleeping sickness.
With the amended and restated Clinical Research Subcontract, we received
from the UNC-CH led consortium a five year funding commitment of approximately
$13.6 million to support the Phase III trial and development of the drug for
commercialization, and to conduct the additional research. To date, we have
received $5.6 million of the approximately $13.6 million for the first year of
funding.
In the aggregate, we have received under the Clinical Research Subcontract
funded by the Foundation the following: (a) $4.3 million paid to us in fiscal
year 2001 to fund Phase II clinical trials to test the safety/tolerability and
efficacy of pafuramidine against African sleeping sickness in approximately 30
patients, (b) approximately $1.4 million paid to us in September 2002 upon the
successful completion of our Phase IIa clinical trial, (c) approximately $2.0
million paid to us in December 2002 upon the delivery of the final Phase IIa
report in respect of the Phase II clinical trial, (d) approximately $1.0 million
paid to us in June 2003 relating to the additional grant for improving drug
synthesis and formulation, (e) approximately $3.0 million paid to us on
-9-
March 14, 2005 (a portion of which was from the additional acceleration grant
described above) to fund Phase IIb and Phase III clinical trials to test the
efficacy and safety/tolerability of pafuramidine against African sleeping
sickness in a larger, more diverse group of patients in calendar year 2005, and
(f) approximately $5.6 million paid to us in May 2006, with a commitment for an
additional approximately $8 million over the next four years to fund completion
of the Phase III clinical trial ,development of pafuramidine for
commercialization and new research activities outlined above.
3. Pafuramidine for Malaria Prophylaxis
According to the WHO, malaria is endemic in over 100 countries. Those
countries are visited by more than 125 million international travelers every
year. It is estimated that every year approximately 10,000 to 30,000 people fall
ill with this life-threatening disease. International travelers are especially
at risk of contracting malaria because their immunity to malaria is not as
developed as people who live in endemic areas and the disease is often diagnosed
incorrectly or late after travelers' return home.
Based on in vitro and clinical trial data, we believe pafuramidine is a
promising drug for prevention of malaria for travelers. In clinical studies to
date, pafuramidine did not cause the significant neurological, gastrointestinal,
photosensitivity-related side effects or psychotic episodes that are associated
with other therapies currently used in malaria prophylaxis.
We are planning to initiate a Phase II malaria challenge study in healthy
volunteers in late 2006. In this study, volunteers will be exposed to mosquitoes
infected with a well-characterized strain of malaria that is readily treated
with chloroquine. Volunteers will be administered pafuramidine, as either one of
two yet to be determined regimens, or a placebo, prior to being exposed to the
mosquitoes. They will be regularly monitored for at least 28 days after the
exposure, including assessment of fever or other clinical symptoms of malaria,
and also by regular blood sampling to detect the presence of malaria parasites.
The volunteers who show any signs or symptoms of malaria will be promptly
treated with chloroquine and carefully monitored until they are determined to be
free of disease. Pafuramidine will be considered an appropriate candidate for
additional prophylaxis studies if none of the volunteers in at least one of the
pafuramidine treatment groups develops malaria during the study.
4. Pafuramidine for Malaria Treatment
Malaria is the second most common infectious disease in the world and is a
significant threat to over 2.6 billion people exposed to this mosquito-borne
disease. Each year an estimated 300 to 500 million new clinical cases of malaria
occur globally that result in 1.5 to 2.0 million deaths. The WHO estimates that
over a million children infected with malaria die in Africa every year; one
child dies every 30 seconds. Many of the available therapies for treating
malaria have high failure rates because the parasites that cause malaria have
developed resistance to older drugs. Malaria is a significant cause of severe
disease and death in infants, small children and pregnant women, and some of the
currently used drugs are not recommended for use in these populations.
Pafuramidine, is in use in our Phase III trial to treat pregnant women and
adolescents for African sleeping sickness. Studies of pafuramidine in juvenile
rats and reproductive adult rats and rabbits have not identified any risks to
these vulnerable populations.
-10-
We believe pafuramidine will be demonstrated to be a safe and well-tolerated
treatment of malaria in pregnant women and infants.
i. Phase IIb Trial
In May 2005, we commenced enrollment in a Phase IIb clinical trial of
pafuramidine to treat uncomplicated P. falciparum malaria. This study was
conducted in Thailand and included 120 patients. The study was designed to
compare the efficacy of three-day regimens of pafuramidine given alone (as
mono-therapy) and in combination with artesunate (a drug for treating malaria
that is derived from the artemisia plant). For comparison purposes, a separate
control group received a combination of the drugs artesunate and mefloquine,
which is a standard treatment for malaria in Thailand. All patients were treated
and then monitored for 28 days.
The patients who participated in the malaria trial were randomly assigned
to groups, each of which were treated for three days using different dose
regimens of pafuramidine; patients received either 200 mg of pafuramidine once
per day, either alone or in combination with artesunate, or 100 mg of
pafuramidine twice per day. Patients' blood samples were evaluated for parasites
prior to enrollment in the study to establish a baseline and checked at regular
times during the three days of therapy, and then periodically until the 28th day
after commencement of the study. For purposes of this study, patients were
considered "cured" if the malaria parasites were eliminated 7 days after the
start of therapy and did not recur within 28 days after the start of treatment.
A control group received a standard combination therapy regimen and the results
from that group will be compared to the patients treated with pafuramidine.
Clinical Trial Trial Design End Points Sites/Size
-------------- ------------ ---------- ----------
o Pafuramidine o Phase IIb o Primary o Two sites in
alone and in o Randomized efficacy - cure Thailand
combination with open label at Day 28 o 120 adult
artesunate for o Pafuramidine o Parasite patients
the treatment of 200 mg once clearance at Day
malaria daily alone or 7
in combination o Blood
with artesunate, concentrations
or pafuramidine of pafuramidine
100 mg twice and DB75 during
daily, or treatment, also
mefloquine plus artesunate in
artesunate the combination
o Oral dosing treatment group
for 3 days o Safety and
tolerability
Study results showed a greater than 90% clearance of the parasite from the
blood for patients receiving pafuramidine at 7 days. However, at 28 days,
patients receiving pafuramidine had recurrence of disease exceeding that of
standard therapy. It was found that average and minimum blood concentrations of
DB75, the active drug produced from the prodrug pafuramidine, in these patients
were lower than previously predicted from studies in healthy adults (see related
Phase 1 study, below). The pharmacokinetics of DB75 in healthy volunteers
appears to be different from that of patients with acute malaria. Overall, the
Phase IIb study demonstrated that the tested three-day dosing regimens of
pafuramidine alone and in combination with artesunate were not appropriate for
treatment of acute uncomplicated malaria.
-11-
The three-day therapy cure rates did not meet the MMV product target profile,
and thus MMV has chosen to instead consider a new malarial drug development
program for Immtech.
The study established a minimally effective dose, which is one of the
objectives of a Phase IIb study. It also identified a minimum blood
concentration of DB75, the active drug produced from the prodrug pafuramidine,
which was associated with 28 day clinical cure in patients achieving that blood
concentration. These data are critical for understanding the activity of
pafuramidine, and for design of subsequent malaria treatment studies. We will be
using this valuable knowledge, as well as recommendations obtained from
regulatory authorities, to design subsequent studies for malaria treatment.
ii. Earlier Malaria Treatment and Supporting Clinical Trials
In December 2003, we reported results of our Phase IIa malaria trial that
was conducted in Thailand. The patients who participated in this malaria trial
were treated with 100 mg capsules of pafuramidine twice per day for five
consecutive days. For purposes of this study, patients were considered to be
"cured" if patients remained free of malaria parasites at 28 days after the
start of treatment. Within 24 hours of the first dose 50% of the patients
cleared the malaria parasite; all 32 patients cleared the malaria parasite and
malaria symptoms (e.g., fever) disappeared within the treatment period.
Pafuramidine was well tolerated with no significant adverse side-effects
reported. All patients were monitored for 28 days after the start of treatment
to ensure that the malaria parasite had been eliminated.
Of the 32 patients in the Phase IIa malaria trial, nine were infected with
Plasmodium vivax and 23 were infected with Plasmodium falciparum (the most
deadly form of malaria contracted by humans). The P. falciparum patients were
treated with pafuramidine as a monotherapy (not in combination with any other
drugs). Ninety-six percent of patients (22 of 23) treated for P. falciparum were
considered to be cured. Blood samples taken from two of the patients prior to
the 28th day after the start of treatment contained malaria parasites but, after
more extensive testing of the genetics of the parasites, an independent third
party concluded that one of the two failed patients had cleared the original
malaria parasite and had acquired a new malaria infection. The nine P. vivax
patients were treated with pafuramidine for five days; eight of them
subsequently received oral Primaquine (a drug used as standard therapy for P.
vivax treatment) and were considered cured at Day 28. One patient experienced a
relapse of P. vivax prior to receiving the scheduled Primaquine treatment and
was given alternative therapy with a successful outcome. All patients completed
the prescribed treatment with pafuramidine without any serious or significant
adverse effects. The results of this study have been published in the Journal of
Infectious Diseases, 2005; Vol. 192: pp. 319-22.
A related Phase I study conducted in late 2004 in Paris, France evaluated
the potential for dosing of pafuramidine for three days. The pharmacokinetics of
pafuramidine in different dosing regimens was evaluated in 54 healthy volunteers
(pharmacokinetics is the study of the uptake, distribution and rate of movement
of a drug in the body from the time it is absorbed until it is eliminated). We
enrolled people from African, Asian and Caucasian populations to evaluate the
differences between once per day and twice per day dosing, with doses ranging
from 200 mg to 600 mg per day for three days. The data from this trial indicated
that pafuramidine dosed at 200 mg once per day reached blood levels that were
expected to have a therapeutic effect in
-12-
treating malaria in three days. This shortened treatment period (3 days vs. 5
days) and once daily dosing was expected to increase compliance with a
prescribed treatment regimen by malaria patients. However, as noted above, the
results in healthy volunteers did not accurately predict the pharmacokinetics of
pafuramidine or DB75, the active drug, in patients with acute malaria.
iii. Funding for Malaria Research and Clinical Trials
On November 26, 2003, we entered into a Testing Agreement with MMV and
UNC-CH pursuant to which we, with the support of MMV and UNC-CH, began studying
pafuramidine as a treatment for malaria. The Phase I study, Phase IIa study, and
Phase IIb study referenced above were sponsored in full by MMV. Additional
support was also received for pharmaceutical drug development and animal
toxicology studies. In the twelve month period ended March 31, 2006, we received
approximately $2.6 million from MMV.
5. AQ13 Combination Product for Malaria Treatment
In February 2006, Tulane University granted to us an exclusive license to
develop, manufacture and commercialize a group of 4-aminoquinoline drugs for
treatment, prophylaxis and diagnosis of infectious diseases (the "Tulane License
Agreement"). These compounds have similar chemical structure and mechanisms of
action to chloroquine, which was the mainstay of malaria treatment for the later
half of the 20th Century. The lead candidate, AQ13, is targeted as a candidate
for treatment of and prophylaxis for malaria. We intend to develop AQ13 as a
combination therapy, most likely with one or more compounds from our
anti-malaria portfolio of aromatic cations.
AQ13 is highly active in vitro against Plasmodium falciparum, including
chloroquine-resistant strains, which is the most severe form of malaria. Tulane
University has conducted the initial in vitro and animal preclinical studies,
which also demonstrated activity in a monkey model of malaria.
Tulane also recently completed the first Phase I clinical study comparing
AQ13 to chloroquine in healthy volunteers. AQ13 was shown to be well tolerated
with potentially improved safety and tolerability compared to chloroquine. A
second Phase I study is planned in early 2007 to assess the tolerability of
regimens to be tested in the Phase IIa proof-of-concept trial in patients with
malaria. This Phase IIa trial is expected to begin in the second half of 2007.
AQ13 will undergo additional animal safety pharmacology and toxicology
studies beginning later in 2006. Reproductive and juvenile toxicology studies
will begin in 2007 in anticipation of enrolling pregnant women, infants and
children in the Phase III trials.
We expect that the development of AQ13 for malaria treatment will be
funded by MMV. Through its license agreement with Tulane, Immtech holds
exclusive commercial rights to these new 4-aminoquinoline compounds. We are
finalizing an agreement among Immtech, MMV, and Tulane for the clinical
development and funding of AQ13. Immtech will manage the preclinical and
clinical development programs and will be responsible for the manufacture of
drug substance and drug product, regulatory activities, and commercialization of
the combination product(s) including AQ13. Tulane University will advise Immtech
and MMV on the clinical
-13-
development of AQ13, and be responsible for the design, synthesis and
optimization of new 4-aminoquinolines with anti-malarial activity.
In a separate "Discovery Agreement" between MMV and UNC-CH entered in
2003, MMV agreed to fund a research program with a three year budget of
approximately $1.4 million to UNC-CH for design, synthesis and optimization of a
new group of aromatic cationic compounds to identify a second generation drug
for treating advanced cases of malaria. Immtech is a third party beneficiary of
the Discovery Agreement and, pursuant to the terms of the Consortium Agreement
(see Collaborations section below), has a worldwide license and exclusive right
to commercialize the discoveries resulting from the Discovery Agreement. We
anticipate that a candidate from this work would be optimized and combined with
AQ13 for subsequent development and commercialization.
6. Drug Discovery and Development Programs
i. Antifungal Program
We have identified several aromatic cationic compounds with the potential
to treat both Candida and Aspergillus infections, which account for a
significant percentage of morbidity and mortality in hospitalized patients. In
vitro studies run by our consortium scientists and an independent laboratory
have identified several compounds that display broad based antifungal activity
against Candida, Aspergillus and Cryptococcus fungi. From these studies, we have
identified a lead group of compounds that display significant in vitro activity
against both drug sensitive and drug resistant strains of fungi. We are
currently optimizing the lead compound in preparation for upcoming studies in in
vivo models of efficacy and safety. Predefined development criteria will be used
to select one or more of the new analogues to advance as clinical development
candidates.
The market for an effective antifungal drug was estimated by DataMonitor
in 2003-04 to be approximately $4.0 billion annually and growing due to the
increasing number of patients who are susceptible to fungal diseases, such as
patients undergoing cancer chemotherapy, patients with HIV and those who have
undergone organ transplants. In addition, the frequency of nosocomial infection
(infection acquired while a patient in a hospital) caused by fungi is now the
third most common cause of sepsis, replacing Escherichia coli (E. coli). Sepsis
is an uncommon but serious consequence of an infection that quickly overwhelms
the immune system and can rapidly lead to death. Recently, strains of fungi
resistant to currently available treatments have developed. There is a
significant opportunity for new drugs effective against specific strains of
fungi, including drug resistant strains, as well as drugs with broad spectrum
effectiveness for both Candida and Aspergillus infections. We believe our orally
deliverable compounds would be well suited for treatment of these infections if
effective.
ii. Hepatitis C
According to a December 2005 Decision Resources, Inc. report, the number
of prevalent cases of hepatitis C virus ("HCV") in the major markets exceeded 11
million in 2004. The HCV drug market, approximately $3 billion in 2005, is
projected to grow to $9 billion in 2012 and over $10 billion annually by 2014.
Growth in use of HCV therapies also will come from
-14-
increasing numbers of patients whose disease do not respond to initial
treatments, and are being retreated with second courses of standard and/or other
new therapies.
Our research activities in hepatitis C are based upon recently published
findings that show compounds active in a HCV-related animal virus, bovine viral
diarrhea virus ("BVDV"), may have similar activity against the human hepatitis C
virus. We have tested several classes of compounds against the BVDV virus in
vitro model, and several compounds exhibited potent inhibitory effects on the
BVDV viral life cycle. We plan to seek a strategic partner to develop this
program.
iii. Tuberculosis Program
Mycobacterium tuberculosis ("TB") is the world's number one killer among
infectious diseases, causing over two million deaths per year, according to the
WHO and the United States Centers for Disease Control and Prevention ("CDC"). TB
is a difficult infection to treat because the bacteria that cause the disease
can "hide" inside white blood cells where they avoid the immune system and are
less susceptible to antibiotic drugs. The CDC reports that about two billion
people, or one-third of the world's population, are infected with TB, including
10 to 15 million people in the United States The disease is spreading rapidly in
developing countries in Asia, Africa, South America and eastern Europe, and is
becoming increasingly problematic in developed countries and in Eastern Europe.
Japan has declared TB its most threatening disease and an alarming increase in
multi-drug resistant ("MDR") TB cases is also reported in the United States. The
combination of the rapid spread of TB and increasing cases of MDR strains of the
TB organism make this infectious disease a major health threat throughout the
world.
In collaboration with the NIH laboratories and Dr. Scott G. Franzblau of
the University of Illinois at Chicago ("UIC"), we have screened over 800 of our
dication compounds for potential drug candidates to treat TB. Of the 50
compounds showing favorable activity, 5 dications showed in vitro activity
comparable or superior in performance to drugs currently available to treat TB.
Based on results from in vitro and in vivo testing, we are making progress with
the most active group of compounds and are optimizing the chemical structures to
enhance the pharmaceutical properties in preparation for upcoming in vivo tests
of efficacy and safety. Selection of development candidates will follow
successful testing of the new analogues against predefined development criteria.
iv. Other Programs and Trials
We have data related to two other indications - neurological disorders,
and diabetes - that indicates to us that compounds from our library could
be appropriate and promising for treating these disorders. In addition, research
indicates that our aromatic cationic compounds may be useful as small molecule
drugs that can potentially selectively control gene expression on a selected
basis.
-15-
C. Technology
1. Aromatic Cationic Compounds
The pharmaceutical compounds made by the scientists at our consortium
universities--UNC-CH, Georgia State, Duke, and Auburn--generally fall under the
broad class of "aromatic cationic" compounds. Aromatic cations are molecules
that have at least one positively charged end and at least one benzene ring in
their structure. Many of the active compounds in our library of compounds are
aromatic dications, molecules with two positive ends that are held together by a
linker; at the atomic level, they look like molecular barbells. Immtech's
library of compounds also includes a subclass of aromatic compounds containing a
single positive charge (monocations).
One mechanism of action of many of our aromatic cationic compounds
involves binding to segments of deoxyribonucleic acid ("DNA"). Aromatic cation
drugs bind in the minor groove of DNA and in so doing, interfere with the
activity of enzymes needed for microbial growth. The composition of the
dications, with positive charges on the ends and linkers of different length,
shape, flexibility and curvature, allows binding to specific sites of the DNA or
other receptors, interfering with key biochemical processes fundamental to
microbe growth and development.
Pentamidine (a dicationic drug on the market that is the current standard
of care for first stage African sleeping sickness) was the drug used by
scientists at UNC and Georgia State to develop our proprietary library of
aromatic compounds that have several advantages over pentamidine. Pentamidine
has many issues related to its toxicity. Pentamidine also has broad based
activity against many diseases including fungal infections and cancer, but it
can only be administered intravenously, by intramuscular injection, or via
inhalation, and is therefore costly and difficult to administer outside of a
hospital setting. In addition, due to its narrow margin between doses that are
considered safe and not leading to toxicity, it needs to be administered by a
person trained in the use and administration of drugs.
Scientists at UNC-CH and Georgia State discovered that much of
pentamidine's toxicity was the result of bi-products formed when the drug is
metabolized, or breaks down within the body. This discovery led to the design of
new compounds which function similarly to pentamidine but do not metabolize in
the same way. This large and growing library of compounds to which we hold an
exclusive, worldwide license is comprised of compounds which tend to be less
toxic than pentamidine. Additional modifications to the structures of these
compounds improved their binding activity and enhanced the applicability of this
new class of antimicrobial agents as drugs. And the scientists' discovery and
development of our proprietary prodrug technology to make these compounds orally
available (see Prodrug Formulations section below) has made the compounds in
Immtech's library even more commercially attractive.
The scientists at our partner universities have designed and synthesized
thousands of aromatic cationic compounds to create a large library of these
compounds. Many of the compounds have been tested in a wide variety of assays
and animal models for activity against various diseases. Scientists at UNC-CH
and Georgia State continue to design and synthesize aromatic cationic molecules
using computer models that help predict structures that will be
-16-
medicinally efficacious. These compounds and their methods of use and
manufacture are the subject of over 150 patents that have issued to date to our
partner universities, patents to which we have exclusive, worldwide licenses
(see Collaborations section below)
2. Prodrug Formulations
One of the many significant accomplishments of our research and
development program was the discovery of technology to make aromatic cationic
drugs orally deliverable. This proprietary technology temporarily masks the
positive charges of the aromatic cation, enabling it to effectively move across
intestinal barriers into blood circulation. Once the drug is in blood
circulation, the masked charges are removed by naturally occurring enzymes
thereby releasing the active drug. Until now, the inability to deliver active
compounds across the digestive membrane into the bloodstream (and through the
blood-brain barrier, if so desired) had reduced the attractiveness of aromatic
cations as effective drug treatments. The scientists at our consortium
universities have developed and patented prodrug synthesis methods and the
prodrug compounds themselves allowing for oral delivery and making this entire
class of compounds significantly more attractive for commercial development.
D. Collaborations
1. Scientific Consortium at UNC-CH, Georgia State, Duke, and Auburn
The consortium of scientists responsible for the invention and development
of our aromatic cationic library of compounds includes scientists from UNC-CH,
Georgia State, Duke University and Auburn University.
On January 15, 1997, we entered into a consortium agreement with UNC-CH
and a third party (to which each of Georgia State, Duke University and Auburn
University shortly thereafter joined) ("Consortium Agreement"). The Consortium
Agreement provided that aromatic cations developed by the scientific consortium
members were to be exclusively licensed to us for global commercialization. As
contemplated by the Consortium Agreement, on January 28, 2002, we entered into a
License Agreement with the consortium whereby we received the exclusive license
to commercialize all future technology and compounds ("future compounds")
developed or invented by one or more of the consortium scientists after January
15, 1997, and which also incorporated into such License Agreement our license
with the consortium with regard to compounds developed on or prior to January
15, 1997 (defined in the Consortium Agreement as "current compounds"). That
License Agreement was amended and restated effective as of March 24, 2006.
Pursuant to the Consortium Agreement, the worldwide license and exclusive
right to commercialize (together with related technology and patents), use,
manufacture, have manufactured, promote, sell, distribute or otherwise dispose
of any and all products based directly or indirectly on aromatic cations
developed by the consortium on or prior to January 15, 1997 (current compounds),
was transferred to us by the third party. The January 28, 2002, License
Agreement granted to us a similar worldwide license and exclusive right to
commercialize discoveries covering products based on aromatic cationic
technology developed by the consortium after January 15, 1997 (defined in the
License Agreement as "future
-17-
compounds") and incorporated the worldwide license and exclusive right to
commercialize discoveries assigned to us by the Consortium Agreement. The key
modifications included in the Amended and Restated License Agreement of March
2006 are changes to the royalty rates payable to the consortium, expansion of
the Company's rights to future technology developed by the consortium with
future grants and increased access to the consortium's patent counsel.
The Consortium Agreement gives us rights to this consortium of scientists'
large and growing library of aromatic cationic compounds and to all future
aromatic cation technology designed by them. The consortium scientists are
considered to be among the world's leading experts in aromatic cations,
infectious diseases, computer modeling of cationic pharmaceutical drugs and
computer-generated drug designs.
The Consortium Agreement requires us to (i) reimburse UNC-CH, on behalf of
the consortium scientists, certain patent and patent-related fees, (ii) pay
certain milestone payments, and (iii) make royalty payments based on revenue
derived from the licensed technology. Each month on behalf of the inventor
scientist or university, as the case may be, UNC-CH submits to us an invoice to
reimburse patenting-related fees incurred prior to the invoice date and related
to patents and patent applications to which we hold a license under the
Consortium Agreement. For the fiscal year ended March 31, 2006, we reimbursed
UNC-CH approximately $436,000 for such patent and patent-related costs, and
through March 31, 2006, we have reimbursed to UNC-CH approximately $2,334,000 in
the aggregate in patent and patent-related costs. We are also required to make
milestone payments in the form of issuance of 100,000 shares of our common stock
to the consortium upon the filing of our first New Drug Application ("NDA") or
an Abbreviated New Drug Application ("ANDA") based on consortium technology and
are required to pay to UNC-CH on behalf of the consortium (other than Duke
University) (i) royalty payments capped at a percentage of our net worldwide
sales of "current products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively) and (ii) a
percentage of any fees we receive under sublicensing arrangements. With respect
to products or licensing arrangements emanating from Duke University technology,
we are required to negotiate in good faith with UNC-CH (on behalf of Duke
University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
2. Clinical Research Agreement with UNC-CH
In November 2000, the Foundation awarded to UNC-CH a $15.1 million grant
to develop new drugs to treat human Trypanosomiasis (human African sleeping
sickness) and leishmaniasis (the "Foundation Grant"). On March 29, 2001, we
entered into a Clinical Research Subcontract with UNC-CH, whereby we were to
receive up to $9.8 million to be paid contingent upon UNC-CH's receipt of the
Foundation Grant. Our continued funding under the Clinical Research Subcontract
was subject to certain terms and conditions over the succeeding five year
period. We were required to conduct certain clinical and research studies
related to the Foundation Grant. In April 2003, the Foundation increased the
Foundation Grant by approximately $2.7 million for the expansion of Phase
IIB/III clinical trials to treat human Trypanosomiasis and improved
manufacturing processes. As of March 31, 2006, we had received, pursuant to the
Clinical Research Subcontract, inclusive of our portion of the Foundation Grant
increase, a total amount of funding of approximately $11.7 million. In March
2006, we amended and restated the
-18-
Clinical Research Subcontract with UNC-CH and UNC-CH in turn obtained an
expanded funding commitment of $13.6 million from the Foundation. Under the
amended and restated agreement, the Company received on May 24, 2006 the first
payment of approximately $5.6 million of a five year $13.6 million contract.
3. License Agreement with Tulane
On February 10, 2006, we entered into a license agreement with Tulane (the
"Tulane License Agreement") which granted to us a worldwide license and
exclusive right to commercialize its platform of aminoquinoline compounds for
the treatment, prophylaxis and diagnosis of infectious diseases. Included in the
class of Tulane's aminoquinoline drug candidates is a lead compound, AQ13, which
is targeted as a candidate, in combination with other of our compounds, for
treatment of and prophylaxis for malaria. Under the terms of the agreement,
Immtech will pay a capped and volume reduced per unit royalty for sales of
licensed products. Immtech also granted to Tulane 5,000 restricted shares of its
common stock on the effective date of the agreement and agreed to grant to
Tulane 10,000 more restricted shares upon initial approval of a New Drug
Application related to a licensed product by a recognized regulatory authority,
including the United States, European or Japanese regulatory authorities.
4. Malaria Program Agreements with Medicines for Malaria Venture
In November 2003, we entered into a Testing Agreement with MMV, a
foundation established in Switzerland, and UNC-CH, pursuant to which we, with
the support of MMV and UNC-CH, conducted a proof of concept study of
pafuramidine in clinical trials with the goal of obtaining marketing approval of
a product for the treatment of malaria. Through March 31, 2006, the Company had
received approximately $5.6 million under this agreement. Immtech and MMV agreed
in December 2005 to terminate the November 2003 agreement and to pursue efforts
on a combination therapy in collaboration with Tulane University. We are
currently finalizing an agreement among ourselves, MMV, and Tulane for
development of the new therapy.
E. Our Subsidiaries
1. Immtech Hong Kong Limited
On January 13, 2003, we entered into an agreement with an investor who
owned, through Lenton Fibre Optics Development Limited ("Lenton"), a Hong Kong
company, a 1.6+ acre commercial real estate parcel located in a "free-trade
zone" called the Futian Free Trade Zone, Shenzhen, in the People's Republic of
China ("PRC"). Under the agreement, we purchased an 80% interest in Lenton by
issuing to the investor 1.2 million unregistered shares of our common stock,
$0.01 par value. We subsequently resold to the investor our interest in Lenton
and the parcel of land in exchange for 100% ownership in the improved property
described below under the headings Super Insight Limited and Immtech Life
Science Limited. In connection with the sale of Lenton, we acquired 100%
ownership of Immtech Hong Kong Limited ("Immtech HK"), including Immtech HK's
interest in Immtech Therapeutics Limited.
Subsequently, through a sublicense agreement, we transferred to Immtech HK
the rights licensed to us under the Consortium Agreement to develop and license
the aromatic cation
-19-
technology platform in certain Asian countries and to commercialize resulting
products. We intend to use Immtech HK as a vehicle to further sublicense rights
to develop specific indications through other subsidiaries formed for the
purpose that are expected to partner with investors who fund development costs
of those indications. Immtech HK is a Hong Kong company.
i. Immtech Therapeutics Limited
Immtech Therapeutics Limited ("Immtech Therapeutics") provides assistance
to healthcare companies seeking access to the PRC to conduct clinical trials and
to manufacture and/or distribute pharmaceutical products in the PRC.
Immtech Therapeutics is majority owned by Immtech HK. Its minority owners
are Centralfield International Limited (a British Virgin Island ("BVI") company
and wholly-owned subsidiary of TechCap Holdings Limited) and Bingo Star Limited
(BVI). TechCap has assets and resources in the PRC upon which Immtech
Therapeutics may draw. Bingo Star Limited has substantial financial and medical
expertise and resources located in Hong Kong and the PRC. Immtech Therapeutics
is a Hong Kong company.
ii. Super Insight Limited (BVI)
On November 28, 2003, we purchased (i) from an investor 100% of Super
Insight Limited ("Super Insight") and Immtech Life Science Limited ("Immtech
Life Science") (Immtech Life Science is a wholly-owned subsidiary of Super
Insight) and (ii) from Lenton Fiber Optics Development Limited, a 100% interest
in Immtech HK. As payment for the acquisition, we transferred to the investor
our 80% interest in Lenton and $400,000 in cash. Super Insight is a British
Virgin Islands company.
iii. Immtech Life Science Limited
Immtech Life Science owns two floors of a building (the "Property")
located in the Futian Free Trade Zone, Shenzhen, in the PRC. We are exploring
the possibility of housing a pharmaceutical production facility for the
manufacture of drug products here or at other locations within PRC. The Property
comprises Level One and Level Two of a building named the Immtech Life Science
Building. The duration of the land use right associated with the building on
which the Property is located is 50 years, which expires May 24, 2051.
Under current law, we would enjoy reduced tax on the business located on
the Property because the local government has granted incentives to business in
high technology industrial sectors located in the Futian Free Trade Zone. Our
intended pharmaceutical manufacture use would qualify for the tax incentives.
Immtech Life Science is a Hong Kong company.
F. Manufacturing
1. First drug candidate, Pafuramidine Maleate
Immtech has finalized the chemistry for the synthesis of pafuramidine drug
substance and has demonstrated the process at the kilogram scale. We recently
improved the manufacturing process by developing an alternate synthetic route
for the initial manufacturing step in order to
-20-
improve yields and reduce production costs. Scale-up to commercial scale is in
progress at a contracted GMP manufacturing plant. The pafuramidine tablet
formulation that is in use in our two currently ongoing Phase III clinical
studies will be scaled-up for clinical trials and ultimately for commercial
scale.
2. AQ13
Approximately 20 kg. of AQ13 drug substance has been produced at a GMP
manufacturing plant. Although we have produced kilogram quantities of AQ13, the
process of synthesizing the drug has not been finalized. The abovementioned 20
kgs. of AQ13 is designated for future pre-clinical and clinical studies. We
believe that utilizing overseas manufacturing contractors/partners will
significantly reduce our manufacturing costs.
3. Aromatic Cationic Compounds
The scientists at our consortium universities, specifically the synthetic
chemistry laboratories at Georgia State and UNC-CH, have the capability to
produce and inventory small quantities of aromatic cations under license to us.
To date, Georgia State and UNC-CH have produced and supplied the aromatic
cations requested in the quantities required under various testing agreements
with third parties. We believe that these scientists will continue to produce
and deliver small quantities of compounds as needed for testing purposes.
4. Third Party Sources
In April 2005, we entered into an agreement with Dr. Reddy's Laboratories,
Inc.("DRL") to improve a selected step in the synthetic process for producing
pafuramidine. Since April 2005, we have entered into several more work orders
with DRL to (i) prepare the pafuramidine compound for production of commercial
quantities for clinical trials, registration and sale, (ii) develop a
micronization process for pafuramidine, and (iii) prepare the formulated
pafuramidine containing drug for clinical trials and registration. In October
2005, we issued a work order to DRL to conduct a salt screening study for AQ13
chemical and to produce kilogram quantities of AQ13 for pre-clinical and
clinical trials. DRL is a global pharmaceutical company that manufactures and
markets API (Bulk Actives), Finished Dosages and Biologics in over 100 countries
worldwide, in addition to having a drug discovery pipeline. DRL also provides
contract services for chemical process development, formulation development, and
commercial manufacturing.
In January 2005, we entered into an agreement with UPM Pharmaceuticals,
Inc. for production and scale-up of pafuramidine tablets. In May 2005, we
entered into an additional work order with UPM to develop and manufacture
placebo tablets for the PCP Phase 3 clinical trial. UPM has previously conducted
analytical method validation and stability studies for us, as well as
manufacturing supplies for clinical trials. UPM is a leading provider of
contract drug development, manufacturing, analytical and regulatory services.
UPM provides formulation, cGMP manufacturing, clinical trial materials,
analytical testing and related regulatory documentation for pharmaceutical
companies.
In September 2005 we entered into an agreement with Fisher Clinical
Services, Inc. ("FCS") to conduct feasibility studies and to manufacture
comparator drug products for the PCP
-21-
Phase 3 clinical study. Since September 2005, we have placed several work orders
with FCS to package drugs for clinical studies, label clinical supplies, package
drug for stability evaluations, and conduct analytical method development and
stability (through Lancaster Laboratories). FCS is a global leader in providing
clinical trial supply and distribution services.
5. Property in the PRC
See disclosure above under the heading "Immtech Life Science Limited". The
Property is located in a mixed-use office park and is suitable for
administrative offices and research and development operations, as well as
potentially housing a small-scale pharmaceutical production facility capable of
producing up to 10 tons of drug product per year. In addition, we have begun the
site selection process to find a location in the PRC for a manufacturing plant
capable of producing up to 60 tons of GMP quality drug product per year.
G. Strategy
Our strategy is to develop and commercialize a pipeline of new oral drugs
to treat infectious diseases and other disorders. Infectious diseases in the
global population have increased significantly during the past 20 years and are
the most common cause of death worldwide according to the WHO. Relatively few
new drugs for the treatment of infectious diseases have been brought to market
during this period. New drugs are needed to overcome the health risks of
multi-drug resistant strains and the increasing number of new pathogens that are
causing these diseases.
Our business model is a new paradigm focused on reducing the time and cost
to develop drugs aimed at solving global health issues. Our pipeline of drug
development activities includes programs in fungal diseases, HCV and
tuberculosis.
Two other indications - neurological disorders and diabetes - are
therapeutic areas for which we believe our aromatic cation technology platform
is appropriate and promising. In addition, recent research indicates that the
aromatic cation compounds may be useful as small molecule drugs that can
potentially selectively control gene expression and provide treatment for
microbial infections, cancer and disorders of genetic origin.
We believe we have been successful in developing a drug with a low
toxicity profile that is orally available using our aromatic cation platform and
prodrug technologies. We have leveraged our scientific partners and foundation
funding while advancing our technology and clinical trials in niche markets such
as African sleeping sickness, as well as in larger markets like malaria. We are
advancing our pipeline in antifungal, HCV and TB drugs, and continue to pursue
other attractive therapeutic opportunities.
We intend to proceed with the development and commercialization of
aromatic cations (which include dications) as drug products pursuant to our
agreement with the consortium as follows:
o Select commercial partners to sell and distribute pafuramidine
worldwide for treatment of PCP;
-22-
o Generate revenues by sales of drug products to commercial entities,
governments, international organizations and foundations expedited
through the FDA's accelerated approval program and/or other
countries' similar programs;
o Conduct a pilot study using pafuramidine as a malaria prophylaxis;
o Complete pivotal Phase III clinical trial of pafuramidine to treat
PCP;
o Complete pivotal Phase III clinical trial of pafuramidine to treat
African sleeping sickness;
o Utilize the FDA's fast-track designation of pafuramidine for the
treatment of African sleeping sickness to potentially expedite
commercial sales through accelerated approval of our NDA or any
foreign accelerated drug approval procedure;
o Select new drug candidates to target fungal infections, HCV and
tuberculosis;
o Complete pivotal Phase III clinical trial of pafuramidine to treat
PCP; and
o License our compounds as agents for use in animal health
indications.
Our strategy is to commercialize aromatic cations and our prodrug
technology, and generate revenues, first in niche markets by selling drugs for
serious or life-threatening diseases where we believe (i) our drug candidates
provide meaningful therapeutic benefits over existing therapies and (ii)
programs are available for expedited regulatory review due to the lack of
available effective treatments for such diseases. We intend to apply for and
utilize FDA fast-track and accelerated approval or corollary foreign accelerated
approval programs to accelerate commercialization of these drug candidates. We
believe our first drug candidates will demonstrate the power and versatility of
the aromatic cation platform and prodrug technologies thereby helping us to
expedite acceptance of the platform and prodrug technologies and to obtain
regulatory approval of our drug candidates for other indications.
H. Research and Development
Our success will depend in large part on our ability to commercialize
products from a large library of well defined compounds to which we hold
worldwide licenses and exclusive rights to commercialize.
We estimate that we have spent approximately $0.9 million, $1.5 million,
and $4.3 million respectively, in fiscal years ended March 31, 2004, 2005 and
2006, on Company sponsored research and development and approximately $2.4
million, $5.8 million, and $5.4 million respectively, in fiscal years ended
March 31, 2004, 2005 and 2006, on research and development sponsored by others.
All research and development activity for fiscal years ended March 31, 2004,
2005 and 2006 has been in support of our pharmaceutical commercialization
effort.
-23-
I. Patents and Trade Secrets
Our pharmaceutical compounds, including pafuramidine, are protected by
multiple patents secured by our university partners. We consider the protection
of our proprietary technologies and products to be important to our business. We
rely on a combination of patents, licenses, copyrights and trademarks to protect
these technologies and products. Protection of our aromatic cation technology
platform includes exclusive licensing rights to, as of March 2006, 244 patents
and patent applications, 150 of which have issued in the United States and in
various global markets. We also own separately thirteen issued patents that have
been assigned to Immtech. Generally, United States patents have a term of 17
years from the date of issue for
patents issued from applications submitted prior to June 8, 1995, and 20 years
from the date of filing of the application in the case of patents issued from
applications submitted on or after June 8, 1995. Patents in most other countries
have a term of 20 years from the date of filing the patent application. Ninety
of our licensed patents and patent applications, which includes 40 licensed
United States patents and patent applications, were submitted after June 8,
1995, including patents covering pafuramidine, its active metabolite drug form
(DB75) and our latest prodrug formulation processes.
Our policy is to file patent applications and defend the patents licensed
to and/or owned by us covering the technology we consider important to our
business in all countries where such protection is available and worthwhile. We
intend to continue to file and defend patent applications we license or own.
Although we pursue and encourage patent protection and defend our patents and
those licensed to us, obtaining patents for pharmaceutical drugs and their
specific uses involves complex legal and factual questions and consequently
involves a high degree of uncertainty. In addition, others may independently
develop similar products, duplicate our potential products or design around our
patent claims. Because of the time delay in patent approval and the secrecy
afforded patent applications during the first 18 months after they are filed, we
do not know if other applications, which might have priority over our
applications, have been filed. We also rely on trade secrets, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position.
Publication of discoveries in the scientific or patent literature tends to
lag behind actual discoveries by several months at a minimum. As a result, there
can be no assurance that patents will be issued from any of our patent
applications or from applications licensed to us. The scope of any of our issued
patents may not be sufficiently broad to offer meaningful protection. In
addition, our issued patents or patents licensed to us could be successfully
challenged, invalidated or circumvented so that our patent rights would not
create an effective competitive barrier.
The patents and patent applications to which we hold an exclusive
worldwide license right include claims to pharmaceutical compounds, methods of
their manufacture, and their uses to treat conditions related to diseases
including PCP, TB, Cryptosporidium parvum, Giardia lamblia, Leishmania mexicana
amazonensis, Trypanosoma brucei rhodesiense, various fungi, Plasmodium
falciparum, Alzheimer's disease, amyloidosis, Type II diabetes, HCV, BVDV and
HIV. We are obligated to reimburse or pay for the patents and patent prosecution
process for any patent applications which claim subject matter to which we want
to have an exclusive license. Patents and patent applications also protect
certain processes for making prodrugs
-24-
and the uses of compounds to detect and treat specific diseases as well as for a
new method for making chemical compounds that stack on top of each other (called
dimers) when they are bound to DNA.
We also rely in part on trade secret, copyright and trademark protection
of our intellectual property. We protect our trade secrets by entering into
confidentiality agreements with third parties, employees and consultants.
Generally, employees and consultants sign agreements to assign to us their
interests in patents and copyrights arising from their work for us. Key
employees also generally agree not to engage in unfair competition with us
during and after their employment with us. We have additional secrecy measures
as well. However, these agreements can be breached and, if they were, there
might not be an adequate remedy available to us. Also, a third party could learn
our trade secrets through means other than by breach of our confidentiality
agreements, or our trade secrets could be independently developed by our
competitors.
J. Governmental Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture, marketing and distribution of drug products.
These agencies and other federal, state and local entities regulate research and
development activities, including the testing, manufacture, quality control,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of our drug candidates.
Our ability to market our drug products will depend on receiving marketing
authorizations from the appropriate regulatory authorities. The foreign
regulatory approval process generally includes all of requirements associated
with FDA approval; however, the requirements governing the conduct of clinical
trials and marketing authorization vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Community, or EC, registration procedures are
available to companies wishing to market a product to more than one EC member
state. If the relevant regulatory authority is satisfied that adequate evidence
of safety, quality and efficacy of a drug candidate has been presented, a
marketing authorization typically will be granted.
Once regulatory approval is obtained for an indication applicable to
diseases endemic in third-world countries, we intend to apply to the WHO to have
the approved drug listed for such indication as a WHO Recommended Drug and for
inclusion on the WHO's Essential Medicines List. The WHO generally accepts
marketing approvals from drug regulatory agencies in the United States, UK,
European Union and Japan as well as other countries with established regulatory
agencies for the Essential Medicines List. In most cases, inclusion as a WHO
recommended Drug and/or inclusion on the Essential Medicine list is the primary
requirement to selling drugs in the countries where we intend to sell
pafuramidine to treat African sleeping sickness and other tropical diseases. We
believe we will then be able to sell our products in such countries while
continuing to perform post-approval studies as and if required.
In the United States, the FDA regulates drug products under the Federal
Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations. The
process required by the FDA
-25-
before our drug candidates may be marketed in the United States generally
involves the following:
o completion of extensive preclinical laboratory tests, preclinical
animal studies and formulation studies, all performed in accordance
with FDA's good laboratory practice, or GLP, regulations;
o submission to the FDA of an investigational new drug, or IND,
application which must become effective before human clinical trials
may begin;
o completion of adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug candidate for each
proposed indication in accordance with ethical principles and good
clinical practice, or GCP, requirements;
o submission to the FDA of a new drug application, or NDA;
o satisfactory completion of an FDA pre-approval inspection of the
manufacturing facilities at which the drug is produced to assess
compliance with current Good Manufacturing Practice, or cGMP,
regulations; and
o FDA review and approval of the NDA prior to any commercial
marketing, sale or shipment of the drug.
The testing and approval process requires substantial time, effort and
financial resources, and we cannot be certain that any approvals for our drug
candidates will be granted on a timely basis, or at all.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as studies to evaluate toxicity in animals.
The results of preclinical tests, together with manufacturing information and
analytical data, are submitted as part of an IND application to the FDA. The IND
automatically becomes effective 30 days after receipt by the FDA, unless the
FDA, within the 30 day time period, raises concerns or questions about the
conduct of the clinical trial, including concerns that human research subjects
will be exposed to unreasonable health risks. In such a case, the IND sponsor
and the FDA must resolve any outstanding concerns before the clinical trial can
begin. Our submission of an IND may not result in FDA authorization to commence
a clinical trial. A separate submission to an existing IND must also be made for
each successive clinical trial conducted during drug development, and the FDA
must grant permission before each clinical trial can begin. Further, an
independent institutional review board, or IRB, for each medical center
proposing to conduct the clinical trial must review and approve the plan for any
clinical trial before it commences at that center, and the IRB must monitor the
study until completed. The FDA, the IRB, or the sponsor may suspend a clinical
trial at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk. Clinical testing also
must satisfy extensive Good Clinical Practice, or GCP, regulations, including
regulations governing informed consent.
-26-
Clinical Trials. For purposes of NDA submission and approval, clinical
trials are typically conducted in three sequential phases, which may overlap:
o Phase I: Studies are initially conducted in a limited population to
test the drug candidate for safety, dose tolerance, absorption,
metabolism, distribution and excretion in healthy humans or, on
occasion, in patients, such as AIDS or cancer patients.
o Phase II: Studies are generally conducted in a limited patient
population to identify possible adverse effects and safety risks, to
determine the potential efficacy of the drug for specific targeted
indications and to determine dose tolerance and optimal dosage.
Multiple Phase II clinical trials may be conducted by the sponsor to
obtain information prior to beginning larger and more expensive
Phase III clinical trials.
o Phase III: These are commonly referred to as pivotal studies. When
Phase II evaluations demonstrate that a dose range of the drug has a
therapeutic effect and an acceptable safety profile, Phase III
trials are undertaken in larger patient populations to further
evaluate dosage, to provide substantial evidence of clinical
efficacy and to further test for safety in an expanded and diverse
patient population at multiple, geographically-dispersed clinical
trial sites.
o Phase IV: In some cases, the FDA may condition approval of an NDA
for a drug candidate on the sponsor's agreement to conduct
additional clinical trials to further assess the drug's safety and
effectiveness after NDA approval. Such post approval trials are
typically referred to as Phase IV studies.
New Drug Application. The results of drug development, preclinical studies
and clinical trials are submitted to the FDA as part of an NDA. The NDA also
must contain extensive manufacturing information. Once the submission has been
submitted for filing, by law the FDA has 30 days to accept or reject the NDA.
Once filed, the FDA has a stated goal of reviewing most applications and
responding to the sponsor within 10 months. The review process can be
significantly extended by FDA requests for additional information or
clarification. The FDA may refer the NDA to an advisory committee for review,
evaluation and recommendation as to whether the application should be approved.
The FDA is not bound by the recommendations of an advisory committee, but it
generally follows them. The FDA may deny approval of an NDA if the applicable
regulatory criteria are not satisfied, or it may require additional clinical
data and/or an additional pivotal Phase III clinical trial. Even if such data
are submitted, the FDA may ultimately decide that the NDA does not satisfy the
criteria for approval. Data from clinical trials are not always conclusive and
FDA may interpret data differently than we or our collaborators interpret the
data. Once issued, the FDA may withdraw product approval if ongoing regulatory
requirements are not met or if safety problems occur after the drug reaches the
market. In addition, the FDA may require testing, including Phase IV studies,
and surveillance programs to monitor the safety of approved products which have
been commercialized, and the FDA has the power to prevent or limit further
marketing of a drug based on the results of these post-marketing programs. Drugs
may be marketed only for the approved indications and in accordance with the
provisions of the approved label. Further, if there are any modifications to the
drug, including changes in indications, labeling, or
-27-
manufacturing processes or facilities, we may be required to submit and obtain
FDA approval of a new NDA or NDA supplement, which may require us to develop
additional data or conduct additional preclinical studies and clinical trials.
Fast-track Designation. FDA's fast-track program is intended to facilitate
the development and to expedite the review of drugs that are intended for the
treatment of a serious or life-threatening condition which demonstrate the
potential to address unmet medical needs for the condition. Under the fast-track
program, the sponsor of a new drug may request the FDA to designate the drug for
a specific indication as a fast-track drug concurrent with or after the IND is
filed for the drug candidate. The FDA must determine if the drug qualifies for
fast-track designation within 60 days of receipt of the sponsor's request.
If fast-track designation is obtained, the FDA may initiate review of
sections of an NDA before the application is complete. This rolling review is
available if the applicant provides, and the FDA approves, a schedule for the
submission of the remaining information and the applicant pays applicable user
fees. However, the time period specified in the Prescription Drug User Fees Act,
which governs the time period goals the FDA has committed to reviewing an
application, does not begin until the complete application is submitted.
Additionally, the fast-track designation may be withdrawn by the FDA if the FDA
believes that the designation is no longer supported by data emerging in the
clinical trial process.
In some cases, a fast-track designated drug may also qualify for one or
more of the following programs:
o Priority Review. Under FDA policies, a drug is eligible for priority
review, or review within a sixth month time frame from the time a
complete NDA is accepted for filing, if the product provides a
significant improvement compared to marketed products in the
treatment, diagnosis, or prevention of a disease. A fast-track
designated drug would ordinarily meet the FDA's criteria for
priority review. We cannot guarantee any of our products will
receive a priority review designation, or if a priority designation
is received, that review or approval will be faster than
conventional FDA procedures, or that FDA will ultimately grant
product approval. There can be no guarantee that we will be granted
priority review quickly or at all or, if granted, that such status
will not be later revoked.
o Accelerated Approval. Under the FDA's accelerated approval
regulations, the FDA is authorized to approve drugs that have been
studied for their safety and effectiveness in treating serious or
life-threatening illnesses and that provide meaningful therapeutic
benefit to patients over existing treatments based upon either a
surrogate endpoint that is reasonably likely to predict clinical
benefit, or on the basis of an effect on a clinical endpoint other
than patient survival. In clinical trials, surrogate endpoints are
alternative measurements of the symptoms of a disease or condition
that are substituted for measurements of observable clinical
symptoms. A drug approved on this basis is generally subject to
rigorous post-market compliance requirements, including the
completion of Phase IV or post-approval studies to validate the
surrogate endpoint or to confirm the effect on the clinical
endpoint. Failure to conduct required post-approval studies, or to
validate a surrogate endpoint
-28-
or confirm a clinical benefit during post-marketing studies, will
allow the FDA to withdraw the drug from the market on an expedited
basis. All promotional materials for drugs approved under
accelerated regulations are subject to prior review by the FDA.
There can be no guarantee that we will be granted accelerated
approval quickly or at all or, if granted, that such approval will
not be later revoked.
When appropriate, we and our collaborators intend to seek fast-track
designation and/or accelerated approval for our drug candidates, including
pafuramidine. On April 23, 2004, the FDA designated pafuramidine for the
treatment of African sleeping sickness as a fast-track product. We cannot
predict whether any of our other drug candidates or proposed indications will
obtain a fast-track and/or accelerated approval designation, or, if obtained,
the ultimate impact, if any, of the fast-track or the accelerated approval
process on the timing or likelihood of FDA approval of any of our proposed
products.
Satisfaction of FDA regulations and requirements, or similar regulations
and requirements of state, local and foreign regulatory agencies typically takes
several years and the actual time required may vary substantially based upon the
type, complexity and novelty of the drug or disease. Government regulation may
delay or prevent marketing of drug candidates for a considerable period of time
and impose costly procedures upon our activities. The FDA or any other
regulatory agency may not grant approvals for new indications for our drug
candidates on a timely basis, if at all. Even if a drug candidate receives
regulatory approval, the approval may be significantly limited to specific
disease states, patient populations and dosages. Further, even after regulatory
approval is obtained, later discovery of previously unknown problems with a drug
may result in restrictions on the drug or even complete withdrawal of the drug
from the market. Delays in obtaining, or failures to obtain, regulatory
approvals for any of our drug candidates would harm our business. In addition,
we cannot predict what adverse governmental regulations may arise from future
United States or foreign governmental action.
Other Regulatory Requirements. Any drugs manufactured or distributed by us
or our collaborators pursuant to FDA approvals are subject to continuing
regulation by the FDA, including recordkeeping requirements and reporting of
adverse experiences associated with the drug. Drug manufacturers and their
subcontractors are required to register their establishments with the FDA and
certain state agencies, and are subject to periodic unannounced inspections by
the FDA and certain state agencies for compliance with ongoing regulatory
requirements, including cGMPs, which impose certain procedural and documentation
requirements upon us and our third party manufacturers. Failure to comply with
the statutory and regulatory requirements can subject a manufacturer to legal or
regulatory action, such as Warning Letters, suspension of manufacturing, seizure
of drug, injunctive action or possible civil penalties. We cannot be certain
that we or our present or future third party manufacturers or suppliers will be
able to comply with the cGMP regulations and other ongoing FDA regulatory
requirements. If our present or future third party manufacturers or suppliers
are not able to comply with these requirements, the FDA may halt our clinical
trials, require us to recall a drug from distribution, or withdraw approval of
the NDA for that drug.
The FDA closely regulates the post-approval marketing and promotion of
drugs, including standards and regulations for direct-to-consumer advertising,
off-label promotion, industry-sponsored scientific and educational activities
and promotional activities involving the
-29-
Internet. A company can make only those claims relating to safety and efficacy
that are approved by the FDA. Failure to comply with these requirements can
result in adverse publicity, Warning Letters, corrective advertising and
potential civil and criminal penalties. Physicians may prescribe legally
available drugs for uses that are not described in the drug's labeling and that
differ from those tested by us and approved by the FDA. Such off-label uses are
common across medical specialties. Physicians may believe that such off-label
uses are the best treatment for many patients in varied circumstances. The FDA
does not regulate the behavior of physicians in their choice of treatments. The
FDA does, however, impose stringent restrictions on manufacturers'
communications regarding off-label use.
Exports From the United States. The FDA regulates the export of unapproved
drug products for use outside of the United States under the FFDCA and its
implementing regulations. The level of regulatory scrutiny the FDA applies to
exports of unapproved drugs depends on a number of factors, including, among
others, the country to which the investigational drug product is exported,
whether that country has approved the drug for commercial sale within that
jurisdiction, whether the exported drug is intended for use in a clinical trial
or is intended to be sold commercially, and, if the drug is to be used in
clinical testing, whether the manufacturer has obtained an IND from the FDA to
conduct the clinical trial. Depending on the applicability of these factors, a
manufacturer may be required to request and obtain authorization from the FDA
prior to exporting an unapproved drug. We have requested and obtained several
authorizations from the FDA to export quantities of our pafuramidine first drug
candidate for use in clinical trials abroad.
K. Competition
Competition in the pharmaceutical and biotechnology industries is intense.
Factors such as scientific and technological developments, the procurement of
patents, timely governmental approval for testing, manufacturing and marketing,
availability of funds, the ability to commercialize drug candidates in an
expedient fashion and the ability to obtain governmental approval for testing,
manufacturing and marketing play a significant role in determining our ability
to effectively compete. Furthermore, our industry is subject to rapidly evolving
technology that could result in the obsolescence of any drug candidates prior to
profitability.
Many of our potential competitors may have substantially greater
financial, technical and human resources than we have and may be better equipped
to develop, manufacture and market products. Many of our potential competitors
have concentrated their efforts in the development of human therapeutics and
developed or acquired internal biotechnology capabilities. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials and in obtaining regulatory approvals. Our competitors may
succeed in obtaining approval for products more rapidly than us and in
developing and commercializing products that are safer and more effective than
those that we propose to develop. Competitors, as well as academic institutions,
governmental agencies and private research organizations, also compete with us
in acquiring rights to products or technologies from universities, and
recruiting and retaining highly qualified scientific personnel and consultants.
The timing of market introduction of our potential products or of competitors'
products will be an important competitive factor. Accordingly, the relative
speed with which we can develop products,
-30-
complete preclinical testing, human clinical trials and regulatory approval
processes and supply commercial quantities to market will influence our ability
to bring a product to market.
Our competition will be determined in part by the indications for which
our products are developed and ultimately approved by regulatory authorities. We
rely on our collaborations with our university partners and other joint venture
partners to enhance our competitive edge by providing manufacturing, testing and
commercialization support. We are developing products to treat infectious
diseases and other diseases, some with no current or effective therapies.
Currently, pafuramidine is in clinical trials to treat malaria, PCP and African
sleeping sickness. Other drugs moving forward in our pipeline address markets
for new drugs for use in treating fungal infections, Hepatitis C, TB, and other
diseases. We are aware of the following companies which manufacture products
that may compete with pafuramidine and/or other products we are currently
developing: Sanofi-Aventis, Bayer, Ciba Geneva, Estellas, Bristol-Myers Squibb,
Hoffman LaRoche, Lannett Co. Inc., Novartis, Merck, Johnson & Johnson, Pfizer,
Watson Pharmaceuticals, Lederle, Pharmascience Inc. and ICN Canada
Pharmaceuticals. However, many of these companies' competing products have
limitations in terms of effectiveness to treat their indicated diseases,
toxicity, severity of side-effects, and/or difficulty of delivery (for example,
pentamidine must be administered either by injection or by inhalation). We
therefore believe that direct competition for our drug candidates for certain
indications has not yet been developed or approved.
L. EMPLOYEES
As of June 3, 2006, we had 26 employees (including 2 employees who work
for Immtech HK, our Hong Kong subsidiary), 12 of whom hold advanced degrees.
Thirteen of our employees work in support of clinical trials, research and
development, and regulatory compliance, and the other 13 work in general and
administrative capacities which includes business development, finance, legal,
investor relations, and administration. In addition, there are over 50
scientists affiliated with our consortium university partners who are engaged in
the research and discovery of novel pharmaceutical compounds to which we have
exclusive license and commercialization rights. We expect to add new employees
in our regulatory, clinical development and commercial development departments
as our programs advance.
ITEM 1A. RISK FACTORS
There is no assurance that we will successfully develop a commercially viable
product; our most advanced drug candidate, our first drug candidate
pafuramidine, is in Phase III human clinical trials for two indications.
We are in various stages of human clinical trials, and in some cases
preclinical development activities required for drug approval and
commercialization. Since our formation in October 1984, we have engaged in
research and development programs, expanding our network of scientists and
scientific advisors, licensing technology agreements and, since obtaining the
rights thereto in 1997, advancing the commercialization of the aromatic cation
technology platform that is the basis for our first drug candidate,
pafuramidine. We have generated no revenue from product sales, do not have any
products currently available for sale, and none are expected to be commercially
available for sale until after March 31, 2007, if at all.
-31-
There can be no assurance that the research we fund and manage will lead to
commercially viable products. Our most advanced programs are in Phase III human
clinical testing using pafuramidine, our first drug candidate, for several
indications including Pneumocystis pneumonia, trypanosomiasis (African sleeping
sickness) and malaria (Phase II) and must undergo substantial additional
regulatory review prior to commercialization.
We have a history of losses and an accumulated deficit; our future profitability
is uncertain.
We have experienced significant operating losses since our inception and
we expect to incur additional operating losses as we continue research and
development, clinical trial and commercialization efforts. As of March 31, 2006,
we had an accumulated deficit of approximately $88.8 million. Losses from
operations were approximately $13.6 million and $15.7 million, for the fiscal
years ended March 31, 2005 and March 31, 2006, respectively.
We need substantial additional funds, currently and in future years, to continue
our research and development; if financing is not available, we may be required
to pursue other financing alternatives, reduce spending for our research
programs or cease operations.
Our operations to date have consumed substantial amounts of cash. Negative
cash flow from operations is expected to continue in the foreseeable future.
Without substantial additional financing, we may be required to reduce some or
all of our research programs or cease operations. Our cash requirements may vary
materially from those now planned because of results of research and
development, results of preclinical and clinical testing, responses to our grant
requests, relationships with strategic partners, changes in the focus and
direction of our research and development programs, delays in the enrollment and
completion of our clinical trials, competitive and technological advances,
United States Food and Drug Administration ("FDA") and foreign regulatory
approval processes and other factors. In any of these circumstances, we may
require substantially more funds than we currently have available or intend to
raise to continue our business. We may seek to satisfy future funding
requirements through public or private offerings of equity securities, by
collaborative or other arrangements with pharmaceutical or biotechnology
companies, issuance of debt or from other sources. Additional financing may not
be available when needed or may not be available on acceptable terms. If
adequate financing is not available, we may not be able to continue as a going
concern or may be required to delay, scale back or eliminate certain research
and development programs, relinquish rights to certain technologies or drug
candidates, forego desired opportunities or license third parties to
commercialize our products or technologies that we would otherwise seek to
pursue internally. To the extent we raise additional capital by issuing equity
securities, ownership dilution to existing stockholders may result.
We receive funding primarily from research and development programs, fees
associated with licensing of our technology, grants and from sales of equity
securities. To date we have directed most of such funds not used for general and
administrative overhead toward our research and development and
commercialization programs (including preparation of submissions to regulatory
agencies). Until one or more of our drug candidates is approved for
-32-
sale, our funding is limited to funds from research and development programs,
fees associated with licensing of our technology, grants and proceeds from sales
of equity or debt securities.
We do not have employment contracts with any employees.
All of our employees are "at will" and may leave at any time. None of our
executive officers has as of this date, expressed any intention to retire or
leave our employ. We do not have "key-man" life insurance policies on any of our
executives.
Most of our business' financial aspects, including investor relations,
intellectual property control and corporate governance, are under the
supervision of Eric L. Sorkin, Cecilia Chan and Gary Parks. Together, Mr.
Sorkin, Ms. Chan and Mr. Parks hold institutional knowledge and business savvy
that they utilize to assist us to forge new relationships and exploit new
business opportunities without diminishing or undermining existing programs and
obligations.
A substantial portion of our proprietary intellectual property is developed by
scientists who are not employed by us.
Our business depends to a significant degree on the continuing
contributions of our key management, scientific and technical personnel, as well
as on the continued discoveries of scientists, researchers and specialists at
UNC-CH, Georgia State University, Duke University, Auburn University, and Tulane
University and other research groups that assist in the development of our drug
candidates. A substantial portion of our proprietary intellectual property is
developed by scientists who are employed by our partner universities and other
research groups. We do not have control over, knowledge of, or access to those
employment arrangements. We have not been advised by any of the key members of
our company, the scientific research groups or of the universities of their
intention to leave their employ or the program.
There can be no assurance that the loss of certain members of management
or the scientists, researchers and technicians from the universities would not
materially adversely affect our business.
Additional research grants to fund our operations may not be available or, if
available, not on terms acceptable to us.
We have funded our product development and operations as of March 31, 2006
through a combination of sales of equity instruments and revenue generated from
research agreements and grants. As of March 31, 2006, our accumulated deficit
was approximately $88.8 million net of approximately $20.8 million, which was
funded either directly or indirectly with grant funds and payments from research
and testing agreements.
In November 2000, the Foundation awarded a $15.1 million grant to UNC-CH
to develop new drugs to treat Human Trypanosomiasis (African sleeping sickness)
and leishmaniasis (the "Foundation Grant"). On March 29, 2001, UNC-CH entered
into a clinical research subcontract agreement with us, whereby we were to
receive up to $9.8 million, subject to certain terms ad conditions, over the
succeeding five year period, to conduct certain clinical and research studies
related to the Foundation Grant. In April 2003, the Foundation increased the
Foundation Grant
-33-
by approximately $2.7 million for the expansion of phase IIB/III clinical trials
to treat human Trypanosomiasis and to improve manufacturing processes. As of
March 31, 2006, we had received, pursuant to the clinical research subcontract
with UNC-CH, inclusive of our portion of the grant increase, a total amount of
funding of approximately $11.7 million. On March 28, 2006, the Foundation
increased the Foundation Grant by an approximate additional $22.6 million; $13.6
million of the addition Foundation Grant is budgeted to be paid to us over five
years under the Amended and Restated Clinical Research Agreement. On May 24,
2006, we received the first payment of approximately $5.6 million of the five
year $13.6 million contract.
In November 2003, we entered into a Testing Agreement with the Medicines
For Malaria Venture, a foundation established in Switzerland and UNC-CH,
pursuant to which we, with the support of MMV and UNC-CH, conducted a proof of
concept study of pafuramidine in human clinical trials with the goal of
obtaining marketing approval of a product for the treatment of malaria. Through
February 10, 2006, the Company had received approximately $5.6 million under
this agreement. We and MMV agreed in December 2005 to terminate the current
agreement to refocus our efforts on a combination therapy using AQ13 in
collaboration with Tulane University. MMV has verbally committed to the new
program and additional funding. We plan to disclose the terms of the new program
and funding upon completion of documentation.
We will continue to apply for new grants to support continuing research
and development of our proprietary aromatic cation technology platform and other
drug candidates. The process of obtaining grants is extremely competitive and
there can be no assurance that any of our grant applications will be acted upon
favorably. Some charitable organizations directly or indirectly provide funding
to us may require licenses to our proprietary information or may impose price
restrictions on the products we develop with their funds. We may not be able to
negotiate terms that are acceptable to us with such organizations. In the event
we are unable to raise sufficient funds to advance our product developments with
such grant funds we may seek to raise additional capital with the issuance of
equity or debt securities. There can be no assurance that we will be able to
place or sell equity or debt securities on terms acceptable to us and, if we
sell equity, existing stockholders may suffer dilution (see Risk Factors, this
section, entitled "Shares eligible for future sale may adversely affect our
ability to sell equity securities," and "Our outstanding options and warrants
may adversely affect our ability to consummate future equity financings due to
the dilution potential to future investors").
None of our drug candidates have been approved for sale by any regulatory
agency; approval is required before we can sell drug products commercially.
Our first drug candidate, pafuramidine, requires additional clinical
testing, regulatory approval and development of marketing and distribution
channels, all of which are expected to require substantial additional investment
prior to commercialization. There can be no assurance that any of our drug
candidates will be successfully developed, proven to be safe and effective in
human clinical trials, meet applicable regulatory standards, be approved by
regulatory authorities, be eligible for third-party reimbursement from
governmental or private insurers, be successfully marketed or achieve market
acceptance. If we are unable to commercialize our drug candidates in a timely
manner we may be required to seek additional funding, reduce or cancel
-34-
some or all of our development programs, sell or license some of our proprietary
information or cease operations.
There are substantial uncertainties related to clinical trials that may result
in the extension, modification or termination of one or more of our programs.
In order to obtain required regulatory approvals for the commercial sale
of our drug candidates, we must demonstrate through human clinical trials that
our drug candidates are safe and effective for their intended uses. Prior to
conducting human clinical trials we must obtain governmental approvals from the
host nation, approval from the United States to export our drug candidate to the
test site (if the test site is not in the United States) and qualify a
sufficient number of volunteer patients that meet our trial criteria. If we do
not obtain required governmental consents or if we do not enroll a sufficient
number of patients in a timely manner or at all, our trial expenses could
increase, results may be delayed or the trial may be cancelled.
We may find, at any stage of our research and development and
commercialization, that drug candidates that appeared promising in earlier
clinical trials do not demonstrate safety or effectiveness in later clinical
trials and therefore do not receive regulatory approvals. Despite the positive
results of our preclinical testing and human clinical trials those results may
not be predictive of the results of later clinical trials and large-scale
testing. Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in various stages of clinical trials, even after
promising results had been obtained in early-stage human clinical trials.
Completion of human clinical trials may be delayed by many factors,
including slower than anticipated patient enrollment, participant retention and
follow up, difficulty in securing sufficient supplies of clinical trial
materials or other adverse events occurring during clinical trials. For
instance, once we obtain permission to run a human trial, there are strict
criteria regulating who we can enroll in the trial. In the case of African
sleeping sickness, we are subject to civil unrest in sub-Sahara Africa where
local rebels could close clinics and dramatically reduce enrollment rates, and
make it difficult to conduct trials. Political instability and the minimal
infrastructure in the African countries where we conduct our African sleeping
sickness trials may cause delays in enrollment and difficulty in the completion
of trials.
Completion of testing, studies and trials may take several years, and the
length of time varies substantially with the type, complexity, novelty and
intended use of the product. Delays or rejections may be based upon many
factors, including changes in regulatory policy during the period of product
development. No assurance can be given that any of our development programs will
be successfully completed, that any IND application filed with the FDA (or any
foreign equivalent filed with the appropriate foreign authorities) will become
effective, that additional clinical trials will be allowed by the FDA or other
regulatory authorities, or that clinical trials will commence as planned. There
have been delays in our testing and development schedules due to the
aforementioned conditions and funding and patient enrollment difficulties and
there can be no assurance that our future testing and development schedules will
be met.
-35-
We do not currently have pharmaceutical manufacturing and distribution
capability, which could impair our ability to develop commercially viable
products at reasonable costs.
Our ability to commercialize drug candidates will depend in part upon our
ability to have manufactured or develop the capability to manufacture our drug
candidates and to distribute those goods, either directly or through third
parties, at a competitive cost and in accordance with FDA and other regulatory
requirements. We currently lack facilities and personnel to manufacture or
distribute our drug candidates. There can be no assurance that we will be able
to acquire such resources, either directly or through third parties, at
reasonable costs, if we develop commercially viable products. We are dependent
on third party relationships for critical aspects of our business; problems that
develop in these relationships may increase costs and/or diminish our ability to
develop our drug candidates.
We use the expertise and resources of strategic partners and third parties
in a number of key areas, including (i) discovery research, (ii) preclinical and
human clinical trials, (iii) product development and (iv) manufacture of
pharmaceutical drugs. We have a worldwide license and exclusive
commercialization rights to a proprietary aromatic cation technology platform
and are developing drugs intended for commercial use based on that platform.
This strategy creates risks by placing critical aspects of our business in the
hands of third parties, whom we may not be able to control. If these third
parties do not perform in a timely and satisfactory manner, we may incur costs
and delays as we seek alternate sources of such products and services, if
available. Such costs and delays may have a material adverse effect on our
business if the delays jeopardize our licensing arrangements by causing us to
become non-compliant with certain license agreements.
We may seek additional third party relationships in certain areas,
particularly in clinical testing, manufacturing, marketing, distribution and
other areas where pharmaceutical and biotechnology company collaborators will
enable us to develop particular products or geographic markets that are
otherwise beyond our current resources and/or capabilities. There is no
assurance that we will be able to obtain any such collaboration or any other
research and development, clinical trial, manufacturing, marketing or
distribution relationships. Our inability to obtain and maintain satisfactory
relationships with third parties may have a material adverse effect on our
business by slowing our ability to develop new products, requiring us to expand
our internal capabilities, increasing our overhead and expenses, hampering
future growth opportunities or causing us to delay or terminate affected
programs.
We are uncertain about our ability to protect or obtain necessary patents and
protect our proprietary information; our ability to develop and commercialize
drug candidates would be compromised without adequate intellectual property
protection.
We have spent and continue to spend considerable funds to develop our drug
candidates and we are relying on the potential to exploit commercially without
competition the results of our product development. Much of our intellectual
property is licensed to us under various agreements including the Consortium
Agreement, related License Agreement and the Tulane License Agreement. It is the
primary responsibility of the discoverer to develop his, her or its
-36-
invention confidentially, insure that the invention is unique, and to obtain
patent protection. In most cases, our role is to reimburse patent related costs
after we decide to develop any such invention. We therefore rely on the
inventors to insure that technology licensed to us is adequately protected.
Without adequate protection for our intellectual property we believe our ability
to realize profits on our future commercialized product would be diminished.
Without protection, competitors might be able to copy our work and compete with
our products without having invested in the development.
There can be no assurance that any particular patent will be granted or
that issued patents (issued to us directly or through licenses) will provide us
with the intellectual property protection contemplated by such patents. Patents
and licenses of patents can be challenged, invalidated or circumvented. Patent
litigation is expensive and time-consuming and the outcome cannot be predicted.
It is also possible that competitors will develop similar products
simultaneously. Our breach of any license agreement or the failure to obtain a
license to any technology or process which may be required to develop or
commercialize one or more of our drug candidates may have a material adverse
effect on our business, including the need for additional capital to develop
alternate technology, the potential that competitors may gain unfair advantage
and lessen our expectation of potential future revenues.
The pharmaceutical and biotechnology fields are characterized by a large
number of patent filings, and a substantial number of patents have already been
issued to other pharmaceutical and biotechnology companies. Third parties may
have filed applications for, or may have been issued, certain patents and may
obtain additional patents and proprietary rights related to products or
processes competitive with or similar to those that we are attempting to develop
and commercialize. We may not be aware of all of the patents potentially adverse
to our interests that may have been issued to others. No assurance can be given
that patents do not exist, have not been filed or could not be filed or issued,
which contain claims relating to or competitive with our technology, drug
candidates, product uses or processes. If patents have been or are issued to
others containing preclusive or conflicting claims, then we may be required to
obtain licenses to one or more of such patents or to develop or obtain
alternative technology. There can be no assurance that the licenses or
alternative technology that might be required for such alternative processes or
products would be available on commercially acceptable terms, or at all.
Because of the substantial length of time and expense associated with
bringing new drug products to market through the development and regulatory
approval process, the pharmaceutical and biotechnology industries place
considerable importance on patent and trade secret protection for new
technologies, products and processes. Since patent applications filed in the
United States are confidential for eighteen months after filing and some are
confidential until their date of issue as a patent and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we (or our licensors) were the first to
make the inventions covered by pending patent applications or that we (or our
licensors) were the first to file patent applications for such inventions. The
patent positions of pharmaceutical and biotechnology companies can be highly
uncertain and involve complex legal and factual questions and, therefore, the
breadth of claims allowed in pharmaceutical and biotechnology patents, or their
enforceability, cannot be predicted. There can be no assurance that any patents
under pending patent applications or any further patent applications will be
issued. Furthermore,
-37-
there can be no assurance that the scope of any patent protection will
exclude competitors or provide us competitive advantages, that any of our (or
our licensors') patents that have been issued or may be issued will be held
valid if subsequently challenged, or that others, including competitors or
current or former employers of our employees, advisors and consultants, will not
claim rights in, or ownership to, our (or our licensors') patents and other
proprietary rights. There can be no assurance that others will not independently
develop substantially equivalent proprietary information or otherwise obtain
access to our proprietary information, or that others may not be issued patents
that may require us to obtain a license for, and pay significant fees or
royalties for, such proprietary information.
We rely on technology developed by others and shared with collaborators to
develop our drug candidates which puts our proprietary information at risk of
unauthorized disclosure.
We rely on trade secrets, know-how and technological advancement to
maintain our competitive position. Although we use license agreements,
confidentiality agreements and employee proprietary information and invention
assignment agreements to protect our trade secrets and other unpatented
know-how, these agreements may be breached by the other party thereto or may
otherwise be of limited effectiveness or enforceability.
We are licensed to commercialize technology from a proprietary aromatic
cation technology platform developed by a scientific consortium, comprised
primarily of scientists employed by universities in an academic setting. The
academic world is improved by the sharing of information. As a business,
however, the sharing of information whether through publication of research,
academic lectures or general intellectual discourse among contemporaries is not
conducive to protection of proprietary information. Our proprietary information
may fall into the possession of unintended parties without our knowledge through
customary academic information sharing.
At times we may enter into confidentiality agreements with other
companies, allowing them to test our technology for potential future licensing,
in return for milestone and royalty payments should any discoveries result from
the use of our proprietary information. We cannot be assured that such parties
will honor these confidentiality agreements subjecting our intellectual property
to unintended disclosure.
The pharmaceutical and biotechnology industries have experienced extensive
litigation regarding patent and other intellectual property rights. We could
incur substantial costs in defending suits that may be brought against us (or
our licensors) claiming infringement of the rights of others or in asserting our
(or our licensors') patent rights in a suit against another party. We may also
be required to participate in interference proceedings declared by the United
States Patent and Trademark Office or similar foreign agency for the purpose of
determining the priority of inventions in connection with our (or our
licensors') patent applications.
Adverse determinations in litigation or interference proceedings could
require us to seek licenses (which may not be available on commercially
reasonable terms) or subject us to significant liabilities to third parties, and
could therefore have a material adverse effect on our business by increasing our
expenses and having an adverse effect on our business. Even if we
-38-
prevail in an interference proceeding or a lawsuit, substantial resources,
including the time and attention of our officers, would be required.
Confidentiality agreements may not adequately protect our intellectual property
which could result in unauthorized disclosure or use of our proprietary
information.
We require our employees, consultants and third parties with whom we share
proprietary information to execute confidentiality agreements upon the
commencement of their relationship with us. The agreements generally provide
that trade secrets and all inventions conceived by the individual and all
confidential information developed or made known to the individual during the
term of the relationship will be our exclusive property and will be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for our proprietary information in the event of
unauthorized use or disclosure of such information. If our unpatented
proprietary information is publicly disclosed before we have been granted patent
protection, our competitors could be unjustly enriched and we could lose the
ability to profitably develop products from such information.
Our industry has significant competition; our drug candidates may become
obsolete prior to commercialization due to alternative technologies thereby
rendering our development efforts obsolete or non-competitive.
The pharmaceutical and biotechnology fields are characterized by extensive
research efforts and rapid technological progress. Competition from other
pharmaceutical and biotechnology companies and research and academic
institutions is intense and other companies are engaged in research and product
development to treat the same diseases that we target. New developments in
pharmaceutical and biotechnology fields are expected to continue at a rapid pace
in both industry and academia. There can be no assurance that research and
discoveries by others will not render some or all of our programs or products
non-competitive or obsolete.
We are aware of other companies and institutions dedicated to the
development of therapeutics similar to those we are developing, including
Sanofi-Aventis, Hoffman-LaRoche Ltd., Pfizer Inc., Novartis, and Bayer
Corporation. Many of our existing or potential competitors have substantially
greater financial and technical resources than we do and therefore may be in a
better position to develop, manufacture and market pharmaceutical products. Many
of these competitors are also more experienced performing preclinical testing
and human clinical trials and obtaining regulatory approvals. The current or
future existence of competitive products may also adversely affect the
marketability of our drug candidates.
In the event some or all of our programs are rendered non-competitive or
obsolete, we do not currently have alternative strategies to develop new product
lines or the financial resources to pursue such a course of action.
-39-
There is no assurance that we will receive FDA or corollary foreign approval for
any of our drug candidates for any indication; we are subject to government
regulation for the commercialization of our drug candidates.
We have not made application to the FDA or any other regulatory agency to
sell commercially or label any of our drug candidates. We or our collaborators
have received licenses from the FDA to export pafuramidine for testing purposes
and have previously been approved to conduct human clinical trials for various
indications in each of the United States, Germany, France, the Democratic
Republic of Congo, Angola, Thailand, Peru and South Africa.
All new pharmaceutical drugs, including our drug candidates, are subject
to extensive and rigorous regulation by the federal government, principally the
FDA under the Federal Food, Drug and Cosmetic Act ("FDCA") and other laws and by
applicable state, local and foreign governments. Such regulations govern, among
other things, the development, testing, manufacturing, labeling, storage,
pre-market clearance or approval, advertising, promotion, sale and distribution
of pharmaceutical drugs. If drug products are marketed abroad, they are subject
to extensive regulation by foreign governments. Failure to comply with
applicable regulatory requirements may subject us to administrative or
judicially imposed sanctions such as civil penalties, criminal prosecution,
injunctions, product seizure or detention, product recalls, total or partial
suspension of production and FDA refusal to approve pending applications.
Each of our drug candidates must be approved for each indication for which
we believe it to be viable. We have not yet determined from which regulatory
agencies we will seek approval for our drug candidates or indications for which
approval will be sought. Once determined, the approval process is subject to
those agencies' policies and acceptance of those agencies' approvals, if
obtained, in the countries where we intend to market our drug candidates.
We have not received regulatory approval in the United States or any foreign
jurisdiction for the commercial sale of any of our drug candidates.
On April 23, 2004 the FDA granted fast-track designation for pafuramidine,
our first drug candidate, for treatment of African sleeping sickness
(trypanosomiasis). Fast-track designation means, among other things, that the
FDA may accept initial late-stage data from us, rather than waiting for the
entire Phase III clinical trial data to be submitted together, for consideration
of approval to market the drug. There is, however, no guarantee that fast-track
designation will result in faster product development or licensing approval or
that our drug candidates will be approved at all.
The process of obtaining FDA or other regulatory approvals, including
foreign approvals, often takes many years and varies substantially based upon
the type, complexity and novelty of the products involved and the indications
being studied. Furthermore, the approval process is extremely expensive and
uncertain. There can be no assurance that our drug candidates will be approved
for commercial sale in the United States by the FDA or regulatory agencies in
foreign countries. The regulatory review process can take many years and we will
need to raise additional funds to complete the regulatory review process for our
current drug candidates. The failure to receive FDA or other governmental
approval would have a material adverse effect on our business by precluding us
from marketing and selling such products and negatively
-40-
impacting our ability to generate future revenues. Even if regulatory approval
of a product is granted, there can be no assurance that we will be able to
obtain the labeling claims (a labeling claim is a product's description and its
FDA permitted uses) necessary or desirable for the promotion of such product.
FDA regulations prohibit the marketing or promotion of a drug for unapproved
indications. Furthermore, regulatory marketing approval may entail ongoing
requirements for post-marketing studies if regulatory approval is obtained; we
will also be subject to ongoing FDA obligations and continued regulatory review.
In particular, we, or our third party manufacturers, will be required to adhere
to Good Manufacturing Practices ("GMP"), which require us (or our third party
manufacturers) to manufacture products and maintain records in a prescribed
manner with respect to manufacturing, testing and quality control. Further, we
(or our third party manufacturers) must pass a manufacturing facilities
pre-approval inspection by the FDA or corollary agency before obtaining
marketing approval. Failure to comply with applicable regulatory requirements
may result in penalties, such as restrictions on a product's marketing or
withdrawal of the product from the market. In addition, identification of
certain side-effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials and
changes in labeling of the product.
Prior to the submission of an application for FDA or other regulatory
approvals, our pharmaceutical drugs undergo rigorous preclinical and clinical
testing, which may take several years and the expenditure of substantial
financial and other resources. Before commencing clinical trials in humans in
the United States, we must submit to the FDA and receive clearance of an IND.
There can be no assurance that submission of an IND for future clinical testing
of any of our drug candidates under development or other future drug candidates
will result in FDA permission to commence clinical trials or that we will be
able to obtain the necessary approvals for future clinical testing in any
foreign jurisdiction. Further, there can be no assurance that if such testing of
drug candidates under development is completed, any such drug compounds will be
accepted for formal review by the FDA or any foreign regulatory agency or
approved by the FDA for marketing in the United States or by any such foreign
regulatory agencies for marketing in foreign jurisdictions.
Our most advanced programs are developing products intended for sale in
countries that may not have established pharmaceutical regulatory agencies.
Some of the intended markets for our treatment of African sleeping
sickness and malaria are in countries without developed pharmaceutical
regulatory agencies. We plan in such cases to try first to obtain regulatory
approval from a recognized pharmaceutical regulatory agency such as the FDA or
one or more European agencies and then to apply to the targeted country for
recognition of the foreign approval. Because the countries where we intend to
market treatments for African sleeping sickness and malaria are not obligated to
accept foreign regulatory approvals and because those countries do not have
standards of their own for us to rely upon, we may be required to provide
additional documentation or complete additional testing prior to distributing
our products in those countries.
There is uncertainty regarding the availability of health care reimbursement to
prospective purchasers of our anticipated products; health care reform may
negatively impact the ability of prospective purchasers of our anticipated
products to pay for such products.
-41-
Our ability to commercialize any of our drug candidates will depend in
part on the extent to which reimbursement for the costs of the resulting drug
will be available from government health administration authorities, private
health insurers, non-governmental organizations and others. Many of our drug
candidates, including treatments for trypanosomiasis, malaria and tuberculosis,
would be in the greatest demand in developing nations, many of which do not
maintain comprehensive health care systems with the financial resources to pay
for such drugs. We do not know to what extent governments, private charities,
international organizations and others would contribute toward bringing newly
developed drugs to developing nations. Even among drugs sold in developed
countries, significant uncertainty exists as to the reimbursement status of
newly approved health care products. There can be no assurance of the
availability of third party insurance reimbursement coverage enabling us to
establish and maintain price levels sufficient for realization of a profit on
our investment in developing pharmaceutical drugs. Government and other
third-party payers are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new drug products
approved for marketing by the FDA and by refusing, in some cases, to provide any
coverage for uses of approved products for disease indications for which the FDA
has not granted marketing approval. If adequate coverage and reimbursement
levels are not provided by government and third-party payers for uses of our
anticipated products, the market acceptance of these products would be adversely
affected.
Healthcare reform proposals are regularly introduced in the United States
Congress and in various state legislatures and there is no guarantee that such
proposals will not be introduced in the future. We cannot predict when any
proposed reforms will be implemented, if ever, or the effect of any implemented
reforms on our business. Implemented reforms may have a material adverse effect
on our business by reducing or eliminating the availability of third-party
reimbursement for our anticipated products or by limiting price levels at which
we are able to sell such products. If reimbursement is not available for our
products, health care providers may prescribe alternative remedies if available.
Patients, if they cannot afford our products, may do without. In addition, if we
are able to commercialize products in overseas markets, then our ability to
achieve success in such markets may depend, in part, on the health care
financing and reimbursement policies of such countries. We cannot predict
changes in health care systems in foreign countries, and therefore, do not know
the effects on our business of possible changes.
Shares eligible for future sale may adversely affect our ability to sell equity
securities.
Sales of our common stock (including the issuance of shares upon
conversion of preferred stock) in the public market could materially and
adversely affect the market price of shares because prior sales have been
executed at or below our current market price. We have outstanding five series
of preferred stock that convert to common stock at prices equivalent to $4.42,
$4.00, $4.42, $9.00 and $7.04, respectively, for our series A, series B, series
C, series D and series E convertible preferred stock (subject to adjustment for
stock splits, stock dividends and similar dilutive events). Our obligation to
convert the preferred stock upon demand by the holders may depress the price of
our common stock and also make it more difficult for us to sell equity
securities or equity-related securities in the future at a time and price that
we deem appropriate.
-42-
As of June 2, 2006 we had 13,995,666 shares of common stock outstanding,
plus (1) 58,400 shares of series A convertible preferred stock, convertible into
approximately 330,316 shares of common stock at the conversion rate of 1:5.656,
(2) 13,464 shares of series B Convertible Preferred stock convertible into
approximately 84,150 shares of common stock at the conversion rate of 1:6.25,
(3) 45,536 shares of series C convertible preferred stock convertible into
approximately 257,556 shares of common stock at the conversion rate of 1:5.656,
(4) 117,200 shares of series D convertible preferred stock convertible into
approximately 325,558 shares of common stock at the conversion rate of 1:2.778,
(5) 110,600 shares of series E convertible preferred stock convertible into
approximately 392,757 shares of common stock at the conversion rate of 1:3.551,
(6) 1,578,117 options to purchase shares of common stock with a weighted-average
exercise price of $9.36 per share, and (7) 2,850,112 warrants to purchase shares
of common stock with a weighted-average exercise price of $7.52. Of the shares
outstanding, 12,191,206 shares of common stock are freely tradable without
restriction. All of the remaining 1,804,460 shares are restricted from resale,
except pursuant to certain exceptions under the Securities Act of 1933, as
amended (the "Securities Act").
Our outstanding options and warrants may adversely affect our ability to
consummate future equity financings due to the dilution potential to future
investors.
We have outstanding options and warrants for the purchase of shares of our
common stock with exercise prices currently below market which may adversely
affect our ability to consummate future equity financings. The holders of such
warrants and options may exercise them at a time when we would otherwise be able
to obtain additional equity capital on more favorable terms. To the extent any
such options and warrants are exercised, the value of our outstanding shares of
our common stock may be diluted.
As of June 2, 2006, we have outstanding vested options to purchase
1,135,739 shares of common stock at a weighted-average exercise price of $9.78,
and vested warrants to purchase 2,740,112 shares of common stock with a
weighted-average price of $7.34
Due to the number of shares of common stock we are obligated to sell
pursuant to outstanding options and warrants described above, potential
investors may not purchase our future equity offerings at market price because
of the potential dilution such investors may suffer as a result of the exercise
of the outstanding options and warrants.
The market price of our common stock has experienced significant volatility.
The securities markets from time to time experience significant price and
volume fluctuations unrelated to the operating performance of particular
companies. In addition, the market prices of the common stock of many publicly
traded pharmaceutical companies have been and can be expected to be especially
volatile. Our common stock price in the 52-week period ended (i) March 31, 2006
had a high of $13.89 and a low of $6.30 and (ii) June 9, 2006 had a high of
$13.70 and a low of $6.30. Announcements of technological innovations or new
products by us or our competitors, developments or disputes concerning patents
or proprietary rights, publicity regarding actual or potential clinical trial
results relating to products under development by us or our competitors,
regulatory developments in both the United States and foreign countries, delays
in our testing and development schedules, public concern as to the
-43-
safety of pharmaceutical drugs and economic and other external factors, as well
as period-to-period fluctuations in our financial results, may have a
significant impact on the market price of our common stock. The realization of
any of the risks described in these "Risk Factors" may have a significant
adverse impact on such market prices.
We may pay vendors in stock as consideration for their services; this may result
in stockholder dilution, additional costs and difficulty retaining certain
vendors.
In order for us to preserve our cash resources, we have previously paid
and may in the future pay vendors in shares, warrants or options to purchase
shares of our common stock rather than cash. Payments for services in stock may
materially and adversely affect our stockholders by diluting the value of
outstanding shares of our common stock. In addition, in situations where we have
agreed to register the shares issued to a vendor, this will generally cause us
to incur additional expenses associated with such registration. Paying vendors
in shares, warrants or options to purchase shares of common stock may also limit
our ability to contract with the vendor of our choice should that vendor decline
payment in stock.
We do not intend to pay dividends on our common stock. Until such time as we pay
cash dividends, our stockholders must rely on increases in our stock price for
appreciation.
We have never declared or paid dividends on our common stock. We intend to
retain future earnings to develop and commercialize our products and therefore
we do not intend to pay cash dividends in the foreseeable future. Until such
time as we determine to pay cash dividends on our common stock, our stockholders
must rely on increases in our common stock's market price for appreciation.
If we do not effectively manage our growth, our resources, systems and controls
may be strained and our operating results may suffer.
We have recently added to our workforce and we plan to continue to
increase the size of our workforce and scope of our operations as we continue
our drug development programs and clinical trials and move towards
commercialization of our products. This growth of our operations will place a
significant strain on our management personnel, systems and resources. We may
need to implement new and upgraded operational and financial systems, procedures
and controls, including the improvement of our accounting and other internal
management systems. These endeavors will require substantial management effort
and skill, and we may require additional personnel and internal processes to
manage these efforts. If we are unable to effectively manage our expanding
operations, our revenue and operating results could be materially and adversely
affected.
Our continuing obligations as a public company under the laws, regulations
and standards relating to corporate governance and public disclosure, including
the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and related regulations,
are likely to increase our expenses and administrative burden. Changes in the
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act and related regulations implemented
by the Securities and Exchange Commission and self-regulatory organizations
(e.g. the AMEX), are creating uncertainty for public companies, increasing legal
and financial
-44-
compliance costs and making some activities more time consuming. These laws,
regulations and standards are subject to varying interpretations, and, as a
result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing
uncertainty regarding compliance matters and higher costs necessitated by
ongoing revisions to disclosure and governance practices. We have and expect to
continue to invest resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general and
administrative expenses and a diversion of management's time and attention from
the business of the Company to compliance activities. If our efforts to comply
with new laws, regulations and standards differ from the conduct expected by
regulatory or governing bodies, those authorities may initiate legal proceedings
against us and our business may be harmed.
There are limitations on the liability of our directors, and we may have to
indemnify our officers and directors in certain instances.
Our certificate of incorporation limits, to the maximum extent permitted
under Delaware law, the personal liability of our directors for monetary damages
for breach of their fiduciary duties as directors. Our bylaws provide that we
will indemnify our officers, directors, employees and other agents to the
fullest extent permitted by law. These provisions may be in some respects
broader than the specific indemnification provisions under Delaware law. The
indemnification provisions may require us, among other things, to (i) indemnify
such persons against certain liabilities that may arise by reason of their
status with or service to the Company (other than liabilities arising from
willful misconduct of a culpable nature), (ii) advance expenses incurred as a
result of any proceeding against such persons as to which they could be
indemnified and (iii) obtain directors' and officers' insurance. Section 145 of
the Delaware General Corporation Law provides that a corporation may indemnify a
director, officer, employee or agent made or threatened to be made a party to an
action by reason of the fact that he or she was a director, officer, employee or
agent of the corporation or was serving at the request of the corporation,
against expenses actually and reasonably incurred in connection with such action
if he or she acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. Delaware law does not permit a corporation to
eliminate a director's duty of care and the provisions of our certificate of
incorporation have no effect on the availability of equitable remedies, such as
injunction or rescission, for a director's breach of the duty of care.
We believe that our limitation of officer and director liability assists
us to attract and retain qualified officers and directors. However, in the event
an officer, a director or the board of directors commits an act that may legally
be indemnified under Delaware law, we will be responsible to pay for such
officer(s) or director(s) legal defense and potentially any damages resulting
therefrom. Furthermore, the limitation on director liability may reduce the
likelihood of derivative litigation against directors, and may discourage or
deter stockholders from instituting litigation against directors for breach of
their fiduciary duties, even though such an action, if successful, might benefit
us and our stockholders. Given the difficult environment and potential for
incurring liabilities currently facing directors of publicly-held corporations,
we believe that director indemnification is in our and our stockholders' best
interests because it
-45-
enhances our ability to attract and retain highly qualified directors and reduce
a possible deterrent to entrepreneurial decision-making.
Nevertheless, limitations of director liability may be viewed as limiting
the rights of stockholders, and the broad scope of the indemnification
provisions contained in our certificate of incorporation and bylaws could result
in increased expenses. Our board of directors believes, however, that these
provisions will provide a better balancing of the legal obligations of, and
protections for, directors and will contribute positively to the quality and
stability of our corporate governance. Our board of directors has concluded that
the benefit to stockholders of improved corporate governance outweighs any
possible adverse effects on stockholders of reducing the exposure of directors
to liability and broadened indemnification rights.
We are exposed to potential risks from recent legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act.
The Sarbanes-Oxley Act requires that we maintain effective internal
controls over financial reporting and disclosure controls and procedures. Among
other things, we must perform system and process evaluation and testing of our
internal controls over financial reporting to allow management to report on, and
our independent registered public accounting firm to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Compliance with Section 404 requires substantial accounting
expense and significant management efforts. Our testing, or the subsequent
review by our independent registered public accounting firm, may reveal
deficiencies in our internal controls that would require us to remediate in a
timely manner so as to be able to comply with the requirements of Section 404
each year. If we are not able to comply with the requirements of Section 404 in
a timely manner each year, we could be subject to sanctions or investigations by
the United States Securities Exchange Commission ("SEC"), the AMEX or other
regulatory authorities that would require additional financial and management
resources and could adversely affect the market price of our common stock.
Product liability exposure may expose us to significant liability.
We do not have pharmaceutical products for sale and we therefore do not
carry product liability insurance. However, if we do commercialize drug products
we will face risk of exposure to product liability and other claims and lawsuits
in the event that the development or use of our technology or prospective
products is alleged to have resulted in adverse effects. We may not be able to
avoid significant liability exposure. We may not have sufficient insurance
coverage and we may not be able to obtain sufficient coverage at a reasonable
cost. An inability to obtain product liability insurance at acceptable cost or
to otherwise protect against potential product liability claims could prevent or
inhibit the commercialization of our products. A product liability claim could
hurt our financial performance. Even if we avoid liability exposure, significant
costs could be incurred, potentially damaging our financial performance. We do
carry commercial general liability insurance and clinical trial insurance which
covers our human clinical trial activities.
-46-
ITEM 2. PROPERTIES
Our executive offices are in New York, located at One North End Avenue,
New York, New York 10282. We pay rent of approximately $10,100 per month, on a
month-to-month basis, for approximately 2,500 square feet of space for our New
York office. Our research and development offices are located at 150 Fairway
Drive, Suite 150, Vernon Hills, Illinois 60061. We occupy approximately 9,750
square feet of space under a lease that expires on March 14, 2010. Our rent for
the Vernon Hills facility is approximately $8,200 per month through March 2008.
We are also charged by the landlord of our Vernon Hills, Illinois offices a
portion of the real estate taxes and common area operating expenses. We believe
our current facilities are adequate for our needs for the foreseeable future
and, in the opinion of our management, the facilities are adequately insured.
Our indirectly wholly-owned subsidiary, Immtech Life Science, owns two
floors of a newly-constructed building located in the Futian Free Trade Zone,
Shenzhen, in the PRC. The property comprises the first two floors of an
industrial building named the Immtech Life Science Building. The duration of the
land use right associated with the building on which the property is located is
50 years which expires May 24, 2051.
ITEM 3. LEGAL PROCEEDINGS
We are parties to the following legal proceedings:
Immtech International, Inc., et al. v. Neurochem, Inc., et al.
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging that Neurochem misappropriated the Company's trade
secrets by filing a series of patent applications relating to compounds
synthesized and developed by the Consortium, with whom Immtech has an exclusive
licensing agreement. The misappropriated intellectual property was provided to
Neurochem pursuant to a testing agreement under which Neurochem agreed to test
the compounds to determine if they could be successfully used to treat
Alzheimer's disease. Pursuant to the terms of the agreement, Neurochem agreed to
keep all information confidential, not to disclose or exploit the information
without Immtech's prior written consent, to immediately advise Immtech if any
invention was discovered and to cooperate with Immtech and its counsel in filing
any patent applications.
In its complaint, the Company also alleges, among other things, that
Neurochem fraudulently induced the Company into signing the testing agreement,
and breached numerous provisions of the testing agreement, thereby blocking the
development of the Consortium's compounds for the treatment of Alzheimer's
disease. By engaging in these acts, the Company alleges that Neurochem has
prevented the public from obtaining the potential benefit of new drugs for the
treatment of Alzheimer's disease, which would compete with Neurochem's Alzhemed
drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company agreed to have a
-47-
three member ICC arbitration panel (the "Arbitration Panel") hear and rule on
the dispute on the expectation that the Arbitration Panel would reach a more
timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005. Final papers
were filed by both parties on November 2, 2005. The ICC tribunal closed the
hearing on April 17, 2006.
On June 9, 2006, the International Court of Arbitration of the ICC
notified the parties that (i) the Arbitral Tribunal found that Neurochem
breached the testing agreement and awarded Immtech approximately $1.9 million in
damages and attorneys' fees and costs, and (ii) denied all of Neurochem's claims
against Immtech.
Gerhard Von der Ruhr et al. v. Immtech International, Inc. et. al.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors. The Von der Ruhr Plaintiff's complaint alleged that (i) the Company
refused to authorize the Company's transfer agent to remove the restrictive
legends from the stock certificates of the Von der Ruhr Plaintiffs, (ii) the
Company refused to honor the Von der Ruhr Plaintiffs' exercise of certain stock
options and (iii) the Company refused to honor an agreement regarding certain
technology. The Von der Ruhr Plaintiffs also allege that certain officers and
directors interfered with the Von der Ruhr Plaintiffs' contracts with the
Company. The complaint sought unspecified monetary damages and punitive damages,
in addition to equitable relief and costs. In a filing made in late February,
2005, the Von der Ruhr Plaintiffs specified damages of approximately $44.5
million in damages, which includes $42 million related to the alleged technology
agreement claim, which the Company believes is meritless. In 2005, one of the
counts in the case was dismissed upon the Company's motion for summary judgment.
The Company has filed pre-trial motions regarding the evidence to be introduced
at the trial of the remaining counts, including a motion to preclude disclosure
of evidence of Von der Ruhr's alleged damages. Those pre-trial motions are
pending. The case is likely to be set for trial sometime in 2006 or 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Matters submitted to a vote of the security holders at our Annual Meeting
on December 15, 2005 at the Westin O'Hare Hotel in Rosemont, Illinois have been
disclosed in our quarterly report on Form 10-Q for the quarter ended December
31, 2005, filed with the SEC on February 9, 2006.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
A. Market Information
Our common stock has been quoted on the American Stock Exchange under the
symbol "IMM" since August 11, 2003 (our common stock was quoted under the Symbol
"IMMT" on the NASDAQ SmallCap Market from April 26, 1999 to March 29, 2000, on
the NASDAQ National
-48-
Market System from March 30, 2000 to March 8, 2002, on the NASDAQ SmallCap
Market from March 9, 2002 to December 2, 2002, and on the NASDAQ OTC Bulletin
Board from December 2, 2002 to August 11, 2003). Following are the reported high
and low share trade prices as reported by IDD Information Services, NASDAQ
Online and Lexis/Nexis for each of the quarters set forth below since the fiscal
quarter ended March 31, 2003.
High Low
---- ---
2003
Quarter ended March 31, 2003 $4.85 $1.58
Quarter ended June 30, 2003. $7.00 $4.15
Quarter ended September 30, 2003 $18.82 $5.70
Quarter ended December 31, 2003 $32.51 $9.00
2004
Quarter ended March 31, 2004 $19.50 $10.11
Quarter ended June 30, 2004. $22.80 $11.85
Quarter ended September 30, 2004 $12.75 $8.45
Quarter ended December 31, 2004 $14.73 $7.58
2005
Quarter ended March 31, 2005 $15.70 $10.03
Quarter ended June 30, 2005. $13.89 $9.50
Quarter ended September 30, 2005 $12.63 $10.61
Quarter ended December 31, 2005 $11.94 $6.30
2006
Quarter ended March 31, 2006 $9.62 $6.80
B. Stockholders
As of June 2, 2006, the Company had approximately 236 stockholders of
record of our common stock and the number of beneficial owners of shares of
common stock as of such date was approximately 3,464. As of June 2, 2006, the
Company had approximately 13,995,666 shares of common stock issued and
outstanding.
C. Dividends
We have never declared or paid dividends on our common stock and we do not
intend to pay any common stock dividends in the foreseeable future. Our Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series D Convertible Preferred Stock, and Series E
Convertible Preferred Stock earn dividends of 6%, 8%, 8%, 6%, and 6% per annum,
respectively, each payable semi-annually on each April 15 and October 15 while
outstanding, and which, at our option, may be paid in cash or in shares of our
common stock valued at the 10-day volume-weighted average of the closing sale
price of the Company's common stock as reported by the primary stock exchange on
which such stock is listed or traded.
-49-
D. Recent Sales of Unregistered Securities
We issued unregistered securities in the following transactions, in each
case pursuant to Section 4(2) of the Securities Act and Regulation 506
thereunder, during the fiscal quarter ended March 31, 2006:
o On February 13, 2006, a holder exercised an option to purchase 300
shares which were exercisable at $2.55 per share resulting in
proceeds to the Company of $765.
o On May 26, 2006, we issued 5,000 restricted shares of common stock
to T. Stephen Thompson as part of his retirement and consulting
agreement.
E. Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2006, regarding
compensation plans (including individual compensation arrangements) under which
our equity securities are authorized for issuance.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights(1) warrants and rights(1) column(a))
Plan category (in thousands) (a) (b) (c)
-------------------------------------- -------------------------- ---------------------- -----------------------
Equity compensation plans approved by
security holders(2)............... 1,554,380 $9.25 762,083
Equity compensation plans not approved
by security holders(3)............ 2,850,110 $7.52
Total................................ 4,404,490 $8.13 762,083
--------------------
(1) As adjusted for reverse stock splits that occurred on each of July 24,
1998 and January 25, 1999.
(2) This category consists solely of options.
(3) This category consists solely of warrants.
F. Series E Convertible Preferred Stock Private Placements
On December 13, 2005, we filed a Series E Convertible Preferred Stock
Certificate of Designation ("Series E Certificate of Designation") with the
Secretary of State of the State of Delaware, designating 167,000 shares of our
5,000,000 authorized shares of preferred stock as Series E Convertible Preferred
Stock, $0.01 par value, with a stated value of $25.00 per share ("Series E
Preferred Stock"). Dividends on the Series E Preferred Stock accrue at a rate of
6% per annum on the $25.00 stated value per share and are payable semi-annually
on April 15 and October 15 of each year while the shares are outstanding. We
have the option to pay the dividend either in cash or in equivalent shares of
common stock. If common stock is to be used to pay the dividend, such common
stock is to be valued at the 10-day volume-weighted average
-50-
of the closing sale price of the Company's common stock as reported by the
primary stock exchange on which such stock is listed or traded.
Each share of Series E Preferred Stock is convertible by the holder at any
time into shares of our common stock at a conversion rate determined by dividing
the $25.00 stated value, plus any accrued and unpaid dividends (the "Liquidation
Price"), by a $7.04 conversion price (the "Conversion Price E"), subject to
anti-dilution adjustment for stock splits, stock dividends and similar events.
We may at any time require that any or all outstanding shares of Series E
Preferred Stock be converted into shares of our common stock, provided that the
shares of common stock into which the Series E Preferred Stock is convertible is
registered pursuant to an effective registration statement. The number of shares
of common stock will be determined by (i) dividing the Liquidation Price by the
Conversion Price E, provided that the closing bid price for our common stock
exceeds $10.56 for 20 out of 30 consecutive trading days within 180 days prior
to notice of conversion, or (ii) if the requirements of (i) above are not met,
the number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price E. The Conversion Price E is subject
to anti-dilution for stock splits, stock dividends and similar events, as set
forth in the Certificate of Designation. The Company will, on December 13, 2008,
at the Company's election, (i) redeem the Series E Preferred Stock plus any
accrued and unpaid interest for cash, (ii) convert the Series E Convertible
Preferred Stock and any accrued and unpaid interest into common stock, or (iii)
redeem and convert the Series E Convertible Preferred Stock in any combination
of (i) or (ii).
The Series E Preferred Stock has a preference in liquidation over the
common stock equal to $25.00 per share, plus any accrued and unpaid dividends,
and is parri passu with all other outstanding series of preferred stock of the
Company. Each issued and outstanding share of Series E Preferred Stock is
entitled to 3.5511 votes (subject to adjustment as above) with respect to any
and all matters presented to our stockholders for their action or consideration.
Except as provided by law or by the provisions establishing any other series of
preferred stock, holders of our Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series D
Convertible Preferred Stock, and Series E Convertible Preferred Stock vote
together with the holders of our common stock as a single class.
On December 13, 2005, we issued an aggregate of 133,600 shares of our
Series E Preferred Stock in a private placement to certain accredited and
non-United States investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act. The gross proceeds of the offering were
$3,340,000. The securities were sold pursuant to exemptions from registration
under the Securities Act. Each purchaser of the Series E Preferred Stock was
granted an option to purchase, at $25.00 per share, up to an additional 25% of
the number of shares of Series E Preferred Stock purchased on December 13, 2005
(the option period terminated on March 10, 2006). On March 10, 2006, we
completed private placements to the Series E Preferred Stock optionholders of
27,000 additional shares of Series E Preferred Stock, which resulted in gross
proceeds to us of approximately $675,000.
Subject to adjustment for dilution as above, each share of Series E
Preferred Stock is convertible into 3.5511 shares of common stock.
-51-
On December 13, 2005, in connection with the Series E Preferred Stock
private placement offering, we issued to the purchasers of the Series E
Preferred Stock, warrants to purchase in the aggregate 83,500 shares of our
common stock at an exercise price of $10.00 per share of common stock. The
warrants expire on December 12, 2008. At any time after December 12, 2006, if
our common stock price closes above $15.00 for 20 out of 30 consecutive trading
days, we may, upon 20 days notice, redeem any unexercised portion of any
warrants for a redemption fee equal to $0.10 per share of common stock
underlying the warrants. During the 20-day notice period, the warrant holder may
exercise all or a portion of the warrants by tendering the appropriate exercise
price.
In connection with the Series E Preferred Stock offering of December 13,
2005, we entered into an Introductory Agreement with Ableguard Investment
Limited ("Ableguard") pursuant to which Ableguard assisted us by identifying
qualified investors. For its services, we granted to Ableguard a warrant to
purchase 68,000 shares of common stock. The terms of the warrant are in all
material respects identical to the terms of the warrants issued to the
purchasers of the Series E Preferred Stock.
G. Conversions of Preferred Stock to Common Stock
Series C. On February 10, 2006, a holder of Series C Convertible Preferred
Stock ("Series C Stock") converted 1,000 shares of Series C Stock and accrued
dividends into 5,732 shares of common stock.
Series E. On March 23, 2006, holders of Series E Convertible Preferred
Stock ("Series E Stock") converted 4,000 shares of Series E Stock and accrued
dividends into 14,418 shares of common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data that was
derived from our financial statements (dollars in thousands except share and per
share data):
Year ended March 31,
---------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Statement of Operations:
REVENUES........................ $3,575 $5,931 $2,416 $1,609 $3,522
-------- -------- -------- -------- --------
EXPENSES:
Research and development..... 9,680 7,309 3,293 2,570 3,958(1)
General and administrative... 9,631(6) 12,190(5) 11,989(4) 3,732(3) 2,928
Equity in loss of joint venture
-------- -------- -------- -------- --------
Total expenses............... 19,311 19,499 15,282 6,302 6,886
-52-
Year ended March 31,
---------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS............ (15,736) (13,569) (12,866) (4,693) (3,364)
----------- ----------- ---------- ----------- ----------
OTHER INCOME (EXPENSE):
Interest income.............. 210 135 20 14 41
Interest expense.............
Loss on sales of investment
securities - net...........
Cancelled offering costs.....
Gain on extinguishment of debt
----------- ----------- ---------- ----------- ----------
Other income (expense) - net 135 20 14 41
NET LOSS........................ (15,526) (13,433) (12,846) (4,679) (3,323)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS(2)................. (764) (580) (3,526) (452) (938)(2)
REDEEMABLE PREFERRED STOCK
CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS...
----------- ----------- ---------- ----------- ----------
NET (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS................. (16,290) (14,013) (16,372) (5,131) (4,261)
=========== =========== ========== =========== ==========
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
----------- ----------- ---------- ----------- ----------
Net loss..................... (1.31) (1.27) (1.43) (0.71) (0.55)
Convertible preferred stock
dividends.................. (0.06) (0.05) (0.39) (0.07) (0.16)
----------- ----------- ---------- ----------- ----------
BASIC AND DILUTED NET (LOSS)
INCOME PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS....... (1.37) $(1.32) $(1.82) $(0.78) $(0.71)
=========== =========== ========== =========== ==========
WEIGHTED AVERAGE SHARES USED IN
COMPUTING BASIC AND DILUTED
LOSS PER SHARE............... 11,852,630 10,606,917 8,977,817 6,565,495 6,011,416
-53-
Year ended March 31,
---------------------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash and cash equivalents....... 14,138 9,472 6,745 112 2,038
Restricted funds on deposit..... 530 2,044 2,155 2,740 602
Working capital (deficiency).... 11,910 8,069 6,136 (115) 1,567
Total assets.................... 18,554 15,276 12,586 6,610 2,876
Convertible preferred stock..... 10,015 7,752 9,522 5,138 4,032
Deficit accumulated during
development stage............ (88,842) (72,552) (58,539) (42,167) (37,036)
Stockholders' equity............ 15,603 11,741 9,748 3,192 1,736
--------------------
(1) Includes $1,159 credit to (reduction in) research and development costs
for the settlement of certain disputed costs previously expensed during
the year ended March 31, 2000.
(2) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(3) Includes non-cash charges of (i) $758 of costs related to the issuance of
150,000 shares of common stock to Cheung Ming Tak to act as the Company's
non-exclusive agent to develop and qualify potential strategic partners
for the purpose of testing and/or the commercialization of Company
products in the PRC, (ii) $188 of costs related to the issuance of 40,000
shares of common stock to The Gabriele Group, L.L.C., for assistance with
respect to management consulting, strategic planning, public relations and
promotions and (iii) $89 of costs related to the issuance of 8,333 shares
of common stock and the vesting of 29,165 warrants to Fulcrum Holdings of
Australia, Inc. ("Fulcrum").
(4) Includes non-cash charges of (i) $2,744 of costs related to the issuance
of warrants to purchase 600,000 shares of common stock issued to China
Harvest International Ltd as payment for "services to assist in obtaining
regulatory approval to conduct clinical trials in the PRC, (ii) $63 for
the issuance of 10,000 shares of common stock issued to Mr. David Tat Koon
Shu for consulting services in the PRC, (iii) $1,400 for the issuance of
100,000 shares of common stock issued to Fulcrum for assisting with
listing the Company's securities on a recognized stock exchange and for
consulting services, (iv) $2,780 for the vested portion of 91,667 shares
of common stock and the vested portion of warrants to purchase 320,835
shares of common stock issued to Fulcrum during the fiscal year based on
agreements signed March 21, 2003 and (v) $247 for the attainment of
certain milestones with respect to the vesting of warrants to purchase
20,000 shares of common stock issued to Pilot Capital Groups, LLC (f/k/a
The Gabriela Group, LLC) based upon agreements signed July 31, 2002.
(5) Includes non-cash charges of (i) $4,531 of costs related to the four year
extension of warrants received from RADE Management Corporation ("RADE"),
(ii) $233 for the issuance of 20,000 options to Mr. Tony Mok for
consulting services in the PRC, (iii) $301 for the extension of the
unexercised Fulcrum warrants to December 23, 2005 and (iv) $10 for the
extension of warrants initially issued to underwriters to purchase 21,400
shares of common stock from April 24, 2004 to May 11, 2004.
(6) Includes non-cash charges of $125 for the repricing and reduced exercise
period of 125,000 Fulcrum warrants. Fulcrum exercised 35,000 warrants. The
remaining 90,000 expired.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
A. Overview
We are dedicated to developing and commercializing drugs for
infectious diseases. We target diseases with significant unmet medical need and
well-defined endpoints that can be evaluated in clinical trials of relatively
short duration. Our first drug candidate, pafuramidine maleate ("pafuramidine"),
also known as DB289, is currently in two Phase III clinical trials, one
-54-
for the treatment of Pneumocystis pneumonia (PCP) in patients with HIV/AIDS and
the other for the treatment of African sleeping sickness (human African
trypanosomiasis). These Phase III trials are based on Proof-of-Concept Phase II
trials, which demonstrated DB289's tolerability and efficacy to treat these
serious infectious diseases. The design and planned analyses for each of our
Phase III clinical trials were preapproved by the United States Food and Drug
Administration (FDA) under Special Protocol Assessments. Our development program
for pafuramidine maleate for treating African sleeping sickness has been
designated "fast-track" by the FDA and is sponsored in full through grants to
our scientific consortium from the Foundation. There is, however, no guarantee
that fast-track designation will result in faster product development or
licensing approval or that our drug candidates will be approved at all.
We recently completed a Phase IIb clinical trial using pafuramidine to
treat malaria. The development of pafuramidine for malaria treatment through the
Phase IIb trial was sponsored by Medicines for Malaria Ventures (MMV). MMV
completed its sponsorship of pafuramidine during our past fiscal year.
Subsequent studies in this indication are currently being designed by the
Company.
Additionally, we are planning a Phase II malaria challenge trial to assess
the efficacy and safety of pafuramidine for malaria prophylaxis. This trial,
which we plan for late 2006, is designed to assess whether pafuramidine treats
malaria infection in the liver. (see "Pafuramidine for Malaria Prophylaxis"
above for description of challenge trial).
In addition to pafuramidine, Immtech has an expanding library of compounds
targeting fungal infections, hepatitis C and other serious diseases. Our initial
in vitro and in vivo assessments have identified several potential lead
candidates and series for each of these indications. We continue to test these
compounds to identify optimum lead compounds to move forward into further
preclinical testing and subsequent clinical development.
Immtech maximizes its research investments by collaborating with academia
and foundations, and designing cost effective clinical trials targeting
indications amenable to shorter duration treatments with well-defined endpoints.
Our first drug candidate, pafuramidine, and several candidates in our discovery
program were discovered and initially evaluated by our research partners at
UNC-CH, Georgia State, Duke University and Auburn University. We have worldwide
licenses to develop and exclusive rights to commercialize compounds discovered
and patented by scientists at these universities, and we have access to a large
library of compounds made by scientists at the above universities. Our license
rights include 150 issued domestic US and foreign patents that cover many
classes of novel chemical compounds.
Since our formation in October 1984, we have engaged in pharmaceutical
research and drug development, expanding our scientific capabilities and
collaborative network, developing technology licensing agreements. Since
obtaining the rights to our library of aromatic cations in 1997, we have been
engaged in the development and commercialization of drugs to treat infectious
diseases. We target as feasible, to preserve cash and minimize stockholders'
dilution, foundation and government grants, the expertise and resources of
strategic partners and third parties in a number of areas, including (i)
discovery research, (ii) pre clinical and human clinical trials and (iii)
manufacture of pharmaceutical drugs. We have licensing and exclusive
-55-
commercialization rights to a large library of cationic compounds and we are
developing drugs intended for commercial use.
Dication drugs (a structural class of aromatic cation drugs defined by
molecules with positive charges on each end held together by a linker) bind in
the minor groove of an organism's DNA, and, in so doing, interfere with the
activity of enzymes needed for microbial growth, thereby killing the infectious
organisms that cause fungal, parasitic, bacterial and viral diseases.
Structurally, dications are chemical molecules that have two positively charged
ends held together by a chemical linker (shaped like a molecular barbell). The
composition of the dications, with positive charges on the ends and linkers of
different length, shape, flexibility and curvature, allows binding to specific
sites of the DNA or other receptors, interfering with key biochemical processes
fundamental to microbe growth and development.
With the exception of certain research funding agreements and certain
grants, we have not generated any revenue from operations. For the period from
inception (October 15, 1984) to March 31, 2006, we incurred cumulative net
losses of approximately $85,152,000. We have incurred additional losses since
such date and we expect to incur additional operating losses for the foreseeable
future. We expect that our cash sources for at least the next year will be
limited to:
o payments from The University of North Carolina at Chapel Hill,
charitable foundations and other research collaborators under
arrangements that may be entered into in the future;
o research grants, such as Small Business Innovation Research ("SBIR")
grants; and
o sales of equity securities or borrowing funds.
The timing and amounts of grant and other revenues, if any, will likely
fluctuate sharply and depend upon the achievement of specified milestones. Our
results of operations for any period may be unrelated to the results of
operations for any other period.
B. Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 of the Notes
to the Consolidated Financial Statements. These financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent liabilities. On an
ongoing basis, we evaluate our estimates, including those related to the fair
value of our preferred and common stock and related options and warrants, the
recognition of revenues and costs related to our research contracts, and the
useful lives or impairment of our property and equipment. We base our estimates
on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis of
judgments regarding the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
-56-
Grants to perform research are our primary source of revenue and are
generally granted to support research and development activities for specific
projects or drug candidates. Revenue related to grants to perform research and
development is recognized as earned, based on the performance requirements of
the specific grant. Prepaid cash payments from research and development grants
are reported as deferred revenue until such time as the research and development
activities covered by the grant are performed.
We use the intrinsic-value method of accounting for stock based awards
granted to employees in accordance with Accounting Principles Board Opinion No.
25 and its related interpretations. We record stock based compensation expense
for non-employees at the fair value of the options or warrants granted in
accordance with Statement of Financial Accounting Standards No. 123 ("SFAS 123")
and Emerging Issues Task Force No. 96-18 ("EITF 96-18"). The fair value of
options granted to non-employees is estimated using a Black-Scholes option
valuation model. The model considers a number of factors, including the market
price and volatility of our common stock at the date of measurement. We measure
the compensation expense for options and warrants granted to non-employees as
the underlying options vest. The compensation expense related to all grants is
being amortized using the graded vesting method, in accordance with SFAS 123,
EITF 96-18 and FASB Interpretation No. 28, over the vesting period of each
respective stock option.
We believe that the accounting policies affecting these estimates are our
critical accounting policies.
C. Research and Development Expenses
All research and development costs are expensed as incurred. Research and
development expenses include, but are not limited to, payroll and personnel
expenses, lab supplies, preclinical studies, raw materials to manufacture
clinical trial drugs, manufacturing costs, sponsored research at other labs,
consulting and research-related overhead. Accrued liabilities for raw materials
to manufacture clinical trial drugs, manufacturing costs, and sponsored research
reimbursement fees are included in accrued liabilities and included in research
and development expenses. Specific information pertaining to amounts spent
directly on each of our major research and development projects follows. This
information includes to the extent ascertainable, project status, costs incurred
for the relevant fiscal years (including costs to date), nature, timing and
estimated costs of project completion, anticipated completion dates, and the
period in which material net cash inflow from projects is expected to commence,
if at all. Not included in the information below are development activities and
the costs therefor undertaken by our partners where we are not responsible for
reimbursement. For example, in our TB program progress continues at our partner
lab, however, no payments were due the lab in fiscal 2006.
All of our research and development projects contain high levels of risk.
Even if development is completed on schedule, there is no guarantee that any of
our products will be licensed for sale. Human trials conducted in foreign and
developing countries have additional risks, including governmental instability
and local militia uprisings that may interrupt or displace our work. We are
unable to quantify the impact to our operations, financial position or liquidity
-57-
if we are unable to complete on schedule, or at all, any of our product
commercialization programs.
D. Malaria
We expensed research and development costs for our malaria program for the
fiscal years ended March 31, 2004, March 31, 2005 and March 31, 2006 of
approximately $250,000, $2,270,000 and $2,650,000, respectively. Since our
inception through March 31, 2006, approximately $5,215,000 has been expensed on
research and development for the malaria project.
E. Pneumocystis pneumonia ("PCP")
We expensed research and development costs for the PCP program for the
fiscal years ended March 31, 2004, March 31, 2005, and March 31, 2006 of
approximately $241,000, $362,000 and $3,025,000, respectively. Since our
inception through March 31, 2006, approximately $3,852,000 has been expensed on
the PCP program.
F. African Sleeping Sickness (Trypanosomiasis)
We expensed research and development costs for the trypanosomiasis program
for the fiscal years ended March 31, 2004, March 31, 2005, and March 31, 2006 of
approximately $2,018,000, $3,584,000 and $2,756,000, respectively. Since our
inception through March 31, 2006, approximately $12,906,000 has been expensed on
the trypanosomiasis program.
G. Antifungal & Tuberculosis ("TB") Programs
Each of the antifungal and TB programs is estimated to cost between $25-40
million dollars (including manufacturing and formulation of their respective
drugs). The Company is unable to calculate when initial drug sales for the
antifungal and TB treatments may commence because of the early stage of
development.
We expensed research and development costs for the antifungal program for
the fiscal years ended March 31, 2004, March 31, 2005, and March 31, 2006 of
approximately $32,000, $29,000 and $467,000, respectively. Since our inception
through March 31, 2006, approximately $863,000 has been expensed on the
antifungal program.
We expensed research and development costs for the TB program for the
fiscal years ended March 31, 2004, March 31, 2005 and March 31, 2006 of
approximately $24,000, $72,000 and $0, respectively. Since our inception through
March 31, 2006, approximately $176,000 has been expensed on the TB program.
-58-
H. Liquidity and Capital Resources
From our inception through March 31, 2006, we have financed our operations
with:
o proceeds from various private placements of debt and equity
securities, an initial public offering and other cash contributed
from stockholders, which in the aggregate raised approximately
$70,089,000
o payments from research agreements, foundation grants and SBIR grants
and STTR program grants of approximately $20,765,000; and
o the use of stock, options and warrants in lieu of cash compensation.
On February 13, 2006, we completed a secondary public offering of common
stock which raised approximately $14,880,000 of gross proceeds through the
issuance of 2,000,000 shares of common stock sold to the public at $7.44 per
share. Net proceeds were approximately $14,713,000.
On December 13, 2005, we issued an aggregate of 133,600 shares of our
Series E Preferred Stock in a private placement to certain accredited and
non-United States investors in reliance on Regulation D and Regulation S,
respectively, under the Securities Act. The gross proceeds of the offering were
$3,340,000. The net proceeds were approximately $3,286,000. We issued to the
purchasers of the Series E Preferred Stock, in connection with the offering,
warrants to purchase in the aggregate 83,500 shares of our common stock at an
exercise price of $10.00 per share of common stock (a warrant to purchase one
share of common stock for each $40 invested in Series E Preferred Stock). The
warrants expire on December 12, 2008. The securities were sold pursuant to
exemptions from registration under the Securities Act. Each purchaser of the
Series E Preferred Stock was also granted an option to purchase, at $25.00 per
share, up to an additional 25% of the number of shares of Series E Preferred
Stock purchased on December 13, 2005 (the option period terminated on March 10,
2006). On March 10, 2006, we completed private placements to the Series E
Preferred Stock optionholders of 27,000 additional shares of Series E Preferred
Stock, which resulted in gross proceeds to us of approximately $675,000. Each
share of Series E Stock, among other things, (i) earns a 6% dividend payable, at
our discretion, in cash or common stock, (ii) has a $25.00 (plus accrued but
unpaid dividends) liquidation preference pari passu with our other outstanding
preferred stock over our common stock, (iii) is convertible at the initial
conversion rate into 3.5511 shares of common stock and (iv) may be converted to
common stock by us at any time.
On July 30, 2004, we completed a secondary public offering of common stock
wherein we sold 899,999 shares of common stock. The shares were sold to the
public at $10.25 per share. The net proceeds were approximately $8,334,000.
On January 22, 2004, we sold in private placements pursuant to Regulation
D and Regulation S of the Securities Act (i) 200,000 shares of our Series D
Convertible Preferred Stock, $0.01 par value ("Series D Stock") at a stated
value of $25.00 per share and (ii) warrants to purchase 200,000 shares of our
common stock with a $16.00 per share exercise price, for the aggregate
consideration of $5,000,000 before issuance cost. The net proceeds were
-59-
approximately $4,571,000. Each share of Series D Stock, among other things, (i)
earns a 6% dividend payable, at our discretion, in cash or common stock, (ii)
has a $25.00 (plus accrued but unpaid dividends) liquidation preference pari
passu with our other outstanding preferred stock, (iii) is convertible at the
initial conversion rate into 2.7778 shares of common stock and (iv) may be
converted to common stock by us at any time. The related warrants expire five
years from the date of grant.
From June 6, 2003 through June 9, 2003, we issued an aggregate of 125,352
shares of our Series C Preferred Stock in private placements to certain
accredited and non-United States investors in reliance on Regulation D and
Regulation S, respectively, under the Securities Act. The securities were sold
pursuant to exemptions from registration under the Securities Act and were
subsequently registered on Form S-3 (Registration Statement No. 333-108278). The
gross proceeds of the offering were $3,133,800 and the net proceeds were
approximately $2,845,000.
On September 25, 2002 and October 28, 2002, we issued an aggregate of
76,725 shares of our Series B Convertible Preferred Stock and 191,812 related
warrants in private placements to certain accredited and non-United States
investors in reliance on Regulation D and Regulation S, respectively, under the
Securities Act. The warrants have an exercise period of five years from the date
of issuance and an exercise price of 6.125 per share. The securities were sold
pursuant to exemptions from registration under the Securities Act and were
subsequently registered on Form S-3 (Registration Statement No. 333-101197). The
gross proceeds of the offering were $1,918,125 and the net proceeds were
approximately $1,859,000.
On February 14, 2002 and February 22, 2002, we issued an aggregate of
160,100 shares of our Series A Convertible Preferred Stock and 400,250 related
warrants in private placements to certain accredited and non-United States
investors in reliance on Regulation D and Regulation S, respectively, under the
Securities Act. In connection with this offering, we issued in the aggregate
60,000 shares of common stock and 760,000 warrants to purchase shares of common
stock to consultants assisting in the private placements. The warrants have an
exercise period of five years from the date of issuance and exercise prices of
(i) $6.00 per share for 500,000 warrants, (ii) $9.00 per share for 130,000
warrants and (iii) $12.00 per share for 130,000 warrants. The $9.00 and $12.00
warrants did not vest, and therefore were cancelled, since our common stock did
not meet or exceed the respective exercise price for 20 consecutive trading days
prior to January 31, 2003. The gross proceeds of the offering were $4,003,000
and the net proceeds were $3,849,000.
On December 8, 2000, we completed a private placement offering that raised
net proceeds of approximately $4,306,000 of additional net equity capital
through the issuance of 584,250 shares of common stock.
On April 26, 1999, we issued 1,150,000 shares of common stock through an
initial public stock offering ("IPO"), resulting in net proceeds of
approximately $9,173,000. The underwriters received warrants to purchase 100,000
additional shares of common stock at $16.00 per share. Those warrants were due
to expire on April 25, 2004. All warrants other than warrants to purchase 21,400
shares expired. The warrant to purchase 21,400 shares was pursuant to an
agreement with the holder and subsequently exercised.
-60-
Our cash resources have been used to finance research and development,
including sponsored research, capital expenditures, expenses associated with the
efforts of the scientific consortium and general and administrative expenses.
Over the next several years, we expect to incur substantial additional research
and development costs, including costs related to early-stage research in
preclinical and clinical trials, increased administrative expenses to support
research and development and commercialization operations and increased capital
expenditures for regulatory approvals, expanded research capacity and various
equipment needs.
As of March 31, 2006, we had federal net operating loss carry-forwards of
approximately $76,314,000, which expire from 2007 through 2026. We also had
approximately $73,800,000 of stated net operating loss carryforwards as of March
31, 2006, which expire from 2009 through 2026, available to offset certain
future taxable income for state (primarily Illinois) income tax purposes.
Because of "change of ownership" provisions of the Tax Reform Act of 1986,
approximately $765,000 of our net operating loss carryforwards for federal
purposes are subject to an annual limitation regarding utilization against
taxable income in future periods. As of March 31, 2006, we had federal income
tax credit carryforwards of approximately $1,511,000, which expire from 2008
through 2026.
We believe our existing resources, but not including proceeds from any
grants we may receive, are sufficient to meet our planned expenditures through
June 2007, although there can be no assurance that we will not require
additional funds. Our working capital requirements will depend upon numerous
factors, including the progress of our research and development programs (which
may vary as drug candidates are added or abandoned), preclinical testing and
clinical trials, achievement of regulatory milestones, our corporate partners
fulfilling their obligations to us, the timing and cost of seeking regulatory
approvals, the level of resources that we devote to the development of
manufacturing, our ability to maintain existing, and establish new,
collaborative arrangements with other companies to provide funding to us to
support these activities and other factors. In any event, we will require
substantial funds in addition to our existing working capital to develop our
drug candidates and otherwise to meet our business objectives.
We have, through our purchase of Super Insight Limited, obtained an
ownership interest in improved real property in the PRC on which we may
construct a pharmaceutical manufacturing facility. We are exploring the
possibility of housing a pharmaceutical production facility for the manufacture
of drug products in this facility or at other locations within PRC. (See "Item I
- Business - F. Manufacturing - Our PRC Facility" above) We may seek partners
both in the PRC and domestically to fund part or all of the capital cost of
construction of the pharmaceutical production line.
-61-
I. Payments Due under Contractual Obligations
We have future commitments at March 31, 2006 consisting of operating lease
obligations as follows:
Year Ending
March 31, Lease Payments
--------- --------------
2007 98,000
--------------
2008 98,000
--------------
2009 103,000
--------------
2010 99,000
--------------
Total $398,000
--------------
J. Results of Operations
1. Year Ended March 31, 2006 Compared with Year Ended March 31, 2005
Revenues under collaborative research and development agreements were
approximately $3,575,000 and $5,931,000 in the years ended March 31, 2006 and
2005, respectively. In 2006, we recognized revenues of approximately $869,000
relating to the clinical research subcontract agreement between us and UNC-CH
funded by a grant that UNC-CH received from the Foundation, and approximately
$2,663,000 relating to the testing agreement with MMV, while in 2005, there were
revenues recognized of approximately $3,592,000 relating to the clinical
research subcontract agreement, and revenues of approximately $2,275,000
relating to the testing agreement with MMV. Additionally there were revenues of
approximately $43,000 recognized from an SBIR grant from the NIH in 2006
compared to approximately $63,000 recognized in 2005.
Research and development expenses increased from approximately $7,309,000
in 2005 to approximately $9,680,000 in 2006. Expenses relating to the clinical
research subcontract agreement with UNC-CH decreased from approximately
$3,584,000 in 2005 to approximately $2,756,000 in 2006. Expenses relating to the
testing agreement with MMV increased from approximately $2,270,000 in 2005 to
approximately $2,650,000 in 2006. Expenses relating to preclinical and clinical
trial costs primarily for Pneumocystis pneumonia increased from approximately
$633,000 in 2005 to approximately $3,376,000. The increase in expenses for
Pneumocystis pneumonia is primarily due to the initiation of Phase III trials in
the US and Latin America.
General and administrative expenses were approximately $9,631,000 in 2006,
compared to approximately $12,190,000 in 2005. Non-cash general and
administrative expenses for common stock, stock options and warrants in 2006
were approximately $151,000 as compared to approximately $5,075,000 in 2005.
Non-cash expenses in 2006 included (i) approximately $125,000 for the reduction
in the warrant price from $15.00 to $8.80 of the Fulcum warrants and the
shortening of the exercise period from December 23, 2005 to November 5, 2005 and
(ii) approximately $26,000 for the issuance of 2,000 shares of common stock for
settling a
-62-
disputed obligation, as compared to non-cash expenses in 2005 of (i)
approximately $4,531,000 for the four year extension of warrants initially
issued to RADE Management Corporation ("RADE"), (ii) approximately $233,000 for
the issuance of options to purchase 20,000 shares of common stock issued to Mr.
Tony Mok for consulting services in the PRC, (iii) approximately $301,000 for
the extension of Fulcrum warrants to December 23, 2005 and (iv) approximately
$10,000 for the extension of 21,400 underwriter warrants from April 24, 2004 to
May 11, 2004. Legal expenses for patents decreased from approximately $449,000
in 2005 to approximately $442,000 in 2006. Legal fees, primarily related to the
Neurochem dispute (including fees to the International Chamber of Commerce and
expert witnesses), increased from approximately $2,393,000 in 2005 to
approximately $4,778,000. Ongoing expenses relating to Immtech Therapeutics,
Super Insight, Immtech Life Science and Immtech Hong Kong decreased from
approximately $347,000 in 2005 to approximately $217,000 in 2006. Accounting
fees increased from approximately $199,000 in 2005 to approximately $217,000 in
2006. Payroll and associated expenses increased from approximately $1,187,000 in
2005 to approximately $1,479,000 in 2006, due primarily to new hires. Contract
services increased from approximately $277,000 in 2005 to approximately $363,000
in 2006, due primarily to the use of consultants and market research. Travel
expenses decreased from approximately $500,000 in 2005 to approximately $399,000
in 2006. Insurance and state franchise taxes increased from approximately
$476,000 in 2005 to approximately $561,000 in 2006. Marketing related expenses
decreased from approximately $662,000 in 2005 to approximately $339,000 in 2006.
All other general and administrative expenses increased from approximately
$625,000 in 2005 to approximately $685,000 in 2006.
We incurred a net loss of approximately $15,525,000 for the year ended
March 31, 2006, as compared to a net loss of approximately $13,433,000 for the
year ended March 31, 2005.
In 2006, we also charged deficit accumulated during the development stage
of approximately $764,000 of non-cash convertible preferred stock dividends and
convertible preferred stock premium deemed dividends as compared to
approximately $580,000 in 2005.
2. Year Ended March 31, 2005 Compared with Year Ended March 31, 2004
Revenues under collaborative research and development agreements were
approximately $5,931,000 and $2,416,000 in the years ended March 31, 2005 and
2004, respectively. In 2005, we recognized revenues of approximately $3,592,000
relating to the clinical research subcontract agreement between us and UNC-CH
funded by a grant that UNC-CH received from the Foundation, and approximately
$2,275,000 relating to the testing agreement with MMV, while in 2004, there were
revenues recognized of approximately $2,114,000 relating to the clinical
research subcontract agreement, and revenues of approximately $302,000 relating
to the testing agreement with MMV. Additionally there were revenues of
approximately $63,000 recognized from an SBIR grant from the NIH in 2005.
Research and development expenses increased from approximately $3,293,000
in 2004 to approximately $7,309,000 in 2005. Expenses relating to the clinical
research subcontract agreement with UNC-CH increased from approximately
$2,099,000 in 2004 to approximately $3,584,000 in 2005. Expenses relating to the
testing agreement with MMV increased from approximately $301,000 in 2004 to
approximately $2,270,000 in 2005. Expenses relating to
-63-
preclinical and clinical trial costs primarily for Pneumocystis pneumonia
increased from approximately $198,000 in 2004 to approximately $633,000 in 2005.
The increase in expenses for Pneumocystis pneumonia was primarily due to ongoing
costs with the clinical trial in Peru.
General and administrative expenses were approximately $12,190,000 in
2005, compared to approximately $11,990,000 in 2004. Non-cash general and
administrative expenses for common stock, stock options and warrant issuance in
2005 were approximately $5,075,000 as compared to approximately $7,234,000 in
2004. Non-cash expenses in 2005 included (i) approximately $4,531,000 for the
four year extension of warrants initially issued to RADE Management Corporation
("RADE"), (ii) approximately $233,000 for the issuance of 20,000 options issued
to Mr. Tony Mok for consulting services in the PRC, (iii) approximately $301,000
for the extension of Fulcrum warrants to December 23, 2005 and (iv)
approximately $10,000 for the extension of 21,400 underwriter warrants from
April 24, 2004 to May 11, 2004, as compared to non-cash expenses in 2004 of (i)
approximately $2,744,000 for the issuance of a warrant to purchase 600,000
shares of common stock issued to China Harvest International Ltd. as payment for
services to assist us in obtaining regulatory approval to conduct clinical
trials in the PRC, (ii) approximately $63,000 for the issuance of 10,000 shares
of common stock issued to Mr. David Tat Koon Shu for consulting services in the
PRC, (iii) approximately $1,400,000 for the issuance of 100,000 shares of common
stock issued to Fulcrum for assistance with listing our securities on a
recognized stock exchange and for consulting services, (iv) approximately
$2,780,000 for the vested portion of 91,667 shares of common stock and the
vested portion of warrants to purchase 320,835 shares of common stock issued to
Fulcrum during the fiscal year based on agreements signed March 21, 2003 and (v)
approximately $247,000 for the reaching of certain milestones which resulted in
the vesting of a warrant to purchase 20,000 shares of common stock issued to
Pilot Capital Group, LLC (f/k/a The Gabriele Group, LLC) based upon agreements
signed July 31, 2002. Legal expenses for patents decreased from approximately
$481,000 in 2004 to approximately $449,000 in 2005. Legal fees and related
mediation fees with the International Chamber of Commerce for the Neurochem
arbitration increased from approximately $1,610,000 in 2004 to approximately
$2,393,000 in 2005 primarily due to increased litigation fees. Expenses relating
to the start-up and consolidation of Immtech Therapeutics, Super Insight,
Immtech Life Science and Immtech Hong Kong into Immtech accounts were
approximately $398,000 in 2004 while ongoing expenses for these entities were
approximately $347,000 in 2005. Accounting fees decreased from approximately
$223,000 in 2004 to approximately $199,000 in 2005. Payroll and associated
expenses increased from approximately $691,000 in 2004 to approximately
$1,187,000 in 2005 due primarily to new hires. Contract services increased from
approximately $43,000 in 2004 to approximately $277,000 in 2005 due primarily to
the use of consultants, and market research. Travel increased from approximately
$193,000 in 2004 to approximately $500,000 in 2005. Insurance and state
franchise taxes increased from approximately $127,000 in 2004 to approximately
$476,000 in 2005. Marketing related expenses increased from approximately
$287,000 in 2004 to approximately $662,000 in 2005. All other general and
administrative expenses decreased from approximately $703,000 in 2004 to
approximately $625,000 in 2005.
We incurred a net loss of approximately $13,433,000 for the year ended
March 31, 2005, as compared to a net loss of approximately $12,846,000 for the
year ended March 31, 2004.
-64-
In 2005, we also charged deficit accumulated during the development stage
of approximately $580,000 of non-cash convertible preferred stock dividends and
convertible preferred stock premium deemed dividends as compared to
approximately $3,526,000 in 2004.
3. Impact of Inflation
Although it is difficult to predict the impact of inflation on our costs
and revenues in connection with our operations, we do not anticipate that
inflation will materially impact our costs of operation or the profitability of
our products when and if marketed.
4. Unaudited Selected Quarterly Information
The following table sets forth certain unaudited selected quarterly
information (amounts in thousands, except per share amounts):
-65-
Fiscal Quarter Ended Fiscal Quarter Ended
---------------------------------------------- ---------------------------------------------
March 31, December September June 30, March 31, December September June 30,
2006 31, 2005 30, 2005 2005 2005 31, 2004 30, 2004 2004
---------- --------- ---------- --------- --------- --------- --------- ---------
Statements of Operations Data:
REVENUES......................... $ 251 $ 965 $ 880 $ 1,479 $ 3,043 $ 325 $ 1,705 $ 858
--------- --------- ---------- --------- --------- --------- --------- ---------
EXPENSES:
Research and development....... 1,914 2,825 2,672 2,269 2,595 1,441 2,187 1,086
General and administrative..... 1,426 2,144(7) 3,329 2,732(6) 3,026(5) 5,271(4) 2,464(3) 1,429(2)
Total expenses....... 3,540 4,969 6,001 5,001 5,651 6,712 4,651 2,515
LOSS FROM OPERATIONS............. (3,089) (4,004) (5,121) (3,522) (2,579) (6,387) (2,946) (1,657)
--------- --------- ---------- --------- --------- --------- --------- ---------
OTHER INCOME(EXPENSE):
Interest income................ 89 21 43 58 51 48 27 9
--------- --------- --------- --------- --------- --------- --------- ---------
NET LOSS......................... (3,000) (3,983) (5,078) (3,464) (2,527) (6,339) (2,919) (1,648)
CONVERTIBLE PREFERRED STOCK
DIVIDENDS AND PREFERRED STOCK
PREMIUM DEEMED DIVIDENDS(1).... (432) (108) (105) (119) (139) (145) (148) (148)
--------- --------- ---------- --------- --------- --------- --------- ---------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS................... $ (3,432) $ (4,091) $ (5,183) $ (3,583) $ (2,665) $ (6,484) $ (3,067) $ (1,797)
========= ========= ========== ========= ========= ========= ========= =========
NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss....................... $ (0.25) $ (0.34) $ (0.44) $ (0.30) $ (0.23) $ (0.59) $ (0.28) $ (0.17)
Convertible preferred stock
dividends..................... (0.04) (0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.02)
--------- --------- ---------- --------- --------- ---------- --------- ---------
BASIC AND DILUTED NET LOSS PER
SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS................... $ (0.29) $ (0.35) $ (0.45) $ (0.31) $ (0.24) $ (0.60) $ (0.29) $ (0.19)
========= ========= ========== ========= ========= ========== ========= =========
--------------------
(1) See Note 7 to Notes to Financial Statements for a discussion on the
convertible preferred stock dividends.
(2) Includes (i) $233 of costs related to the issuance of 20,000 options to
Mr. Tony Mok for consulting services in the PRC, and (ii) $10 for the
extension of 21,400 underwriter warrants from April 24, 2004 to May 11,
2004.
(3) Includes $1,032 of costs related to the four year extension of 225,000
RADE warrants from July 24, 2004 to July 24, 2008.
(4) Includes $3,498 of costs related to the four year extension of 750,000
RADE warrants from October 12, 2004 to October 12, 2008.
(5) Includes $301 of costs related to the extension of the unexercised Fulcrum
warrants from March 21, 2005 to December 23, 2005.
(6) Includes $26 of costs related to the issuance of 2,000 common shares for
settling a disputed obligation.
(7) Includes $125 of costs related to the reduction of the price of the
Fulcrum warrants from $15.00 to $8.80 and the shortening of the expiry
date from December 23, 2006 to November 5, 2006
-66-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The exposure of market risk associated with risk-sensitive instruments is
not material, as our operations are conducted primarily in U.S. dollars and we
invest primarily in short-term government obligations and other cash
equivalents. We intend to develop policies and procedures to manage market risk
in the future if and when circumstances require.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements appear following Item 15 of this report and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
A. Disclosures and Procedures
We maintain controls and procedures designed to ensure that we are able to
collect the information we are required to disclose in the reports we file with
the SEC, and to process, summarize and disclose this information within the time
periods specified in the rules of the SEC. Our Chief Executive and Chief
Financial Officers are responsible for establishing and maintaining these
procedures and, as required by the rules of the SEC, evaluate their
effectiveness. Based on their evaluation of our disclosure controls and
procedures, which took place as of the end of the period covered by this Annual
Report on Form 10-K, our Chief Executive and Chief Financial Officers believe
that these procedures are effective to ensure that we are able to collect,
process and disclose the information we are required to disclose in the reports
we file with the SEC within the required time periods.
B. Internal Controls
We maintain a system of internal controls designed to provide reasonable
assurance that: (1) transactions are executed in accordance with management's
general or specific authorization and (2) transactions are recorded as necessary
to (a) permit preparation of financial statements in conformity with generally
accepted accounting principles and (b) maintain accountability for assets.
Access to assets is permitted only in accordance with management's general or
specific authorization and the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
C. Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). We have
-67-
designed our internal control system to provide reasonable assurance to our
board of directors regarding the preparation and fair presentation of published
financial statements. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Under the supervision and with the participation of our management,
including our chief executive and chief financial officers, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO"). Based on our evaluation, our management
concluded that our internal control over financial reporting was effective as of
March 31, 2006.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of March 31, 2006, has been audited by Deloitte &
Touche, LLP, an independent registered public accounting firm, as stated in
their Report on Internal Control over Financial Reporting which is included
herein on page F-2 hereto.
ITEM 9B. OTHER INFORMATION
Arbitral Panel Awarded Immtech Approximately $1.9 Million in Dispute With
Neurochem
On August 12, 2003, the Company filed a lawsuit against Neurochem, Inc.
("Neurochem") alleging that Neurochem misappropriated the Company's trade
secrets by filing a series of patent applications relating to compounds
synthesized and developed by the Consortium, with whom Immtech has an exclusive
licensing agreement. The misappropriated intellectual property was provided to
Neurochem pursuant to a testing agreement under which Neurochem agreed to test
the compounds to determine if they could be successfully used to treat
Alzheimer's disease. Pursuant to the terms of the agreement, Neurochem agreed to
keep all information confidential, not to disclose or exploit the information
without Immtech's prior written consent, to immediately advise Immtech if any
invention was discovered and to cooperate with Immtech and its counsel in filing
any patent applications.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company agreed to have a three member ICC arbitration
panel (the "Arbitration Panel") hear and rule on the dispute on the expectation
that the Arbitration Panel would reach a more timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005 and final
papers were filed by both parties on November 2, 2005. On June 9, 2006, the
International Court of Arbitration of the ICC notified the parties that (i) the
Arbitral Tribunal found that Neurochem breached the testing agreement and
awarded Immtech approximately $1.9 million in damages and attorneys' fees and
costs, and (ii) denied all of Neurochem's claims against Immtech.
PART III.
-68-
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Information Regarding Directors and Executive Officers
The table below sets forth the names and ages of our directors and
executive officers as of June 2, 2006, as well as the positions and offices held
by such persons. A summary of the background and experience of each of these
individuals is set forth after the table. Each director serves for a term of one
year and is eligible for reelection at our next annual stockholders' meeting.
Name Age Position(s)
-------------------------- --- -------------------------------------------
President and Chief Executive Officer, and
Eric L. Sorkin 46 Chairman of the Board of Directors
Cecilia Chan 43 Executive Director and Director
Chief Financial Officer, Secretary and
Gary C. Parks 56 Treasurer
Carol Ann Olson, MD, Ph.D. 53 Vice President and Chief Medical Officer
Dina Grinshpun 33 General and Intellectual Property Counsel
Harvey R. Colten, MD 66 Director
Judy Lau 45 Director
Levi H.K. Lee, MD 64 Director
Frederick W. Wackerle 67 Director
Eric L. Sorkin, President, Chief Executive Officer and Chairman. In 2000,
Mr. Sorkin became a director of the Company. In 2005, he was appointed Chairman
of the Board and in January 2006, Chief Executive Officer. Mr. Sorkin began his
career on Wall Street in 1982 at Dean Witter, which is now a subsidiary of
Morgan Stanley. From an entry-level position, he was promoted to Managing
Director within six years. Mr. Sorkin was among the core group of professionals
at Dean Witter that developed the firm's investment portfolio to assets of over
USD $3 billion. At Dean Witter, Mr. Sorkin's transaction counterparties included
Aetna, International Paper, Continental Insurance, Barclays Banks, Chase
Manhattan, Harvard University, Southern Bell, Cigna, the State of Wisconsin,
AIG, Modern Woodman of America, Zurich American Life, and San Francisco City and
County. Mr. Sorkin was responsible for investment selection, negotiations,
transaction and financial structuring, debt placement, and asset management. Mr.
Sorkin was a Vice President, Owner, and/or Director of over 20 public investment
partnerships with investment funds totaling over USD $1 billion. In 1993, Mr.
Sorkin created his own investment firm and began making private equity
investments in the United States and in the PRC. Mr. Sorkin graduated from Yale
University with a B.A. in Economics.
Cecilia Chan, Executive Director and Director. Ms. Chan has served as a
member of the Board of Directors since November 16, 2001. She joined Immtech as
Vice President in July, 1999 and was appointed to her current post, Executive
Director, in March, 2006. She has 20 years of experience in making investments
and in business development. She began working on Immtech's growth strategy in
1998, spearheading Immtech's initial public offering in April
-69-
1999. Ms. Chan is responsible for strategic development, fund raising and
directing our uses of capital resources. Prior to joining Immtech, Ms. Chan was
a Vice President at Dean Witter, which is now a subsidiary of Morgan Stanley,
until 1993 and thereafter concentrated her efforts as a private investor until
she joined Immtech. During her eight years at Dean Witter, Ms. Chan completed
over $500 million in investments and was vice-president of public partnerships
having assets in excess of $800 million. Since 1993, Ms. Chan has developed and
funded investments in the United States and the PRC. She graduated from New York
University in 1985 with a Bachelor of Science degree in International Business.
Gary C. Parks, Secretary, Treasurer and Chief Financial Officer. Mr. Parks
joined Immtech in January 1994, having previously served at Smallbone, Inc.,
from 1989 until 1993, where he was Vice President, Finance. Mr. Parks was a
Division Controller with International Paper from 1986 to 1989. Prior to that,
he was Vice President, Finance, of SerckBaker, Inc., a subsidiary of BTR plc,
from 1982 to 1986 and a board member of SerckBaker de Venezuela. Mr. Parks holds
a B.A. from Principia College and an MBA from the University of Michigan.
Carol Ann Olson, MD, Ph.D., Vice President and Chief Medical Officer. Dr.
Olson is responsible for the management of the clinical trial programs and
medical affairs of the Company, including the development of integrated clinical
plans and management of medical related issues with worldwide regulators. Prior
to joining Immtech, Dr. Olson worked at Abbott Laboratories, Pharmaceutical
Division for eleven years in various capacities, most recently as Global Project
Head and Global Medical Director for Anti-Infective Development. In this
function, she had line management responsibility for strategic planning,
execution of clinical development plans, manufacturing and commercialization,
product safety, scientific communications and regulatory affairs for outpatient
respiratory antibiotics, including Clarithromycin and Cefdinir. As part of her
responsibilities at Abbott, Dr. Olson managed the filing of IND applications and
New Drug Applications (NDA) with the United States Food and Drug Administration
(FDA). Prior to this position, Dr. Olson was Global Franchise Medical Director
responsible for the Anti-Infective Franchise Program at Abbott from 2000 - 2002.
In 2001, she participated on a team responsible for Medical Affairs Acquisition
& Integration Management for the Knoll/BASF Pharma Acquisitions. During Dr.
Olson's initial years at Abbott (1994 - 2000), she held a number of Medical
Director Positions for different product groups in the Pharmaceutical Division.
Dr. Olson received both her Medical Doctor degree and Ph.D., Biochemistry, from
the University of Chicago. She received a Master of Science degree from North
Dakota State University and attended Concordia College, where she earned a B.A.
degree. Additionally, Dr. Olson was a Medical Fellow Specialist -- Division of
Infectious Diseases, Department of Medicine at the University of Minnesota and
Medical Resident, Department of Medicine at the University of Chicago. While at
Abbott she earned a number of awards including the Chairman's Award, Abbott
Laboratories (1994).
Dina Grinshpun, General and Intellectual Property Counsel. Ms. Grinshpun
previously worked at Fish & Richardson P.C., one of the largest law firms in the
world specializing in intellectual property, complex litigation, and technology
law. She accumulated valuable experience litigating patent infringement suits in
a variety of subject matters and drafting patent applications, opinion letters,
and various agreements. Prior to joining Fish & Richardson P.C., Ms. Grinshpun
was a judicial clerk for the Honorable Randall R. Rader at the United States
Court of Appeals for the Federal Circuit, the court with exclusive jurisdiction
over patent
-70-
appeals. In addition, she has a strong technical background, having worked as a
pharmaceutical chemist at Procter & Gamble Pharmaceuticals, Inc. prior to
becoming an attorney.
Harvey Colten, MD, Director. Dr. Colten has served as Director since
October 30, 2000. He is currently Vice President and Senior Associate Dean for
Academic Affairs at Columbia University Health Sciences Division and College of
Physicians and Surgeons. Prior to joining Columbia University, he served as
Chief Medical Officer at iMetrikus, Inc., a healthcare Internet company focused
on improving the communication between the patient, physician and the medical
industry from 2000 until 2002, and prior to that he was the Dean of the Medical
School and Vice President for Medical Affairs at Northwestern University from
1997 to 2000. He previously served as the Harriet B. Spoehrer Professor and
Chair of the Department of Pediatrics and Professor of Molecular Microbiology at
Washington University School of Medicine, St. Louis, Missouri, whose faculty he
joined in 1986. He earned a B.A. at Cornell University in 1959, an MD from
Western Reserve University in 1963, and an M.A. (honorary) from Harvard in 1978.
Following his clinical training, he was a researcher at the National Institutes
of Health from 1965 to 1970. In 1970, he was appointed to the faculty at the
Harvard Medical School, where he was named Professor of Pediatrics in 1979 and
Chief of the Division of Cell Biology, Pulmonary Medicine, and Director of the
Cystic Fibrosis Program at Children's Hospital Medical Center, Boston. He is a
member of the Institute of Medicine and was Vice-Chair of its Council. He is a
member of the American Society for Clinical Investigation, the Society for
Pediatric Research, the Association of American Physicians, the American
Pediatric Society, the American Association of Immunologists (former secretary
and treasurer), and the American Society for Biochemistry and Molecular Biology.
He is also a Fellow of the American Association for the Advancement of Science,
the American Academy of Allergy and Immunology and the American Academy of
Pediatrics. Dr. Colten is a Diplomat of the American Board of Pediatrics, served
on the American Board of Allergy and Immunology, was a member of the National
Heart, Lung, and Blood Institute Advisory Council, and serves on the Board of
Directors of the Oasis Institute and the March of Dimes Scientific Advisory
Council, in addition to many other Federal and private health groups that advise
on scientific and policy issues. Dr. Colten also served as Vice Chairman of the
Board of Directors of Parents as Teachers National Center. He has been on
editorial boards and advisory committees of several leading scientific and
medical journals, including the New England Journal of Medicine, Journal of
Clinical Investigation, Journal of Pediatrics, Journal of Immunology, Annual
Review of Immunology, Proceedings of the Association of American Physicians and
American Journal of Respiratory Cell and Molecular Biology.
Judy Lau, Director. Ms. Lau has served as Director since October 31, 2003.
Since July 2002, Ms. Lau has served as the Chairperson of Convergent Business
Group, a Hong Kong-based investment advisory firm with investments focused in
high technology, life sciences, healthcare and environmental engineering
projects in the greater China region. From May of 2001 to July of 2002, Ms. Lau
served as General Manager of China Overseas Venture Capital Co. Ltd., a venture
capital firm. From October of 2000 to April of 2001, Ms. Lau served as Chief
Executive Officer of the Good Fellow Group, a Chinese investment firm; and from
March of 1999 to September of 2000, Ms. Lau was the Managing Director of America
Online HK, an Internet Service Provider and Hong Kong affiliate of Time Warner,
Inc. From April of 1998 to February of 1999, Ms. Lau worked as a consultant to
Pacific Century Group. Ms. Lau has served in the position of Director of Immtech
Hong Kong Ltd. since June, 2003. Ms. Lau
-71-
was named in 2000, one of the thirty-six most influential Business Women of Hong
Kong by Capital Magazine and is a Fellow of the Hong Kong Association for the
Advancement of Science and Technology.
Levi Hong Kaye Lee, M.D., Director. Dr. Lee has served as Director since
October 31, 2003. Dr. Lee has been in private medical practice, specializing in
pediatrics, since 1971. His practice is located in Hong Kong. Dr. Lee received a
B.A. in Biochemistry from the University of California, Berkeley, in 1962, and
received his M.D. from the University of California, San Francisco, in 1966. Dr.
Lee has served in the position of Director of Immtech Hong Kong Ltd. since June,
2003. He was appointed a Diplomat of the American Board of Pediatrics in 1971.
Frederick W. Wackerle, Director. Mr. Wackerle has served as Director since
December 17, 2001. He is an author, private investor and consultant. He has been
an advisor to Chief Executive Officers ("CEOs") and boards and previously was an
executive search consultant for 40 years. Mr. Wackerle specialized in advising
corporate boards on management succession. In the past ten years, he devoted a
significant amount of his time to investing in and advising biotechnology
companies on succession planning, and recruited CEO candidates and board members
for companies that include Biogen, Inc., ICOS Corp., Amylin Pharmaceuticals,
Inc., Enzon, Inc., Medtronic Inc. and Ventana Medical Systems. Mr. Wackerle has
published a book on management succession entitled, "The Right CEO-Straight Talk
About Making CEO Selection Decisions" (Jossey-Bass), and is a graduate of
Monmouth College, Illinois, where he has been active on their Board of Trustees.
He is also a board member of The Rehabilitation Institute of Chicago and an
Executive Advisory Partner to Wind Point Partners, a private equity concern.
B. Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers and 10% stockholders of a registered class of equity securities to file
reports of ownership and reports of changes in ownership of our common stock and
other equity securities with the SEC. Directors, executive officers and 10%
stockholders are required to furnish us with copies of all Section 16(a) forms
they file. Based on a review of the copies of such reports furnished to us, we
believe that during fiscal 2006, our directors, executive officers and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them.
C. Board Committees
The board of directors has an audit committee, a compensation committee
and a nominating committee. The function, composition, and number of meetings of
each of these committees are described below.
1. Audit Committee
The audit committee (a) has sole authority to appoint, replace and
compensate our independent auditors and is directly responsible for oversight of
their work; (b) approves all audit fees and terms, as well as any permitted
non-audit services; (c) meets and discusses directly with our independent
auditors their audit work and related matters and (d) oversees and performs such
-72-
investigations with respect to our internal and external auditing procedures and
affairs as the audit committee deems necessary or advisable and as may be
required by applicable law.
The members of the audit committee are Directors Lau (Chairman), Colten
and Lee. Each member of the audit committee is "independent" in accordance with
the rules of the SEC and the listing standards of the American Stock Exchange.
Since Mr. Sorkin became our Chief Executive Officer on January 30, 2006,
we no longer have an "audit committee financial expert" on the Audit Committee.
The Company is actively seeking to recruit a new independent board member with
financial expert qualifications to join the board and its Audit Committee to
serve in such capacity.
2. Compensation Committee
The compensation committee (a) annually reviews and determines salaries,
bonuses and other forms of compensation paid to our executive officers and
management; (b) selects recipients of awards of incentive stock options and
non-qualified stock options and establishes the number of shares and other terms
applicable to such awards; and (c) construes the provisions of and generally
administers the Second Amended and Restated Immtech Pharmaceuticals, Inc. 2000
Stock Incentive Plan.
The members of the compensation committee are Directors Wackerle
(Chairman), Lau and Colten.
3. Nominating Committee
The nominating committee has authority to review the qualifications of,
interview and nominate candidates for election to the board of directors.
The members of the nominating committee are Directors Colten (Chairman),
Lau and Wackerle. Each member of the nominating committee is "independent" in
accordance with the listing standards of the American Stock Exchange.
D. Code of Ethics
We have adopted a "code of ethics", as defined by the SEC, that applies to
our Chief Executive Officer, Chief Financial Officer, principal accounting
officer and persons performing similar functions with Immtech and our
subsidiaries. We have filed with the SEC a copy of our Code of Ethics as Exhibit
14.1 to this Annual Report on Form 10-K. We also post the text of our Code of
Ethics on our Internet website (www.immtechpharma.com).
E. Family Relationships
There are no family relationships between or among any officer or director
of Immtech.
-73-
ITEM 11. EXECUTIVE COMPENSATION
A. Summary Compensation Table
The following table sets forth certain information regarding the
compensation of our Chief Executive Officer and our four most highly compensated
executive officers for the fiscal years ended March 31, 2004, 2005 and 2006.
Except as set forth below, no other compensation was paid to these individuals
during the years indicated.
Long-Term
Year Annual Compensation Compensation Awards
---- ------------------- -------------------
Securities Underlying
Salary ($) Options/SARs (#)
---- ------------------- -------------------
Eric L. Sorkin(1) 2006 20,834
Chief Executive Officer and Chairman
Cecilia Chan 2006 $201,234
Executive Director and Director 2005 $187,078 20,000
2004 $148,000 25,000
Gary C. Parks 2006 $165,294 20,000
Secretary, Treasurer and Chief Financial Officer 2005 $157,880 15,000
2004 $134,375 15,000
Carol Ann Olson, MD, Ph.D. (2) 2006 $200,000 30,000
Vice President and Chief Medical Officer 2005 $91,270 40,000
2004 -- --
Dina Grinshpun (3) 2006 $68,258 30,000
General and Intellectual Property Counsel 2005 -- --
2004 -- --
T. Stephen Thompson(4) 2006 $263,294
President, and Director 2005 $241,088 30,000
2004 $185,000 40,000
--------------------
(1) Became Chief Executive Officer on January 23, 2006 and subsequently became
President on May 1, 2006. The Company is currently negotiating with Mr.
Sorkin his compensation for the period since he became Immtech's Chief
Executive Officer, and going forward.
(2) Employment commenced on October 18, 2004.
(3) Employment commenced on November 4, 2005.
(4) Retired effective May 1, 2006.
B. Stock Option Grants and Exercises During the Fiscal Year Ended March 31,
2006
The following table sets forth information concerning stock option grants
made during the fiscal year ended March 31, 2006, to our executive officers
named in the "Summary Compensation Table" above. This information is for
illustration purposes only and is not intended to predict the future price of
our common stock. The actual future value of the options will depend on the
market value of the common stock.
-74-
Stock Option Grants In Fiscal Year Ended March 31, 2006
Potential Realizable
Value At Assumed Annual
Rates of Stock Price
Appreciation For Option
Individual Grants Term
------------------------------------------------------------------------------ -----------------------
Number of
Securities Percent of Total
Underlying Options/SARs Exercise
Options/ SARs Granted to Price Expiration
Name Granted Employees (%) ($/SH) Date 5% ($) 10% ($)
---------------- ------------- ---------------- -------- ---------- -------- --------
Eric L. Sorkin 20,834 5.72 7.85 1/24/2016 266,401 424,199
Gary C. Parks 20,000 5.49 7.29 1/23/2016 237,493 378,168
Carol Ann Olson 30,000 8.24 7.29 1/23/2016 356,239 567,251
Dina Grinshpun 30,000 8.24 7.29 1/23/2016 356,239 567,251
The following table sets forth certain summary information concerning
exercised and unexercised options and warrants to purchase common stock held by
the executive officers named in the "Summary Compensation Table" as of March 31,
2006.
Stock Option and Warrant Exercises In Fiscal Year Ended March 31, 2006,
and Fiscal Year-End Option/Warrant Values
Number of Unexercised Value of Unexercised
Options/Warrants at Fiscal In-The-Money Options/Warrants
Shares Year End (#) at Fiscal Year End ($)
Acquired on Realized ---------------------------- -----------------------------
Exercise (#) Value ($) Exercisable Unexercisable Exercisable Unexercisable
------------ ----------- ----------- ------------- ------------ --------------
Eric L. Sorkin 21,028 $50,467(1) 293,791 25,515 $370,604(2) $0
Cecilia Chan 29,800 $147,808(3) 292,512 4,167 $403,853(4) $0
Gary C. Parks 0 0 78,737 21,458 $217,829(5) $8,433(6)
Carol Ann Olson 0 0 15,833 54,167 $1,150(6) $12,650(6)
Dina Grinshpun 0 0 3,750 26,250 $1,500(7) $10,500(7)
T. Stephen Thompson 8,872 $64,677(8) 178,445 6,250 $518,437(9) $0
--------------------
(1) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $5.35 multiplied by the number of shares
underlying the option and warrant.
(2) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $6.25 multiplied by the number of shares
underlying the options and warrant.
(3) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $2.79 multiplied by the number of shares
underlying the option and warrant.
(4) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $6.12 multiplied by the number of shares
underlying the options and warrants.
(5) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $2.55 multiplied by the number of shares
underlying the options and warrant.
-75-
(6) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $7.29 multiplied by the number of shares
underlying the option.
(7) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $7.35 multiplied by the number of shares
underlying the option.
(8) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $0.46 multiplied by the number of shares
underlying the option.
(9) Based on the March 31, 2006, value of $7.75 per share, minus the average
per share exercise price of $3.21 multiplied by the number of shares
underlying the options and warrants.
C. Director Compensation
We compensate non-employee members of the Board of Directors for their
service as Board members through the grant to each such director of 20,000
options to purchase our common stock upon joining the Board. In addition, each
non-employee director receives options to purchase 15,000 shares of common stock
for each subsequent year of Board service, options to purchase 3,000 shares of
common stock for each year of service on each Board committee and options to
purchase 1,000 shares of common stock for each Board committee chaired. Such
options are generally granted at fair market value on the date of grant, vest
ratably over 2 years and expire 10 years from the date of grant. We also
reimburse the directors for out-of-pocket expenses incurred in connection with
their service as directors.
D. Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between our Board of Directors or our
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past.
-76-
E. Board Compensation Committee Report on Executive Compensation
June 14, 2006
COMPENSATION COMMITTEE REPORT
Our compensation committee establishes levels of cash compensation and
forms and amounts of non-cash compensation for our executive officers. The
guiding principles of our compensation committee are as follows:
o To provide a reasonable level of compensation sufficient to attract
and retain executive personnel best suited by training, ability and
other relevant criteria for the management requirements of our
company,
o To balance base compensation (non-contingent) and incentive
compensation (contingent upon performance) for the purpose of
motivating executive personnel,
o To determine the extent and method of aligning the financial
interest of our executive personnel with the interest of our
stockholders in the appreciation of their investment,
o Administer the Company's 2000 Stock Incentive Plan, as amended from
time to time,
o Review compensation plans, programs and policies,
o To use equity incentives to align the interests of our executive
officers with the interests of stockholders, and
o Monitor the performance and compensation of executive officers.
The goal of the Company's executive compensation policy is to ensure that
an appropriate relationship exists between executive compensation and the
creation of stockholder value, while at the same time attracting, motivating and
retaining senior management. The compensation committee's informal executive
compensation philosophy (which applies generally to all Company management,
including the Chief Executive Officer) considers a number of factors, which may
include:
o Providing levels of compensation competitive with companies at a
comparable stage of development and in the Company's geographic
area,
o Integrating management's compensation with the achievement of
performance goals, and
o Recognizing and providing incentive for individual initiative and
achievement.
The compensation structure of the Company's executive officers, including
its Chief Executive Officer, is based on competitive, market-based pay practices
and performance
-77-
evaluations, and generally includes a combination of base salary, discretionary
bonuses and stock options. In setting compensation levels, the compensation
committee considers data regarding compensation practices from a group of
biotechnology and pharmaceutical companies that are believed to be generally
comparable to the Company.
Currently, our Chief Executive Officer does not receive a cash salary. We
are negotiating with him to provide payment for his services since he became our
Chief Executive Officer on January 30, 2006, and going forward.
Base salary is not targeted at any particular level within the group of
companies considered. Instead, total salary is determined based on a subjective
assessment of the executive's performance and the Company's needs. Consistent
with its belief that equity ownership by senior management is beneficial in
aligning the interests of senior management with those of the stockholders, the
Company provides potentially significant long-term incentive opportunities to
its senior management through discretionary grants of stock options, thereby
emphasizing the potential creation of long-term stockholder value. The
compensation committee considers stock options effective long-term incentives
because an executive can profit only if the value of the common stock increases.
In making these grants, the compensation committee considers its subjective
assessment of the Company's future prospects, an executive officer's current
level of ownership of the common stock, the period during which an executive
officer has been in a key position with the Company, individual performance and
competitive practices within the comparative group of companies.
No contingent compensation was paid to any officer for Fiscal Year 2006.
Section 162(m) of the Internal Revenue Code generally denies a deduction
to any publicly held corporation for compensation paid to its chief executive
officer and its four other highest-paid executive officers to the extent that
any such individual's compensation exceeds $1 million, subject to certain
exceptions. The compensation committee intends to take actions to minimize the
Company's exposure to nondeductible compensation expense under Section 162(m).
While keeping this goal in mind, the compensation committee also will try to
maintain the flexibility that the committee believes to be an important element
of the Company's executive compensation program.
The compensation committee Report does not constitute soliciting material
and shall not be deemed filed or incorporated by reference into any other
Company filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent the Company specifically
incorporates this compensation committee Report by reference therein.
Respectfully submitted,
The Compensation Committee
Frederick W. Wackerle (Chair)
Judy Lau
Harvey Colten, M.D.
-78-
F. Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder
returns for Immtech's common stock, the S&P 500 Index and the Peer Group. The
graph assumes the investment of $100 on April 1, 2001, and the reinvestment of
all dividends. The performance shown is not necessarily indicative of future
performance.
[line graph]
2001 2002 2003 2004 2005 2006
------ ------ ------ ------ ------ ------
Immtech Pharmaceuticals, Inc. 100.00 83.49 78.27 322.14 216.07 134.85
S&P 500 Index 100.00 100.24 75.41 101.91 108.72 121.47
Peer Group 100.00 75.97 24.05 62.18 62.36 79.97
The information contained in the graph above shall not be deemed to be
"soliciting material" or to be "filed" with the SEC, nor shall such information
be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or subject
to Regulation 14A or 14C promulgated under the Exchange Act, other than as
provided in Item 402 of the SEC's Regulation S-K, or to the liabilities of
Section 18 of the Exchange Act, except to the extent that Immtech specifically
requests that the information be treated as soliciting material or specifically
incorporates it by reference in such filing.
TOTAL STOCKHOLDER RETURNS
Total Return To Stockholder's
(Dividends reinvested monthly)
ANNUAL RETURN PERCENTAGE
YEARS ENDED
------------------------------------------
Company Name / Index Mar 02 Mar 03 Mar 04 Mar 05 Mar 06
--------------------------- ------ ------ ------ ------ ------
Immtech International, Inc. -16.51 -6.25 311.58 -32.93 -37.59
S&P 500 Index 0.24 -24.77 35.13 6.69 11.73
Peer Group -24.03 -68.34 158.50 0.30 28.23
Peer Group Companies
--------------------
Cubist Pharmaceuticals, Inc. (NASDAQ: CBST)
-79-
EntreMed, Inc. (NASDAQ: ENMD)
Encysive Pharmaceuticals, Inc. (NASDAQ: ENCY)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of June 2, 2006, by (i) each of our
directors and executive officers, (ii) all directors and executive officers as a
group and (iii) each person known to be the beneficial owner of more than 5% of
our common stock.
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
-------------------------------------- -------------------- ------------------
Eric L. Sorkin(1)
c/o Immtech Pharmaceuticals, Inc.
One North End Ave.
New York, NY 10282 423,541 shares 2.95%
Cecilia Chan(2)
c/o Immtech Pharmaceuticals, Inc.
One North End Ave.
New York, NY 10282 354,081 shares 2.48%
Gary C. Parks(3)
c/o Immtech Pharmaceuticals, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 108,746 shares 0.77%
Carol Ann Olson, MD, Ph.D.(4)
c/o Immtech Pharmaceuticals, Inc.
150 Fairway Drive, Ste. 150
Vernon Hills, IL 60061 20,833 shares 0.15%
Dina Grinshpun((5))
c/o Immtech Pharmaceuticals, Inc.
One North End Ave.
New York, NY 10282 8,750 shares 0.06%
Harvey Colten, M.D.(6)
c/o Office of the Dean Columbia
University
College of Physicians and Surgeons
630 West 168th Street
New York, NY 10032 81,838 shares 0.58%
Judy Lau((7))
Room 1801, 18th Floor
Kwai Hung Holdings Centre
89 Kings Road
North Point, Hong Kong 64,667 shares 0.46%
Levi H.K. Lee, M.D.((8))
1405 Lane Crawford House
70 Queens Road Central,
Hong Kong 260,501 shares 1.85%
-80-
Number of Shares Percentage of
of Common Stock Outstanding Shares
Name and Address Beneficially Owned of Common Stock
-------------------------------------- -------------------- ------------------
Frederick W. Wackerle((9))
3750 N. Lake Shore Drive
Chicago IL 60613 142,730 shares 1.01%
T. Stephen Thompson(10)
00 Pembroke Drive
Lake Forest, IL 60045 546,343 shares 3.84%
All executive officers, former
officer and directors as a group (10
persons) 2,012,030 shares 13.05%
--------------------
(1) Includes (i) 48,981 shares of common stock; (ii) 20,362 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
53,267 shares of common stock issuable upon the conversion of series E
preferred stock; (iv) 226,500 shares of common stock issuable upon the
exercise of warrants as follows: vested warrant to purchase 36,923 shares
of common stock at $6.47 per share by July 24, 2008, vested warrant to
purchase 173,077 shares of common stock at $6.47 per share by October 12,
2008, vested warrant to purchase 9,000 shares of common stock at $6.00 per
share by February 14, 2007 (only after the series A preferred stock has
been converted) and vested warrant to purchase 7,500 shares of common
stock at $10.00 per share by December 13, 2008; and (v) 74,431 shares of
common stock issuable upon the exercise of options as follows: vested
option to purchase 27,000 shares of common stock at $4.75 per share by
December 18, 2006, vested option to purchase 972 shares of common stock at
$2.55 per share by December 24, 2007, vested option to purchase 22,000
shares of common stock at $14.29 per share by February 1, 2014, the vested
portion of 19,250 shares of an option to purchase 22,000 shares of common
stock at $11.03 by November 15, 2014, and the vested portion of 5,209
shares of an option to purchase 20,834 shares of common stock at $7.85 by
January 24, 2016.
(2) Includes (i) 56,621 shares of common stock; (ii) 5,781 shares of common
stock issuable upon the conversion of series B preferred stock; (iii)
225,512 shares of common stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 50,123 shares of common stock at $6.47
per share by July 24, 2008, vested warrant to purchase 173,077 shares of
common stock at $6.47 per share by October 12, 2008, and vested warrant to
purchase 2,312 shares of common stock at $6.125 per share by September 25,
2007; and (iv) 66,167 shares of common stock issuable upon the exercise of
options as follows: vested option to purchase 40,000 shares of common
stock at $2.55 per share by December 24, 2012, vested option to purchase
25,000 shares of common stock at $21.66 per share by November 5, 2013, and
the vested portion of 19,167 shares of an option to purchase 20,000 shares
of common stock at $9.41 per share by September 7, 2014.
(3) Includes (i) 21,914 shares of common stock; (ii) 2,262 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
1,000 shares of common stock issuable upon the exercise of warrants as
follows: vested warrant to purchase 1,000 shares of common stock at $6.00
per share by February 14, 2007 (only after the series A preferred stock
has been converted); and (iv) 83,570 shares of common stock issuable upon
the exercise of options as follows: vested option to purchase 14,195
shares of common stock at $1.74 per share by April 16, 2008, vested option
to purchase 10,000 shares of common stock at $10.00 per share by July 19,
2011, vested option to purchase 25,000 shares of common stock at $2.55 per
share by December 24, 2012, vested option to purchase 15,000 shares of
common stock at $21.66 per share by November 5, 2013, the vested portion
of 14,375 shares of an option to purchase 15,000 shares of common stock at
$9.41 per share by September 7, 2014, and the vested portion of 5,000
shares of an option to purchase 20,000 shares of common stock at $7.29 per
share by January 23, 2016.
(4) Includes 20,833 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 13,333 shares of an option to
purchase 40,000 shares of common stock at $8.38 per share by October 17,
2014, and the vested portion of 7,500 shares of an option to purchase
30,000 shares of common stock at $7.29 per share by January 23, 2016.
-81-
(5) Includes 8,750 shares of common stock issuable upon the exercise of
options as follows: the vested portion of 8,750 shares of an option to
purchase 30,000 shares of common stock at $7.35 per share by December 21,
2015.
(6) Includes (i) 1,088 shares of common stock; and (ii) 80,750 shares of
common stock issuable upon the exercise of options as follows: vested
option to purchase 20,000 shares of common stock at $10.50 per share
by December 28, 2010, vested option to purchase 7,000 shares of common
stock at $4.75 per share by December 18, 2006, vested option to purchase
7,000 shares of common stock at $2.55 per share by December 24, 2007,
vested option to purchase 22,000 shares of common stock at $14.29 per
share by February 1, 2014, the vested portion of 19,250 shares of an
option to purchase 22,000 shares of common stock at $11.03 by November 15,
2014, and the vested portion of 5,500 shares of an option to purchase
22,000 shares of common stock at $7.85 by January 24, 2016.
(7) Includes 64,667 shares of common stock issuable upon the exercise of
options as follows: vested option to purchase 20,000 shares of common
stock at $21.66 per share by November 5, 2013, vested option to purchase
21,000 shares of common stock at $14.29 per share by February 1, 2014, the
vested portion of 18,375 shares of an option to purchase 21,000 shares of
common stock at $11.03 by November 15, 2014, and the vested portion of
5,292 shares of an option to purchase 21,167 shares of common stock at
$7.85 by January 24, 2016.
(8) Includes (i) 138,652 shares of common stock; (ii) 11,312 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
52,037 shares of common stock issuable upon the conversion of series C
preferred stock; and (iv) 58,500 shares of common stock issuable upon the
exercise of options as follows: vested option to purchase 20,000 shares of
common stock at $21.66 per share by November 5, 2013, vested option to
purchase 18,000 shares of common stock at $14.29 per share by February 1,
2014, the vested portion of 15,750 shares of an option to purchase 18,000
shares of common stock at $11.03 by November 15, 2014, and the vested
portion of 4,750 shares of an option to purchase 19,000 shares of common
stock at $7.85 by January 24, 2016.
(9) Includes (i) 24,053 shares of common stock; (ii) 13,575 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
7,102 shares of common stock issuable upon the conversion of series E
preferred stock; (iv) 7,250 shares of common stock issuable upon the
exercise of warrants as follows: vested warrant to purchase 6,000 shares
of common stock at $6.00 per share by February 14, 2007 (only after the
series A preferred stock has been converted), and vested warrant to
purchase 1,250 shares of common stock at $10.00 per share by December 13,
2008; and (v) 90,750 shares of common stock issuable upon the exercise of
options as follows: vested option to purchase 15,000 shares of common
stock at $10.50 per share by December 28, 2010, vested option to purchase
22,000 shares of common stock at $4.75 per share by December 18, 2006,
vested option to purchase 7,000 shares of common stock at $2.55 per share
by December 24, 2007, vested option to purchase 22,000 shares of common
stock at $14.29 per share by February 1, 2014, the vested portion of
19,250 shares of an option to purchase 22,000 shares of common stock at
$11.03 by November 15, 2014, and the vested portion of 5,500 shares of an
option to purchase 22,000 shares of common stock at $7.85 by January 24,
2016.
(10) Includes (i) 298,308 shares of common stock; (ii) 45,249 shares of common
stock issuable upon the conversion of series A preferred stock; (iii)
12,500 shares of common stock issuable upon the conversion of series B
preferred stock; (iv) 2,841 shares of common stock issuable upon the
conversion of series E preferred stock; (v) 25,500 shares of common stock
issuable upon the exercise of warrants as follows: vested warrant to
purchase 20,000 shares of common stock at $6.00 per share by February 14,
2007 (only after the series A preferred stock has been converted), vested
warrant to purchase 5,000 shares of common stock at $6.125 per share by
September 25, 2007, and vested warrant to purchase 500 shares of common
stock at $10.00 per share by December 13, 2008; and (vi) 161,945 shares of
common stock issuable upon the exercise of options as follows: vested
option to purchase 14,195 shares of common stock at $1.74 per share by
April 16, 2008, vested option to purchase 75,000 shares of common stock at
$2.55 per share by December 24, 2012, vested option to purchase 40,000
shares of common stock at $21.66 per share by November 5, 2013, the vested
portion of 28,750 shares of an option to purchase 30,000 shares of common
stock at $9.41 per share by September 7, 2014, and the vested portion of
4,000 shares of an option to purchase 56,000 shares of common stock at
$7.35 per share by May 1, 2012.
-82-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following transactions are disclosed as transactions transacted with a
party that was, at one time or from time-to-time, a "related party".
A. Super Insight Limited
On November 28, 2003, we entered into a share purchase agreement and deed
of indemnity related to the purchase of Super Insight Limited (the "Share
Purchase Agreement") and an Allonge to the Share Purchase Agreement related to
the shares in Super Insight Limited ("Super Insight") and Immtech Hong Kong
Limited ("Immtech Hong Kong") (the "Allonge") with Mr. Chan Kon Fung ("Mr.
Chan"), Lenton Fibre Optics Development Limited, Super Insight and Immtech Hong
Kong. Pursuant to the terms of the Share Purchase Agreement and the Allonge, we
purchased (i) from Mr. Chan 100% of the outstanding shares of Super Insight and
its wholly-owned subsidiary, subsequently named Immtech Life Science Limited
("Immtech Life Science") and (ii) from Lenton, 100% of Lenton's interest in
Immtech Hong Kong. As payment for Super Insight and Immtech Hong Kong, we
transferred to Mr. Chan our 80% interest in Lenton and paid him $400,000 in
cash.
In January 2003, Mr. Chan Kon Fung, the counterparty in the Super Insight
transaction listed above, received 1.2 million shares of our common stock in
exchange for an 80% interest in Lenton Fibre Optics Development Limited; the
same 80% interest we are transferring to Mr. Chan to obtain the 100% interest in
Super Insight. With 1.2 million shares of our common stock, Mr. Chan became a
"10% beneficial owner" of Immtech and therefore our board determined that the
acquisition of Super Insight required increased scrutiny as an affiliate
transaction. Our board reviewed the Super Insight transaction prior to its
completion and determined that the terms of the transaction were no less
favorable to us than we could have obtained in a similar transaction with an
unaffiliated third-party and therefore approved the transaction.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee selects our independent auditor for each fiscal year.
During the year ended March 31, 2006, Deloitte & Touche LLP was employed
primarily to perform the annual audit and to render other services, including
audit services related to the Company's internal control reporting to comply
with Sarbanes-Oxley Section 404. The following table presents the aggregate fees
billed for professional services rendered by Deloitte and Touche LLP, the member
firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, the "Deloitte Entities") during the years ended March 31, 2005
and 2006. Other than as set forth below, no professional services were rendered
or fees billed by the Deloitte Entities during 2005 or 2006.
-83-
2006 2005
--------------- ----------------
Audit Fees(1)......................... $211,000 $192,000
Audit Related Fees.................... -- --
Total Audit and Audit Related Fees.... 211,000 192,000
Tax Fees(2)........................... 6,000 7,000
All Other Fees........................ -- --
Total Fees............................ $217,000 $199,000
--------------------
(1) Includes fees and out-of-pocket expenses for the following services: Audit
of the consolidated financial statements, quarterly reviews, SEC filings
and consents, financial accounting and reporting consultation, and costs
in our fiscal year ended March 31, 2006 preparing the 2006 audit
requirement for compliance with Sarbanes-Oxley Act section 404 and
financial testing.
(2) Includes fees and out-of-pocket expenses for tax compliance, tax planning
and advice.
All work performed by the Deloitte Entities as described above has been
approved by the Audit Committee prior to the Deloitte Entities' engagement to
perform such service. The Audit Committee pre-approves on an annual basis the
audit, audit-related, tax and other services to be rendered by the Deloitte
Entities based on historical information and anticipated requirements for the
following fiscal year. To the extent that our management believes that a new
service or the expansion of a current service provided by the Deloitte Entities
is necessary, such new or expanded service is presented to the Audit Committee
or one of its members for review and approval.
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. Documents Filed with this Report.
The following documents are filed as part of this Form 10-K:
1. Financial Statements
The consolidated financial statements required by this item are submitted
in a separate section beginning on page F-1 of this report.
2. Financial Statement Schedules
None.
3. Exhibits
The information called for by this paragraph is contained in the Index to
Exhibits of this Form 10- K, which is incorporated herein by reference.
-84-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
IMMTECH PHARMACEUTICALS, INC.
Date: June 14, 2006 By: /s/ Eric L. Sorkin
------------------------------------ -----------------------------------
Eric L. Sorkin
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Date
----------------------------------------------------- ----------------------
/s/ Eric L. Sorkin June 14, 2006
----------------------------------------------------- ----------------------
Eric L. Sorkin
Chief Executive Officer and President
(Principal Executive Officer)
/s/ Gary C. Parks June 14, 2006
----------------------------------------------------- ----------------------
Gary C. Parks
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Cecilia Chan June 14, 2006
----------------------------------------------------- ----------------------
Cecilia Chan
Executive Director and Director
/s/ Harvey Colten, MD June 14, 2006
----------------------------------------------------- ----------------------
Harvey Colten, MD
Director
/s/ Judy Lau June 14, 2006
----------------------------------------------------- ----------------------
Judy Lau
Director
/s/ Levi H.K. Lee, MD June 14, 2006
----------------------------------------------------- ----------------------
Levi H.K. Lee, MD
Director
/s/ Frederick W. Wackerle June 14, 2006
----------------------------------------------------- ----------------------
Frederick W. Wackerle
Director
-85-
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------------- --------------------------------------------------------
1.1 (19) Form of Underwriting Agreement between the Company and
Jefferies & Company, Inc. dated July 26, 2004.
1.2 (24) Form of Underwriting Agreement between the Company and
Ferris, Baker Watts, Incorporated, dated February 8,
2006.
3.1 (2) Certificate of Incorporation of the Company, as amended
3.2 (8) By-laws of the Company, with amendment
3.3 (18) Amended and Restated Certificate of Incorporation of the
Company, dated June 14, 2004
3.4 (21) Amendment to Bylaws dated February 9, 2005
4.1 (3) Form of Common Stock Certificate
4.2 (2) Warrant Agreement, dated July 24, 1998, by and between
the Company and RADE Management Corporation
4.3 (2) Warrant Agreement, dated October 12, 1998, by and
between the Company and RADE Management Corporation
4.4 (8) Warrant Agreement, dated March 15, 2001, by and between
the Company and The Kriegsman Group
4.5 (9) Certificate of Designation for Series A Convertible
Preferred Stock Private Placement, dated February 14,
2002
4.6 (9) Stock Purchase Warrant, dated February 14, 2002, for
Series A Convertible Preferred Stock Private Placement
4.7 (11) Certificate of Designation for Series B Convertible
Preferred Stock Private Placement, dated September 25,
2002
4.8 (11) Stock Purchase Warrant, dated September 25, 2002, for
Series B Convertible Preferred Stock Private Placement
4.9 (12) Certificate of Designation for Series C Convertible
Preferred Stock Private Placement, dated June 6, 2003
4.10 (17) Certificate of Designation for Series D Convertible
Preferred Stock Private Placement, dated January 15, 2004
-86-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------------- --------------------------------------------------------
4.11 (17) Stock Purchase Warrant, dated January 15, 2004, for
Series D Convertible Preferred Stock Private Placement
4.12 (22) Certificate of Designation for Series E Convertible
Preferred Stock Private Placement, dated December 13,
2005
4.13 (22) Stock Purchase Warrant, dated December 13, 2005, for
Series E Convertible Preferred Stock Private Placement
4.14 (22) Certificate of Correction to Certificate of
Incorporation dated December 14, 2005.
4.15 (23) Amended and Restated Bylaws of the Company effective as
of January 27, 2006.
4.16 (25) Certificate of Amendment (Name Change) to Certificate of
Incorporation dated March 22, 2006.
4.17 (25) Amended and Restated Bylaws of the Company effective as
of March 22, 2006.
10.1 (1) Letter Agreement, dated January 15, 1997, by and among
the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.2 (1) 1993 Stock Option and Award Plan
10.3 (6) 2000 Stock Option and Award Plan
10.4 (1) Letter Agreement, dated May 29, 1998, between the
Company and Franklin Research Group, Inc.
10.5 (1) Indemnification Agreement, dated June 1, 1998, between
the Company and RADE Management Corporation
10.6 (1) Letter Agreement, dated June 24, 1998, between the
Company and Criticare Systems, Inc.
10.7 (1) Letter Agreement, dated June 25, 1998, between the
Company and Criticare Systems, Inc.
10.8 (2) Amendment, dated January 15, 1999, to Letter Agreement
among the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
-87-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------------- --------------------------------------------------------
10.9 (5) Office Lease, dated August 26, 1999, by and between the
Company and Arthur J. Rogers & Co.
10.10 (8) License Agreement, dated August 25, 1993, by and among
the University of North Carolina at Chapel Hill and
Pharm-Eco Laboratories, Inc.
10.11 (8) Assignment Agreement, dated as of March 27, 2001, by and
between the Company and Pharm-Eco Laboratories, Inc.
10.12 (8) Clinical Research Subcontract, dated as of March 29,
2001, by and between The University of North Carolina at
Chapel Hill and the Company
10.13 (1) Material Transfer and Option Agreement, dated March 23,
1998, by and between the Company and Sigma Diagnostics,
Inc.
10.14 (1) License Agreement, dated March 10, 1998, by and between
the Company and Northwestern University
10.15 (1) License Agreement, dated October 27, 1994, by and
between the Company and Northwestern University
10.16 (1) Assignment of Intellectual Properties, dated June 29,
1998, between the Company and Criticare Systems, Inc.
10.18 (1) Assignment Agreement, dated June 26, 1998, by and
between the Company and Criticare Systems, Inc.
10.19 (1) Assignment Agreement, dated June 29, 1998, by and
between the Company and Criticare Systems, Inc.
10.20 (1) International Patent, Know-How and Technology License
Agreement, dated June 29, 1998, by and between the Company
and Criticare Systems, Inc.
10.21 (1) Employment Agreement, dated 1992, by and between the
Company and T. Stephen Thompson
10.22 (2) Funding and Research Agreement, dated September 30,
1998, by and among the Company, NextEra Therapeutics,
Inc. and Franklin Research Group, Inc.
10.23 (4) Two Year Plus 200% Lock-Up Agreement executed by James Ng
-88-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------------- --------------------------------------------------------
10.24 (4) Employment Agreement, dated 1998, by and between NextEra
and Lawrence Potempa
10.25 (7) Form of Regulation D Subscription Agreement for
December 8, 2000 Private Placement
10.26 (7) Form of Regulation S Subscription Agreement for
December 8, 2000 Private Placement
10.27 (9) Form of Regulation D Subscription Agreement for
February 14, 2002 Series A Preferred Private Placement
10.28 (9) Form of Regulation S Subscription Agreement for
February 14, 2002 Series A Preferred Private Placement
10.29 (10) Amendment, dated January 28, 2002, to License Agreement
among the Company, Pharm-Eco Laboratories, Inc. and The
University of North Carolina at Chapel Hill, as amended
10.30(11) Form of Regulation D Subscription Agreement for
September 2002 Series B Preferred Private Placement
10.31(11) Form of Regulation S Subscription Agreement for
September 2002 Series B Preferred Private Placement
10.32 (12) Form of Regulation D Subscription Agreement for June
2003 Series C Preferred Private Placement
10.33 (12) Form of Regulation S Subscription Agreement for June
2003 Series C Preferred Private Placement
10.34 (14) Regis Pharmaceutical Manufacturing Agreement dated
March 4, 2003
10.35 (15) Share Purchase Agreement and Deed of Indemnity as
related to shares in Super Insight Limited, dated
November 28, 2003, by and between the Company, Chan Kon
Fung and Super Insight Limited
10.36 (15) Allonge to the Share Purchase Agreement and Deed of
Indemnity as related to shares in Super Insight Limited
and Immtech Hong Kong Limited, dated November 28, 2003,
by and between the Company, Chan Kon Fung, Lenton Fibre
Optics Development Limited, Super Insight Limited, and
Immtech Hong Kong Limited
10.37 (17) Form of Regulation D Subscription Agreement for January
2004 Series D Preferred Private Placement
-89-
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
------------------- --------------------------------------------------------
10.38 (17) Form of Regulation S Subscription Agreement for January
2004 Series D Preferred Private Placement
10.39 (20) Form of First Amendment to Office Lease, dated
August 18, 2004, by and between the Company and Arthur
J. Rogers & Co.
10.40(22) Form of Subscription Agreement for December 13, 2005,
Series E Preferred Private Placement
10.41 (26) Amended and Restated Consortium License Agreement
(Redacted) dated March 24, 2006, among Immtech, The
University of North Carolina at Chapel Hill, Auburn
University, Duke University and the Georgia State
University Research Foundation, Inc.
10.42 (26) Amended and Restated Clinical Research Subcontract,
dated March 28, 2006, between Immtech and The University
of North Carolina at Chapel Hill,
14.1 (18) Code of Ethics
21.1 (13) Subsidiaries of Registrant
23.1 (27) Consent of Deloitte & Touche LLP
31.1 (27) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 (27) Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 (27) Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 (27) Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by Reference to our Registration Statement on Form SB-2
(Registration Statement No. 333-64393), as filed with the Securities and
Exchange Commission on September 28, 1998.
(2) Incorporated by Reference to Amendment No. 1 to our Registration Statement
on Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on February 11, 1999.
(3) Incorporated by Reference to Amendment No. 2 our Registration Statement on
Form SB-2 (Registration Statement No. 333-64393), as filed with the
Securities and Exchange Commission on March 30, 1999.
(4) Incorporated by Reference to our Form 10-KSB for the fiscal year ended
March 31, 1999 (File No. 001-14907), as filed with the Securities and
Exchange Commission on June 29, 1999.
(5) Incorporated by Reference to our Annual Report on Form 10-KSB for the
fiscal year ended March 31, 2000 (File No. 000-25669), as filed with the
Securities and Exchange Commission on June 26, 2000.
-90-
(6) Incorporated by Reference to Annex A to our Definitive Proxy Statement
(File No. 000-25669), as filed with the Securities and Exchange Commission
on August 25, 2000.
(7) Incorporated by Reference to our Quarterly Report on Form 10-QSB (File No.
000-25669), as filed with the Securities and Exchange Commission on
February 14, 2001.
(8) Incorporated by Reference to our Annual Report on Form 10-KSB/A (File No.
000-25669), as filed with the Securities and Exchange Commission on June
29, 2001, as amended on July 6, 2001.
(9) Incorporated by Reference to our Form 8-K (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002.
(10) Incorporated by Reference to our Form 10-Q (File No. 000-25669), as filed
with the Securities and Exchange Commission on February 14, 2002, as
amended on June 10, 2002.
(11) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on September 25, 2002.
(12) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 10, 2003.
(13) Incorporated by Reference to our Form 10-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 27, 2003, as amended
on October 15, 2003.
(14) Incorporated by Reference to our Form 10-K/A (File No. 001-14907), as
filed with the Securities and Exchange Commission on October 15, 2003.
(15) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 2, 2003.
(16) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 3, 2003.
(17) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on January 21, 2004.
(18) Incorporated by Reference to our Form 10-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on June 14, 2004.
(19) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on July 27, 2004.
(20) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on October 8, 2004.
(21) Incorporated by Reference to our Form 10-Q (File No. 001-14907), as filed
with the Securities and Exchange Commission on February 9, 2005.
(22) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on December 14, 2005.
(23) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on January 30, 2006.
(24) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on February 8, 2006.
(25) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on March 23, 2006.
(26) Incorporated by Reference to our Form 8-K (File No. 001-14907), as filed
with the Securities and Exchange Commission on March 30, 2006.
(27) Filed herewith.
-91-
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Consolidated Financial Statements as of
March 31, 2005 and 2006, for the Years
Ended March 31, 2004, 2005 and 2006 and
for the Period October 15, 1984 (Date of
Inception) to March 31, 2006 (Unaudited)
and Report of Independent Registered
Public Accounting Firm
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
TABLE OF CONTENTS
-------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM....................F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
REGARDING COMPLIANCE WITH THE SARBANES-OXLEY ACT OF 2002...................F-4
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2005 AND 2006,
FOR THE YEARS ENDED MARCH 31, 2004, 2005 AND 2006, AND FOR THE
PERIOD FROM OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2006
(UNAUDITED):
Balance Sheets.............................................................F-6
Statements of Operations...................................................F-8
Statements of Stockholders' Equity (Deficiency in Assets)...............F-9-12
Statements of Cash Flows..................................................F-13
Notes to Financial Statements..........................................F-14-42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Immtech Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of Immtech
Pharmaceuticals, Inc. (a development stage enterprise) and subsidiaries (the
"Company") as of March 31, 2005 and 2006, and the related consolidated
statements of operations, stockholders' equity (deficiency in assets) and cash
flows for each of the three years in the period ended March 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of March 31,
2005 and 2006, and the results of its operations and its cash flows for each of
the three years in the period ended March 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of March 31, 2006, based
on the criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated June 14, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Milwaukee, Wisconsin
June 14, 2006
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Immtech Pharmaceuticals, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Immtech
Pharmaceuticals, Inc. (a development stage enterprise) and subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
March 31, 2006, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
F-4
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of March 31, 2006, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of March 31, 2006, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended March 31, 2006 of the Company and our
report dated June 14, 2006, expressed an unqualified opinion on those financial
statements.
/s/ DELOITTE & TOUCHE LLP
-------------------------
Milwaukee, Wisconsin
June 14, 2006
F-5
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND 2006
-----------------------------------------------------------------------------------------------------------------------------
ASSETS 2005 2006
---------------------------------------------------------------------------------------- ----------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents $9,471,694 $14,137,867
Restricted funds on deposit 2,044,079 530,186
Other current assets 88,103 193,059
----------------- ----------------
Total current assets 11,603,876 14,861,112
PROPERTY AND EQUIPMENT - Net 3,655,604 3,555,965
OTHER ASSETS 16,594 137,341
----------------- ----------------
TOTAL ASSETS $15,276,074 $18,554,418
----------------- ----------------
See notes to consolidated financial statements.
F-6
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
LIABILITIES AND STOCKHOLDERS' EQUITY 2005 2006
---------------------------------------------------------------------------------------- ----------------- ----------------
CURRENT LIABILITIES:
Accounts payable $2,046,620 $2,328,965
Accrued expenses 173,699 226,749
Deferred revenue 1,314,786 395,779
----------------- ----------------
Total current liabilities 3,535,105 2,951,493
Total liabilities 3,535,105 2,951,493
----------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 4,080,000 and 3,913,000 shares
authorized and unissued as of March 31, 2005 and 2006
Series A convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 320,000 shares authorized, 60,400 and 58,400 shares issued and
outstanding as of March 31, 2005 and 2006, respectively; aggregate
liquidation preference of $1,551,165 and $1,499,785 as of March 31,
2005 and 2006, respectively 1,551,165 1,499,785
Series B convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 240,000 shares authorized, 19,925 and 13,464 shares issued and
outstanding as of March 31, 2005 and 2006; aggregated liquidation preference
of $516,093 and $348,621 as of March 31, 2005 and 2006 516,093 348,621
Series C convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 160,000 shares authorized, 60,452 and 45,536 shares
outstanding as of March 31, 2005, and 2006, respectively; aggregate
liquidation preference of $1,566,976 and $1,179,646 as of March 31, 2005
and 2006, respectively 1,566,976 1,180,345
Series D convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 200,000 shares authorized, 160,280 and 117,200 shares
outstanding as of March 31, 2005 and 2006, respectively; aggregate
liquidation preference of $4,117,657 and $3,010,914 as of March 31, 2005
and 2006, respectively 4,117,657 3,010,914
Series E convertible preferred stock, par value $0.01 per share, stated value
$25 per share, 167,000 shares authorized, 156,600 shares outstanding as of
March 31, 2006, aggregate liquidation preference of $3,975,528 as of
March 31, 2006 3,975,528
Common stock, par value $0.01 per share, 100,000,000 shares authorized, 11,332,366
and 13,758,506 shares issued and outstanding as of March 31, 2005 and 2006,
respectively 113,324 137,585
Additional paid-in capital 76,428,132 94,292,235
Deficit accumulated during the developmental stage (72,552,378) (88,842,088)
----------------- ----------------
Total stockholders' equity 11,740,969 15,602,925
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,276,074 $18,554,418
================= ================
See notes to consolidated financial statements.
F-7
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 2004, 2005 AND 2006 AND THE PERIOD
OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2006 (UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
(Inception)
Years Ended March 31, to March 31,
2004 2005 2006 2006
------------- -------------- --------------- ---------------
REVENUES $2,416,180 $5,930,696 $3,575,042 $20,764,740
EXPENSES:
Research and development 3,292,737 7,309,102 9,680,184 51,353,554
General and administrative 11,989,670 12,190,228 9,631,018 54,882,800
Equity in loss of joint venture 135,002
------------- -------------- --------------- ---------------
Total expenses 15,282,407 19,499,330 19,311,202 106,371,356
------------- -------------- --------------- ---------------
LOSS FROM OPERATIONS (12,866,227) (13,568,634) (15,736,160) (85,606,616)
OTHER INCOME (EXPENSE):
Interest income 20,414 135,470 210,725 944,187
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942)
Cancelled offering costs (584,707)
Gain on extinguishment of debt 1,427,765
------------- -------------- --------------- ---------------
Other income (expense) - net 20,414 135,470 210,725 654,801
------------- -------------- --------------- ---------------
NET LOSS (12,845,813) (13,433,164) (15,525,435) (84,951,815)
CONVERTIBLE PREFERRED STOCK DIVIDENDS AND CONVERTIBLE
PREFERRED STOCK PREMIUM DEEMED DIVIDENDS (3,526,277) (579,816) (764,275) (6,260,172)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(16,372,090) $(14,012,980) $(16,289,710) $(88,842,088)
============= ============== =============== ===============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Net loss $(1.43) $(1.27) $(1.31)
Convertible preferred stock dividends and convertible
preferred stock premium deemed dividends (0.39) (0.05) (0.06)
============= ============== ===============
BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(1.82) $(1.32) $(1.37)
============= ============== ===============
WEIGHTED AVERAGE SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 8,977,817 10,606,917 11,852,630
See notes to consolidated financial statements.
F-8
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS) YEARS
ENDED MARCH 31, 2004, 2005 AND 2006 AND THE PERIOD OCTOBER 15, 1984 (DATE OF
INCEPTION) TO MARCH 31, 2006 (UNAUDITED)
Series A Convertible Series B Convertible Series C Convertible Series D Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
--------------------- -------------------- --------------------- ----------------------
Issued and Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
October 15, 1984 (Inception)
Issuance of common stock to
founders
Balance, March 31, 1985
Issuance of common stock
Net loss
Balance, March 31, 1986
Issuance of common stock
Net loss
Balance, March 31, 1987
Issuance of common stock
Net loss
Balance, March 31, 1988
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1989
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1990
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1991
Issuance of common stock
Provision for compensation
Issuance of stock options in
exchange for cancellation of
indebtedness
Net loss
Balance, March 31, 1992
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1993
Issuance of common stock
Provision for compensation
Net loss
Balance, March 31, 1994
Net loss
Balance, March 31, 1995
Issuance of common stock for
compensation
Net loss
Balance, March 31, 1996
Issuance of common stock
Provision for compensation -
employees
Series E Convertible Common Deficit Accumulated Total
Preferred Stock Stock Accumulated Other Stockholders'
---------------------- Issued Additional During the Comprehensive Equity
Issued and and Paid-in Development Income (Deficiency
Outstanding Amount Outstanding Amount Capital Stage (Loss) in Assets)
----------- ------ ----------- ------ ---------- ------------ ------------ -------------
October 15, 1984 (Inception)
Issuance of common stock
to founders 113,243 $1,132 $24,868 $26,000
---------- ------ --------- -------------
Balance, March 31, 1985 113,243 1,132 24,868 26,000
Issuance of common stock 85,368 854 269,486 270,340
Net loss $(209,569) (209,569)
------------ -------------
Balance, March 31, 1986 198,611 1,986 294,354 (209,569) 86,771
Issuance of common stock 42,901 429 285,987 286,416
Net loss (47,486) (47,486)
------------ -------------
Balance, March 31, 1987 241,512 2,415 580,341 (257,055) 325,701
Issuance of common stock 4,210 42 28,959 29,001
Net loss (294,416) (294,416)
------------ -------------
Balance, March 31, 1988 245,722 2,457 609,300 (551,471) 60,286
Issuance of common stock 62,792 628 569,372 570,000
Provision for compensation 489,975 489,975
Net loss (986,746) (986,746)
------------ -------------
Balance, March 31, 1989 308,514 3,085 1,668,647 (1,538,217) 133,515
Issuance of common stock 16,478 165 171,059 171,224
Provision for compensation 320,980 320,980
Net loss (850,935) (850,935)
------------ -------------
Balance, March 31, 1990 324,992 3,250 2,160,686 (2,389,152) (225,216)
Issuance of common stock 218 2 1,183 1,185
Provision for compensation 6,400 6,400
Net loss (163,693) (163,693)
------------ -------------
Balance, March 31, 1991 325,210 3,252 2,168,269 (2,552,845) (381,324)
Issuance of common stock 18,119 181 85,774 85,955
Provision for compensation 864,496 864,496
Issuance of stock options in
exchange for cancellation
of indebtedness 57,917 57,917
Net loss (1,479,782) 1,479,782)
------------ -------------
Balance, March 31, 1992 343,329 3,433 3,176,456 (4,032,627) (852,738)
Issuance of common stock 195,790 1,958 66,839 68,797
Provision for compensation 191,502 191,502
Net loss (1,220,079) (1,220,079)
------------ -------------
Balance, March 31, 1993 539,119 5,391 3,434,797 (5,252,706) (1,812,518)
Issuance of common stock 107,262 1,073 40,602 41,675
Provision for compensation 43,505 43,505
Net loss (2,246,426) (2,246,426)
------------ -------------
Balance, March 31, 1994 646,381 6,464 3,518,904 (7,499,132) (3,973,764)
Net loss (1,661,677) (1,661,677)
------------ -------------
Balance, March 31, 1995 646,381 6,464 3,518,904 (9,160,809) (5,635,441)
Issuance of common stock
for compensation 16,131 161 7,339 7,500
Net loss (1,005,962) (1,005,962)
------------ -------------
Balance, March 31, 1996 662,512 6,625 3,526,243 (10,166,771) (6,633,903)
Issuance of common stock 12,986 130 5,908 6,038
Provision for
compensation - employees 45,086 45,086
F-9
Series A Convertible Series B Convertible Series C Convertible Series D Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
--------------------- -------------------- --------------------- ---------------------
Issued and Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ------ ----------- ------ ----------- ------ ----------- ------
Provision for compensation -
nonemployees
Issuance of warrants to purchase
common stock
Net loss
Balance, March 31, 1997
Exercise of options
Provision for compensation -
employees
Provision for compensation -
nonemployees
Contributed capital - common
stockholders
Net loss
Balance, March 31, 1998
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation -
nonemployees
Issuance of common stock to
Criticare
Conversion of Criticare debt to
common stock
Conversion of debt to common stock
Conversion of redeemable preferred
stock to common stock
Net loss
Balance, March 31, 1999
Comprehensive loss:
Net loss
Other comprehensive loss:
Unrealized loss on investment
securities available for sale
Comprehensive loss
Issuance of common stock under
initial public offering, less
offering costs of $513,000
Exercise of options and warrants
Provision for compensation -
nonemployees
Issuance of common stock for
compensation - nonemployees
Issuance of common stock for
accrued interest
Balance, March 31, 2000
Comprehensive loss:
Net loss
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale
Reclassification adjustment for loss
included in net loss
Comprehensive loss
Issuance of common stock under
private placement offering
Exercise of options
Provision for compensation -
nonemployees
Contributed capital - common
stockholder
Balance, March 31, 2001
Net loss
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash
offering costs of $153,985 160,100 $4,002,500
Series E Convertible Common Deficit Accumulated Total
Preferred Stock Stock Accumulated Other Stockholders'
--------------------- Issued Additional During the Comprehensive Equity
Issued and and Paid-in Development Income (Deficiency
Outstanding Amount Outstanding Amount Capital Stage (Loss) in Assets)
----------- ------ ----------- ------ ---------- ----------- ------------- ------------
Provision for compensation -
nonemployees 62,343 62,343
Issuance of warrants to purchase
common stock 80,834 80,834
Net loss (1,618,543) (1,618,543)
------------ ------------
Balance, March 31, 1997 675,498 6,755 3,720,414 (11,785,314) (8,058,145)
Exercise of options 68,167 682 28,862 29,544
Provision for compensation -
employees 50,680 50,680
Provision for compensation -
nonemployees 201,696 201,696
Contributed capital - common
stockholders 231,734 231,734
Net loss (1,477,132) (1,477,132)
------------ ------------
Balance, March 31, 1998 743,665 7,437 4,233,386 (13,262,446) (9,021,623)
Issuance of common stock under
private placement offering 575,000 5,750 824,907 830,657
Exercise of options 40,650 406 12,944 13,350
Provision for compensation -
nonemployees 2,426,000 2,426,000
Issuance of common stock to
Criticare 86,207 862 133,621 134,483
Conversion of Criticare debt to
common stock 180,756 1,808 856,485 858,293
Conversion of debt to common stock 424,222 4,242 657,555 661,797
Conversion of redeemable preferred
stock to common stock 1,195,017 11,950 1,852,300 3,713,334 5,577,584
Net loss (1,929,003) (1,929,003)
------------ ------------
Balance, March 31, 1999 3,245,517 32,455 10,997,198 (11,478,115) (448,462)
Comprehensive loss:
Net loss (11,433,926) (11,433,926)
Other comprehensive loss:
Unrealized loss on investment
securities available for sale $(1,178) (1,178)
------------
Comprehensive loss (11,435,104)
Issuance of common stock under
initial public offering, less
offering costs of $513,000 1,150,000 11,500 9,161,110 9,172,610
Exercise of options and warrants 247,420 2,474 424,348 426,822
Provision for compensation -
nonemployees 509,838 509,838
Issuance of common stock for
compensation - nonemployees 611,250 6,113 6,106,387 6,112,500
Issuance of common stock for
accrued interest 28,147 281 281,189 281,470
----------- ------ ---------- ------------
Balance, March 31, 2000 5,282,334 52,823 27,480,070 (22,912,041) (1,178) 4,619,674
------------
Comprehensive loss:
Net loss (9,863,284) (9,863,284)
Other comprehensive income (loss):
Unrealized loss on investment
securities available for sale (1,764) (1,764)
Reclassification adjustment for loss
included in net loss 2,942 2,942
------------
Comprehensive loss (9,862,106)
Issuance of common stock under
private placement offering 584,250 5,843 4,299,806 4,305,649
Exercise of options 88,661 886 41,922 42,808
Provision for compensation -
nonemployees 1,739,294 1,739,294
Contributed capital - common
stockholder 13,825 13,825
---------- ------------
Balance, March 31, 2001 5,955,245 59,552 33,574,917 (32,775,325) 859,144
Net loss (3,323,110) (3,323,110)
Issuance of Series A convertible
preferred stock under private
placement offerings, less cash
offering costs of $153,985 754,550 (908,535) 3,848,515
F-10
Series A Convertible Series B Convertible Series C Convertible Series D Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
----------------------- ----------------------- ---------------------- --------------------
Issued and Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- ---------- ----------- ---------- ----------- ---------- ----------- -------
Issuance of common stock as offering
costs under private placement
offerings
Accrual of preferred stock
dividends 29,400
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2002 160,100 4,031,900
Net loss
Issuance of Series B convertible
preferred stock under private
placement offerings, less cash
offering costs of $58,792 76,725 $1,918,125
Issuance of common stock for
services provided in connection
with private placement offerings
Conversion of convertible preferred
stock to common stock (17,300) (437,396) (20,000) (515,671)
Accrual of preferred stock dividends 226,210 76,227
Payment of preferred stock dividends (152,709) (8,714)
Issuance of common stock for
land-use rights acquisition
Issuance of common stock and
warrants for services
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2003 142,800 3,668,005 56,725 1,469,967
Net loss
Issuance of Series C convertible
preferred stock under private
placement offerings, less
offering costs of $1,685,365
(including cash of $289,000) 125,352 3,133,800
Issuance of Series D convertible
preferred stock under private
placement offerings, less cash
offering costs of $428,919 200,000 5,000,000
Issuance of common stock for
services provided in connection
with private placement offerings
Conversion of convertible preferred
stock to common stock (62,000) (1,566,440) (36,800) (939,231) (53,048) (1,344,792)
Accrual of preferred stock
dividends 147,311 53,533 175,157 56,712
Payment of preferred stock
dividends (173,626) (68,176) (89,979)
Exercise of warrants
Issuance of common stock and
warrants for services -
nonemployees
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2004 80,800 2,075,250 19,925 516,093 72,304 1,874,186 200,000 5,056,712
Net loss
Conversion of convertible preferred
stock to common stock (20,400) (521,960) (11,852) (301,463) (39,720) (1,016,645)
Accrual of preferred stock
dividends 112,758 39,849 130,988 296,220
Payment of preferred stock
dividend (114,883) (39,849) (136,735) (218,630)
Exercise of warrants
Extension of warrants
Series E Convertible Common Deficit Accumulated Total
Preferred Stock Stock Accumulated Other Stockholders'
-------------------- Issued Additional During the Comprehensive Equity
Issued and and Paid-in Development Income (Deficiency
Outstanding Amount Outstanding Amount Capital Stage (Loss) in Assets)
----------- ------- ----------- ------ ---------- ----------- ------------- ------------
Issuance of common stock as offering
costs under private placement
offerings 60,000 600 (600)
Accrual of preferred stock
dividends (29,400)
Exercise of options 51,214 512 18,972 19,484
Provision for compensation -
nonemployees 332,005 332,005
----------
Balance, March 31, 2002 6,066,459 60,664 34,679,844 (37,036,370) 1,736,038
Net loss (4,679,069) (4,679,069)
Issuance of Series B convertible
preferred stock under private
placement offerings, less cash
offering costs of $58,792 90,640 (149,432) 1,859,333
Issuance of common stock for
services provided in connection
with private placement offerings 290,000 2,900 942,200 945,100
Conversion of convertible preferred
stock to common stock 228,448 2,285 950,758 (24)
Accrual of preferred stock dividends (302,437)
Payment of preferred stock dividends 45,529 456 160,657 (310)
Issuance of common stock for
land-use rights acquisition 1,260,000 12,600 2,986,200 2,998,800
Issuance of common stock and
warrants for services 8,333 83 89,042 89,125
Exercise of options 217 2 126 128
Provision for compensation -
nonemployees 243,150 243,150
----------
Balance, March 31, 2003 7,898,986 78,990 40,142,617 (42,167,308) 3,192,271
Net loss (12,845,813) (12,845,813)
Issuance of Series C convertible
preferred stock under private
placement offerings, less
offering costs of $1,685,365
(including cash of $289,000) (565,088) (1,120,277) 1,448,435
Issuance of Series D convertible
preferred stock under private
placement offerings, less cash
offering costs of $428,919 1,544,368 (1,973,287) 4,571,081
Issuance of common stock for
services provided in connection
with private placement offerings 220,000 2,200 1,394,800 1,397,000
Conversion of convertible preferred
stock to common stock 887,817 8,878 3,841,327 (258)
Accrual of preferred stock
dividends (432,713)
Payment of preferred stock
dividends 44,398 443 330,197 (1,141)
Exercise of warrants 559,350 5,594 4,468,572 4,474,166
Issuance of common stock and
warrants for services -
nonemployees 201,667 2,017 7,231,835 7,233,852
Exercise of options 23,068 231 10,361 10,592
Provision for compensation -
nonemployees 267,500 267,500
Balance, March 31, 2004 9,835,286 98,353 58,666,489 (58,539,398) 9,747,685
Net loss (13,433,164) (13,433,164)
Conversion of convertible preferred
stock to common stock 295,813 2,959 1,837,011 (97)
Accrual of preferred stock
dividends (579,816)
Payment of preferred stock
dividend 42,878 429 507,934 (1,735)
Exercise of warrants 235,390 2,354 1,893,482 1,895,836
Extension of warrants 4,841,245 4,841,245
F-11
Series A Convertible Series B Convertible Series C Convertible Series D Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
---------------------- -------------------- ---------------------- -----------------------
Issued and Issued and Issued and Issued and
Outstanding Amount Outstanding Amount Outstanding Amount Outstanding Amount
----------- --------- ----------- ------- ----------- --------- ----------- ----------
Issuance of common stock for
secondary offering, less
offering costs of $337,803
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2005 60,400 1,551,165 19,925 516,093 60,452 1,566,976 160,280 4,117,657
Net loss
Conversion of convertible preferred
stock to common stock (2,000) (51,068) (6,461) (163,249) (14,916) (375,903) (43,080) (1,095,429)
Accrual of preferred stock
dividends 88,784 34,423 96,222 196,707
Payment of preferred stock
dividend (89,096) (38,646) (106,950) (208,021)
Exercise of warrants
Repricing of warrants
Issuance of Series E convertible
preferred stock under private
placement offerings, less cash
offering costs of $53,930
Issuance of common stock for
secondary offering, less
offering costs of $166,554
Issuance of common stock for
services - nonemployees
Exercise of options
Provision for compensation -
nonemployees
Balance, March 31, 2006 58,400 $1,499,785 13,464 $348,621 45,536 1,180,345 117,200 $3,010,914
Series E Convertible Common Deficit Accumulated Total
Preferred Stock Stock Accumulated Other Stockholders'
--------------------- Issued Additional During the Comprehensive Equity
Issued and and Paid-in Development Income (Deficiency
Outstanding Amount Outstanding Amount Capital Stage (Loss) in Assets)
----------- ------- ----------- -------- ----------- ------------ ------------ ------------
Issuance of common stock for
secondary offering, less
offering costs of $337,803 899,999 8,999 8,324,687 8,333,687
Exercise of options 23,000 230 21,870 22,100
Provision for compensation -
nonemployees 335,412 335,412
Balance, March 31, 2005 11,332,366 113,324 76,428,132 (72,552,378) 11,740,969
Net loss (15,525,435) (15,525,435)
Conversion of convertible preferred
stock to common stock (4,000) (101,611) 272,428 2,724 1,784,435 (101)
Accrual of preferred stock
dividends 62,139 (478,275)
Payment of preferred stock
dividend 37,812 378 441,187 (1,148)
Exercise of warrants 60,000 600 429,950 430,550
Repricing of warrants 125,042 125,042
Issuance of Series E convertible
preferred stock under private
placement offerings, less cash
offering costs of $53,930 160,600 4,015,000 232,070 (286,000) 3,961,070
Issuance of common stock for
secondary offering, less
offering costs of $166,554 2,000,000 20,000 14,693,373 14,713,373
Issuance of common stock for
services - nonemployees 2,000 20 25,800 25,820
Exercise of options 53,900 539 79,563 80,102
Provision for compensation -
nonemployees 52,683 52,683
Balance, March 31, 2006 156,600 $3,975,528 13,758,506 137,585 $94,292,235 $(88,842,088) $15,602,925
(concluded)
F-12
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MARCH 31, 2004, 2005 AND 2006
AND THE PERIOD OCTOBER 15, 1984 (DATE OF INCEPTION) TO MARCH 31, 2006
(UNAUDITED)
--------------------------------------------------------------------------------
October 15,
1984
Years Ended March 31 (Inception)
----------------------------------------------- to March 31,
OPERATING ACTIVITIES: 2004 2005 2006 2006
------------ ------------ ------------ ------------
Net loss $(12,845,813) $(13,433,164) $(15,525,435) $(84,951,815)
Adjustments to reconcile net loss to net cash used in
operating activities:
Compensation recorded related to issuance of common stock,
common stock options and warrants 7,501,352 5,176,655 203,545 27,741,527
Depreciation and amortization of property and equipment 115,261 128,706 155,273 1,036,420
Deferred rental obligation (6,366) (14,413)
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942
Amortization of debt discounts and issuance costs 134,503
Gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Other current assets 73,546 (28,124) (104,956) (193,059)
Other assets 4,371 (1,117) (120,747) (137,341)
Accounts payable 428,427 1,076,312 282,345 2,656,500
Accrued expenses 17,561 151,317 53,050 889,762
Deferred revenue (722,978) (516,307) (919,007) 395,779
------------ ------------ ------------ ------------
Net cash used in operating activities (5,434,639) (7,460,135) (15,975,932) (53,715,259)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (417,012) (174,095) (55,634) (1,565,455)
Restricted funds on deposit 585,019 110,849 1,513,893 (530,186)
Advances to Joint Venture (135,002)
Proceeds from maturities of investments 1,800,527
Purchases of investment securities (1,803,469)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 168,007 (63,246) 1,458,259 (2,233,585)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Net advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Net proceeds from issuance of redeemable preferred stock 3,330,000
Net proceeds from issuance of convertible preferred stock and
warrants 7,416,516 3,961,070 17,085,434
Payments for convertible preferred stock dividends and for
fractional shares of common stock resulting from the
conversions of convertible preferred stock (1,399) (1,832) (1,249) (4,814)
Net proceeds from issuance of common stock 4,484,758 10,251,624 15,224,025 46,277,690
Additional capital contributed by stockholders 245,559
------------ ------------ ------------ ------------
Net cash provided by financing activities 11,899,875 10,249,792 19,183,846 70,088,997
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,633,243 2,726,411 4,666,173 14,137,867
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,040 6,745,283 9,471,694
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,745,283 $9,471,694 $14,137,867 $14,137,867
------------ ------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION (Note 11)
See notes to consolidated financial statements.
F-13
IMMTECH PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MARCH 31, 2004, 2005 AND
2006.
1. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech Pharmaceuticals, Inc. (a development
stage enterprise) and its subsidiaries (the "Company") are pharmaceutical
companies working to commercialize oral drugs to treat infectious diseases by
applying their proprietary aromatic cation technology platform to the treatment
of cancer, diabetes and other diseases. The Company has advanced clinical
programs that include new treatments for malaria, Pneumocystis pneumonia ("PCP")
and African sleeping sickness (trypanosomiasis), and drug development programs
for fungal infections and tuberculosis. The Company has worldwide licensing and
exclusive commercialization rights to an aromatic cationic pharmaceutical
technology platform and is developing drugs intended for commercial use based on
that technology.
The Company holds worldwide licenses and rights to license technology,
primarily from a scientific consortium that has granted to the Company exclusive
rights to commercialize products from the licensed technology. The scientific
consortium includes scientists from The University of North Carolina at Chapel
Hill ("UNC-CH"), Georgia State University ("Georgia State"), Duke University
("Duke University") and Auburn University ("Auburn University"). The Company is
a development stage enterprise and, since its inception on October 15, 1984, has
engaged in research and development programs, expanded its network of scientists
and scientific advisors and licensing technology agreements, and work to
commercialize the aromatic cation pharmaceutical technology platform (the
Company acquired its rights to the aromatic cation technology platform in 1997
and promptly thereafter commenced development of its current programs). The
Company uses the expertise and resources of strategic partners and third parties
in a number of areas, including: (i) laboratory research, (ii) animal and human
trials and (iii) manufacture of pharmaceutical drugs.
The Company does not have any products currently available for sale, and
no products are expected to be commercially available for sale until after March
31, 2007, if at all.
Since inception, the Company has incurred accumulated net losses of
approximately $84,952,000. Management expects the Company will continue to incur
significant losses during the next several years as the Company continues
development activities, clinical trials and commercialization efforts. In
addition, the Company has various research and development agreements with third
parties and is dependent upon such parties' abilities to perform under these
agreements. There can be no assurance that the Company's activities will lead to
the development of commercially viable products. The Company's operations to
date have consumed substantial amounts of cash. The negative cash flow from
operations is expected to continue in the foreseeable future. The Company
believes it will require substantial additional funds to commercialize its drug
candidates. The Company's cash requirements may vary
F-14
materially from those now planned when and if the following become known:
results of research and development efforts, results of clinical testing,
responses to grant requests, formation and development of relationships with
strategic partners, changes in the focus and direction of development programs,
competitive and technological advances, requirements in the regulatory process
and other factors. Changes in circumstances in any of the above areas may
require the Company to allocate substantially more funds than are currently
available or than management intends to raise.
Management believes the Company's existing unrestricted cash and cash
equivalents, and the grants received or awarded and awaiting disbursement of,
will be sufficient to meet the Company's planned expenditures through at least
the next twelve months, although there can be no assurance the Company will not
require additional funds. Management may seek to satisfy future funding
requirements through public or private offerings of securities, by collaborative
or other arrangements with pharmaceutical or biotechnology companies or from
other sources or by issuance of debt.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they become due,
complete the development and commercialization of drug candidates and,
ultimately, to generate sufficient revenues for profitable operations.
Management's plans for the forthcoming year, in addition to normal operations,
include continuing financing efforts, obtaining additional research grants and
entering into research and development agreements with other entities.
Principles of Consolidation - The consolidated financial statements
include the accounts of Immtech Pharmaceuticals, Inc. and its wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents. Cash and cash equivalents consist of an amount on deposit at a bank
and an investment in a money market mutual fund, stated at cost, which
approximates fair value.
Restricted Funds on Deposit - Restricted funds on deposit consist of cash
in two accounts on deposit at banks which are restricted for use in accordance
with (i) a clinical research subcontract agreement with UNC-CH and (ii) a
malaria drug development agreement with Medicines for Malaria Venture ("MMV").
Concentration of Credit Risk - The Company maintains its cash in
commercial banks. Balances on deposit are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to specified limits.
Investment - The Company accounts for its investment in NextEra
Therapeutics, Inc. ("NextEra") on the equity method. As of March 31, 2005 and
2006, according to NextEra's disclosure, the Company owned approximately 28% of
the issued and outstanding shares of NextEra common stock. The Company has
recognized an equity loss in NextEra to the extent of the basis of its
investment, and the investment balance is zero as of March 31, 2005 and 2006.
Recognition of any investment income on the equity method by the Company for its
investment
F-15
in NextEra will occur only after NextEra has earnings in excess of previously
unrecognized equity losses. The Company does not provide, and has not provided,
any financial guarantees to NextEra.
Property and Equipment - Property and equipment are recorded at cost and
depreciated and amortized using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to fifty years.
Leasehold improvements are amortized over the lesser of the life of the related
lease or their useful life.
Land-Use Rights - Land-use rights represent an agreement to use land in
the PRC for a period of 50 years which was being amortized over that period on a
straight-line basis prior to the Super Insight transaction described in Note 2
below; the former land use rights were exchanged for land-use rights in two
floors in a building in the Futian Bonded Zone, Shenzhen, PRC.
Long-Lived Assets - The Company periodically evaluates the carrying value
of its property and equipment. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. If the sum of the expected future undiscounted cash
flows is less than the carrying amount of an asset, a loss is recognized for the
asset which is measured by the difference between the fair value and the
carrying value of the asset.
Deferred Rental Obligation - Rental obligations with scheduled rent
increases are recognized on a straight-line basis over the lease term.
Revenue Recognition - Grants to perform research are the Company's primary
source of revenue and are generally granted to support research and development
activities for specific projects or drug candidates. Revenue related to grants
to perform research and development is recognized as earned based on the
performance requirements of the specific grant. Cash payments from research and
development grants received in advance of delivery of services are reported as
deferred revenue until such time as the research and development activities
covered by the grant are performed.
Research and Development Costs - Research and development costs are
expensed as incurred and include costs associated with research performed
pursuant to collaborative agreements. Research and development costs consist of
direct and indirect internal costs related to specific projects as well as fees
paid to other entities that conduct certain research activities on the Company's
behalf.
Income Taxes - The Company accounts for income taxes using an asset and
liability approach. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. In addition, a valuation
allowance is recognized if it is more likely than not that some or all of the
deferred income tax assets will not be realized. A valuation allowance is used
to offset the related net deferred income tax assets due to uncertainties of
realizing the benefits of certain net operating loss and tax credit
carryforwards and other deferred income tax assets.
F-16
Net Income (Loss) Per Share - Net income (loss) per share is calculated in
accordance with Statement of Financial Accounting Standard ("SFAS") No. 128,
"Earnings Per Share." Basic net income (loss) and diluted net income (loss) per
share are computed by dividing net income (loss) attributable to common
stockholders by the weighted average number of common shares outstanding.
Diluted net income per share, when applicable, is computed by dividing net
income attributable to common stockholders by the weighted average number of
common shares outstanding increased by the number of potential dilutive common
shares based on the treasury stock method. Diluted net loss per share was the
same as the basic net loss per share for the years ended March 31, 2004, 2005
and 2006, as none of the Company's outstanding common stock options, warrants
and the conversion features of Series A, B, C, D and E Convertible Preferred
Stock were dilutive.
Stock-Based Compensation - On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement No. 123R, "Share-Based Payment" ("SFAS
123R"), which requires compensation costs related to share-based payment
transactions to be recognized in the financial statements. With limited
exceptions, the amount of the compensation cost is to be measured based on the
grant-date fair value of the equity or liability instruments issued. In
addition, liability awards are to be measured each reporting period.
Compensation cost is to be recognized over the period that an employee provides
service in exchange for the award. SFAS 123R replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Through March 31, 2006 the Company has adhered to the disclosure-only provisions
of SFAS No. 123, and has applied APB Opinion No. 25 and related interpretations
in accounting for its employee stock option plans. The Company has adopted SFAS
123R effective as of April 1, 2006. The effect of adopting the new rules on
reporting net loss is dependent upon the number of options granted in the future
and the fair value of those options.
During the years ended March 31, 2004, 2005 and 2006, the Company issued
277,000, 371,000 and 324,001 stock options, respectively, to certain employees
and directors. If the Company had recognized compensation expense for these
options granted during the years ended March 31, 2004, 2005, and 2006,
consistent with the fair-value method prescribed by SFAS No. 123, net loss and
net loss per share would have been changed to the pro forma amounts indicated
below:
2004 2005 2006
---- ---- ----
Net loss attributable to common stockholders - as reported.. $(16,372,090) $(14,012,980) $(16,289,710)
Add: stock-based compensation expense included in reported
net loss................................................. 0 0 0
Deduct: total employee stock-based compensation expense
determined under fair value method for all awards........ (1,205,881) (3,414,407) (3,575,570)
Net loss attributable to common stockholders - pro forma.... $(17,577,971) $(17,427,387) $(19,865,280)
Basic and diluted net loss per share attributable to common
stockholders - as reported............................... $(1.82) $(1.32) $(1.37)
Basic and diluted net loss per share attributable to common
stockholders - pro forma................................. $(1.96) $(1.64) $(1.68)
F-17
The weighted average assumptions used for grants during the year ended
March 31, 2004 were: (1) expected dividend yield of 0%, (2) risk-free interest
rate of 4.3%, (3) expected volatility of 113%, and (4) expected option life of
10 years. The weighted average assumptions used for grants during the year ended
March 31, 2005 were: (1) expected dividend yield of 0%, (2) risk-free interest
rate of 4.5%, (3) expected volatility of 112%, and (4) expected option life of
10 years. The weighted average assumptions used for grants during the year ended
March 31, 2006 were: (1) expected dividend yield of 0%, (2) risk-free interest
rate of 4.6%, (3) expected volatility of 71%, and (4) expected option life of 10
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
value of its options and may not be representative of the future effects on
reported net income (loss) or the future stock price of the Company. The
weighted average estimated fair value of employee stock options granted during
the years ended March 31, 2004, 2005 and 2006 was $18.23, $10.13 and $8.11,
respectively. For purposes of pro forma disclosure, the estimated fair value of
the options is expensed ratably over the options' vesting period.
Fair Value of Financial Instruments - The Company believes that the
carrying amount of its financial instruments (cash and cash equivalents,
restricted funds on deposit, accounts payable and accrued expenses) approximates
the fair value of such instruments as of March 31, 2005 and 2006 based on the
short-term nature of the instruments.
Segment Reporting - The Company is a development stage pharmaceutical
company that operates as one segment.
Comprehensive Loss - There were no differences between comprehensive loss
and net loss for the years ended March 31, 2004, 2005, and 2006.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
2. EXCHANGE OF LAND-USE RIGHTS
On November 28, 2003, the Company entered into a share purchase agreement
and deed of indemnity (the "Share Purchase Agreement") related to the purchase
of shares of Super Insight Limited ("Super Insight") and an allonge ("Allonge")
to the Share Purchase Agreement as related to the purchase of shares of Super
Insight and Immtech Hong Kong Limited with Mr. Chan Kon Fung ("Mr. Chan"),
Lenton, Super Insight and Immtech Hong Kong Limited.
F-18
Pursuant to the terms of the Share Purchase Agreement and the Allonge, Immtech
purchased: (i) from Mr. Chan 100% of Super Insight and its wholly owned
subsidiary, Immtech Life Science Limited ("Immtech Life Science") and (ii) from
Lenton, 100% of Lenton's interest in Immtech Hong Kong. As payment for the
shares of Super Insight and Immtech Hong Kong, Immtech transferred to Mr. Chan
its 80% interest in Lenton and paid $400,000 in cash.
Immtech Life Science has land-use rights through May 2051 for two floors
of a newly-constructed building located in the Futian Bonded Zone, Shenzhen, in
the PRC.
This transaction resulted in the surrender of the Company's ownership
interest in Lenton and the consolidation of the Company's wholly owned
subsidiary, Super Insight. The primary assets of both Lenton and Super Insight
were land-use rights in the PRC. This transaction has been accounted for as a
like-kind exchange of similar assets. Accordingly, this transaction did not
impact the Company's consolidated statement of operations.
3. RECAPITALIZATION, PRIVATE PLACEMENTS, INITIAL PUBLIC OFFERING AND
SECONDARY PUBLIC OFFERING
On July 24, 1998 (the "Effective Date"), the Company completed a
recapitalization (the "Recapitalization") pursuant to which, among other items:
(i) the Company's debt holders converted approximately $3,151,000 in stockholder
advances, notes payable and related accrued interest and accounts payable into
604,978 shares of common stock and approximately $203,000 in cash (see Note 10);
(ii) the Company's Series A Redeemable Preferred stockholders converted
1,794,550 shares of Series A Redeemable Preferred Stock into 578,954 shares of
common stock (see Note 10) and (iii) the Company's Series B Redeemable Preferred
stockholders converted 1,600,000 shares of Series B Redeemable Preferred Stock
into 616,063 shares of common stock (see Note 10).
Contemporaneously with the completion of the Recapitalization, the Company
issued and sold 575,000 shares of common stock at $1.74 per share, or $1,000,000
in the aggregate, to certain accredited investors pursuant to private
placements. The placement agent, New China Hong Kong Securities Limited
("NCHK"), received $50,000 and warrants to purchase 75,000 shares of the
Company's common stock at $0.10 per share for services and expense reimbursed.
RADE Management Corporation ("RADE") received warrants to purchase 225,000
shares of the Company's common stock at $0.10 per share, which was subsequently
amended on April 22, 1999 to increase the exercise price from $0.10 per share to
$6.47 per share, for RADE's services in the Recapitalization. RADE subleases an
office facility to the Company for which the Company pays rent directly to
RADE's landlord on RADE's behalf (see Note 9). During the years ended March 31,
2004, 2005, and 2006, the Company paid approximately $121,000, $124,000 and
$120,000 respectively, for the use of the office facility.
On April 26, 1999, the Company issued 1,150,000 shares of common stock in
an initial public stock offering resulting in net proceeds of approximately
$9,173,000. Costs incurred of approximately $513,000 and warrants to purchase
100,000 shares of common stock issued to the underwriters for their services in
the initial public offering were netted from the proceeds of the offering (see
Note 7).
F-19
On December 8, 2000, the Company completed a private placement offering
which raised approximately $4,306,000 of additional equity capital through the
issuance of 584,250 shares of common stock.
In February 2002, the Company completed private placement offerings which
raised approximately $3,849,000 of additional equity capital (net of
approximately $154,000 of cash offering costs) through the issuance of 160,100
shares of Series A Convertible Preferred Stock, and five-year warrants to
purchase 400,250 shares of the Company's common stock at an exercise price of
$6.00 per share (see Note 7).
In September and October 2002, the Company completed private placement
offerings which raised approximately $1,859,000 of additional equity capital
(net of approximately $59,000 of cash offering costs) through the issuance of
76,725 shares of Series B Convertible Preferred Stock and five-year warrants to
purchase 191,812 shares of the Company's common stock at an exercise price of
$6.125 per share (see Note 7).
In June 2003, the Company completed private placement offerings which
raised approximately $2,845,000 of additional equity capital (net of
approximately $288,000 of cash offering costs) through the issuance of 125,352
shares of Series C Convertible Preferred Stock. Total cash and non-cash offering
costs with respect to the issuance of the Series C Convertible Preferred Stock
was approximately $1,685,000 (see Note 7).
In January 2004, the Company completed private placement offerings which
raised approximately $4,571,000 of additional equity capital (net of
approximately $429,000 of cash offering costs) through the issuance of 200,000
shares of Series D Convertible Preferred Stock and warrants to purchase 200,000
shares of the Company's common stock at an exercise price of $16.00 per share.
The warrants expire five years from the date of grant (see Note 7).
In July 2004, the Company completed a secondary public offering of its
common stock which raised approximately $8,334,000 of additional equity capital
(net of approximately $338,000 of cash offering costs) through the issuance of
899,999 shares of the Company's common stock which were sold to the public at
$10.25 per share (see Note 7).
In December 2005, the Company completed private placement offerings which
raised approximately $3,340,000 of additional equity capital (net of
approximately $54,000 of cash offering costs) through the issuance of 133,600
shares of Series E Convertible Preferred Stock and warrants to purchase 83,500
shares of the Company's common stock at an exercise price of $10.00 per share.
The warrants expire three years from the date of grant (see Note 7).
In February 2006, the Company completed a secondary public offering of its
common stock which raised approximately $14,880,000 of additional equity (net of
approximately $167,000 of cash offering costs) through the issuance of 2,000,000
shares of the Company's common stock which were sold to the public at $7.44 per
share (see Note 7).
In March 2006, the Company completed private placement offerings which
raised $675,000 of additional equity capital (option agreement attached to the
December 2005 offering) through the issuance of 27,000 shares of Series E
Convertible Preferred Stock (see Note 7).
F-20
4. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and related
diseases. Pursuant to a research and funding agreement with NextEra, Franklin
provided $1,350,000 to NextEra to fund the scale-up of manufacturing for and
initiation of certain clinical trials of NextEra's drug candidates and the
Company contributed its rmCRP technology and use of laboratory facilities.
During the year ended March 31, 2000, the Company advanced $135,000 to NextEra
to fund its operations. The Company's advance to NextEra was expensed during the
year ended March 31, 2000. The Company did not advance any funds to NextEra
during the years ended March 31, 2004, 2005 and 2006. The Company does not
provide, and has not provided, any financial guarantees to NextEra.
As of March 31, 2005 and 2006, the Company owned, as disclosed by NextEra,
approximately 28% of the issued and outstanding shares of NextEra common stock.
The Company has recognized an equity loss in NextEra to the extent of the basis
of its investment. Future recognition of any investment income on the equity
method by the Company for its investment in NextEra will occur only after
NextEra has earnings in excess of previously unrecognized equity losses. As of
March 31, 2005 and 2006, the Company's net investment in NextEra is zero.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 2005 and
2006:
2005 2006
---------- ----------
Research and laboratory equipment........... $ 497,328 $ 497,328
Furniture and office equipment.............. 302,251 357,885
Leasehold improvements...................... 3,601,353 3,601,353
---------- ----------
Property and equipment - at cost............ 4,400,932 4,456,566
Less accumulated depreciation and
amortization.............................. 745,328 900,601
---------- ----------
Property and equipment - net................ $3,655,604 $3,555,965
========== ==========
6. INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach which generally requires the recognition of deferred income tax assets
and liabilities based on the expected future income tax consequences of events
that have previously been recognized in the Company's financial statements or
tax returns. In addition, a valuation allowance is recognized if it is more
likely than not that some or all of the deferred income tax assets will not be
realized. A valuation allowance is used to offset the related net deferred
income tax assets due to uncertainties of realizing the benefits of certain net
operating loss and tax credit carryforwards and other deferred income tax
assets.
F-21
The Company has no significant deferred income tax liabilities.
Significant components of the Company's deferred income tax assets are as
follows:
March 31,
--------------------------
2005 2006
------------ ------------
Deferred income tax assets:
Federal net operating loss carryforwards......... $ 20,548,000 $ 25,947,000
State net operating loss carryforwards........... 2,772,000 3,542,000
Federal income tax credit carryforwards.......... 1,060,000 1,511,000
Deferred revenue................................. 510,000 134,000
------------ ------------
Total deferred income tax assets.............. 24,890,000 31,134,000
------------ ------------
Valuation allowance................................ (24,890,000) (31,134,000)
------------ ------------
Net deferred income taxes recognized in the
accompanying balance sheets...................... $ 0 $ 0
============ ============
As of March 31, 2006, the Company had federal net operating loss
carryforwards of approximately $76,314,000 which expire from 2007 through 2026.
The Company also has approximately $73,800,000 of state net operating loss
carryforwards as of March 31, 2006, which expire from 2009 through 2026,
available to offset future taxable income for state (primarily Illinois) income
tax purposes. Because of "change of ownership" provisions of the Tax Reform Act
of 1986, approximately $765,000 of the Company's net operating loss
carryforwards for federal income tax purposes are subject to an annual
limitation regarding utilization against taxable income in future periods. As of
March 31, 2006, the Company had federal income tax credit carryforwards of
approximately $1,511,000 which expire from 2008 through 2026.
A reconciliation of the provision for income taxes (benefit) at the
federal statutory income tax rate to the effective income tax rate follows:
Years Ended March 31,
-----------------------------
2004 2005 2006
Federal statutory income tax rate...... (34.0)% (34.0)% (34.0)%
State income taxes..................... (4.8) (4.8) (4.8)
Non-deductible compensation and expenses 0.0 0.0 0.0
Benefit of federal and state net
operating loss and tax credit
carryforwards and other deferred
income tax assets not recognized..... 38.8 38.8 38.8
---------- --------- ----------
Effective income tax rate.............. 0.0% 0.0% 0.0%
---------- --------- ----------
7. STOCKHOLDERS' EQUITY
On January 7, 2004, the stockholders of the Company approved an increase
in the number of authorized common stock from 30 million to 100 million shares.
On June 14, 2004, the Company filed with the Secretary of State of the State of
Delaware an Amended and Restated Certificate of Incorporation implementing,
among other things, the approved authorized 70 million share common stock
increase from 30 million to 100 million shares of common stock.
Series A Convertible Preferred Stock - On February 14, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State of
Delaware designating 320,000 shares of the Company's 5,000,000 authorized shares
of preferred stock as Series A Convertible Preferred Stock, $0.01 par value,
with a stated value of $25.00 per share. Dividends accrue at a rate of 6.0% per
annum on the $25.00 stated value per share and are payable semi-
F-22
annually on April 15, and October 15 of each year while the shares are
outstanding. The Company has the option to pay the dividend either in cash or in
equivalent shares of common stock, as defined. Included in the carrying value of
the Series A Convertible Preferred Stock in the accompanying condensed
consolidated balance sheets are $39,785 and $41,166 of accrued preferred stock
dividends at March 31, 2006 and 2005, respectively. Each share of Series A
Convertible Preferred Stock may be converted by the holder at any time into
shares of common stock at a conversion rate determined by dividing the $25.00
stated value, plus any accrued and unpaid dividends (the "Liquidation Price"),
by a $4.42 conversion price (the "Conversion Price A"), subject to certain
adjustments, as defined in the Series A Certificate of Designation. During the
year ended March 31, 2001, the Company issued 160,100 shares of Series A
Convertible Preferred Stock for net proceeds of $3,849,000 (less cash offering
costs of approximately $184,000). On October 15, 2005, the Company issued 4,213
shares of common stock and paid $206 in lieu of fractional common shares as
dividends on the preferred shares and on April 15, 2005, the Company issued
3,469 shares of common stock and paid $117 in lieu of fractional common shares
as dividends on the preferred shares. On October 15, 2004, the Company issued
6,026 shares of common stock and paid $136 in lieu of fractional common shares
as dividends on the preferred shares and on April 15, 2004, the Company issued
2,961 shares of common stock and paid $352 in lieu of fractional common shares
as dividends on the preferred shares. On October 15, 2003, the Company issued
4,010 shares of common stock and paid $296 in lieu of fractional common shares
as dividends on the preferred shares and on April 15, 2003, the Company issued
23,316 shares of common stock and paid $96 in lieu of fractional common shares
as dividends on the preferred shares. During the years ended March 31, 2006,
2005 and 2004 certain preferred stockholders converted 2,000, 20,400, and 62,000
shares of Series A Convertible Preferred Stock, including accrued dividends, for
11,409, 116,364 and 353,667 shares of common stock, respectively.
The Company may at any time require that any or all outstanding shares of
Series A Convertible Preferred Stock be converted into shares of the Company's
common stock, provided that the shares of common stock into which the Series A
Convertible Preferred Stock are convertible are registered pursuant to an
effective registration statement, as defined. The number of shares of common
stock to be received by the holders of the Series A Convertible Preferred Stock
upon a mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price A, provided that the closing bid price
for the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price A.
The Conversion Price is subject to certain adjustments, as defined in the Series
A Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series A Convertible Preferred Stock by payment of the
Liquidation Price to the holder of such shares, provided that the holder does
not convert the Series A Convertible Preferred Stock into shares of common stock
during the 30 day period. The Series A Convertible Preferred Stock has a
preference in liquidation equal to $25.00 per share, plus any accrued and unpaid
dividends. Each issued and outstanding share of Series A Convertible Preferred
Stock shall be entitled to 5.6561 votes (subject to adjustment) with respect to
any and all matters presented to the Company's stockholders for their action or
consideration. Except as
F-23
provided by law or by the provisions establishing any other series of preferred
stock, Series A Convertible Preferred stockholders and holders of any other
outstanding preferred stock shall vote together with the holders of common stock
as a single class.
Series B Convertible Preferred Stock - On September 25, 2002, the Company
filed a Certificate of Designation with the Secretary of State of the State of
Delaware designating 240,000 shares of the Company's 5,000,000 authorized shares
of preferred stock as Series B Convertible Preferred Stock, $0.01 par value,
with a stated value of $25.00 per share. Dividends accrue at a rate of 8.0% per
annum on the $25.00 stated value per share and are payable semi-annually on
April 15 and October 15 of each year while the shares are outstanding. The
Company has the option to pay the dividend either in cash or in equivalent
shares of common stock, as defined. Included in the carrying value of the Series
B Convertible Preferred Stock in the accompanying condensed consolidated balance
sheets are $12,021 and $17,968 of accrued preferred stock dividends as of March
31, 2006 and 2005, respectively. Each share of Series B Convertible Preferred
Stock may be converted by the holder at any time into shares of common stock at
a conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.00 conversion
price (the "Conversion Price B"), subject to certain adjustments, as defined in
the Series B Certificate of Designation. During the year ended March 31, 2003,
the Company issued 76,725 shares of Series B Convertible Preferred Stock for net
proceeds of $1,859,000 (net of cash offering costs of approximately $59,000). On
October 15, 2005, the Company issued 1,805 shares of common stock and paid $48
in lieu of fractional common shares as dividends on the preferred shares and on
April 15, 2005, the Company issued 1,526 shares of common stock and paid $49 in
lieu of fractional common shares as dividends on the preferred shares. On
October 15, 2004, the Company issued 2,213 shares of common stock and paid $34
in lieu of fractional common shares as dividends on the preferred shares and on
April 15, 2004, the Company issued 974 shares of common stock and paid $17 in
lieu of fractional common shares as dividends on the preferred shares. On
October 15, 2003, the Company issued 1,130 shares of common stock and paid $139
in lieu of fractional common shares as dividends on the preferred shares and on
April 15, 2003, the Company issued 11,049 shares of common stock and paid $17 in
lieu of fractional common shares as dividends on the preferred shares. During
the years ended March 31, 2006, 2005, and 2004 certain preferred stockholders
converted 6,461, 0, and 36,800 shares of Series B Convertible Preferred stock,
including accrued dividends, for 40,569, 0, and 232,851 shares of common stock,
respectively.
The Company may at any time require that any or all outstanding shares of
Series B Convertible Preferred Stock be converted into shares of the Company's
common stock, provided that the shares of common stock into which the Series B
Convertible Preferred Stock are convertible are registered pursuant to an
effective registration statement, as defined. The number of shares of common
stock to be received by the holders of the Series B Convertible Preferred Stock
upon a mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price B, provided that the closing bid price
for the Company's common stock exceeds $9.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price B.
The Conversion Price B is subject to certain adjustments, as defined in the
Series B Certificate of Designation.
F-24
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series B Convertible Preferred Stock by payment of the
Liquidation Price to the holder of such shares, provided that the holder does
not convert the Series B Convertible Preferred Stock into shares of common stock
during the 30 day period. The Series B Convertible Preferred Stock has a
preference in liquidation equal to $25.00 per share, plus any accrued and unpaid
dividends. Each issued and outstanding share of Series B Convertible Preferred
Stock shall be entitled to 6.25 votes (subject to adjustment) with respect to
any and all matters presented to the Company's stockholders for their action or
consideration. Except as provided by law or by the provisions establishing any
other series of preferred stock, Series B Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
Series C Convertible Preferred Stock - On June 6, 2003, the Company filed
a Certificate of Designation with the Secretary of State of the State of
Delaware designating 160,000 shares of the Company's 5,000,000 authorized shares
of preferred stock as Series C Convertible Preferred Stock, $0.01 par value,
with a stated value of $25.00 per share. Dividends accrue at a rate of 8.0% per
annum on the $25.00 stated value per share and are payable semi-annually on
April 15 and October 15 of each year while the shares are outstanding. The
Company has the option to pay the dividend either in cash or in equivalent
shares of common stock, as defined. Included in the carrying value of the Series
C Convertible Preferred Stock in the accompanying condensed consolidated balance
sheets are $41,945 and $55,676 of accrued preferred stock dividends as of March
31, 2006 and 2005, respectively. Each share of Series C Convertible Preferred
Stock may be converted by the holder at any time into shares of common stock at
a conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $4.42 conversion
price (the "Conversion Price C"), subject to certain adjustments, as defined in
the Series C Certificate of Designation. During the year ended March 31, 2004,
the Company issued 125,352 shares of Series C Convertible Preferred Stock for
net proceeds of $2,845,000 (net of approximately $289,000 of cash offering
costs). Total cash and non-cash offering costs with respect to the issuance of
the Series C Convertible Preferred Stock were approximately $1,685,000. The
preferred shares issued have an embedded beneficial conversion feature based on
the market value on the day of issuance and the price of conversion. The
beneficial conversion was equal to approximately $1,120,000 and was accounted
for as a deemed dividend during the year ended March 31, 2004. On October 15,
2005, the Company issued 4,483 shares of common stock and paid $148 in lieu of
fractional common shares as dividends on the preferred shares and on April 15,
2005, the Company issued 4,625 shares of common stock and paid $212 in lieu of
fractional common shares as dividends on the preferred shares. On October 15,
2004, the Company issued 7,161 shares of common stock and paid $86 in lieu of
fractional common shares as dividends on the preferred shares and on April 15,
2004, the Company issued 3,534 shares of common stock and paid $397 in lieu of
fractional common shares as dividends on the preferred shares. During the years
ended March 31, 2006, 2005, and 2004 certain preferred stockholders converted
14,916, 11,852 and 53,048 shares of Series C Convertible Preferred Stock,
including accrued dividends, for 84,708, 67,454, and 301,299 shares of common
stock, respectively.
The Company may at any time require that any or all outstanding shares of
Series C Convertible Preferred Stock be converted into shares of the Company's
common stock, provided that the shares of common stock into which the Series C
Convertible Preferred Stock are
F-25
convertible are registered pursuant to an effective registration statement, as
defined. The number of shares of common stock to be received by the holders of
the Series C Convertible Preferred Stock upon a mandatory conversion by the
Company is determined by (i) dividing the Liquidation Price by the Conversion
Price C provided that the closing bid price for the Company's common stock
exceeds $9.00 for 20 consecutive trading days within 180 days prior to notice of
conversion, as defined, or (ii) if the requirements of (i) are not met, the
number of shares of common stock is determined by dividing 110% of the
Liquidation Price by the Conversion Price C. The Conversion Price C is subject
to certain adjustments, as defined in the Series C Certificate of Designation.
The Company may at any time, upon 30 days' notice, redeem any or all
outstanding shares of the Series C Convertible Preferred Stock by payment of the
Liquidation Price to the holder of such shares, provided that the holder does
not convert the Series C Convertible Preferred Stock into shares of common stock
during the 30 day period. The Series C Convertible Preferred Stock has a
preference in liquidation equal to $25.00 per share, plus any accrued and unpaid
dividends. Each issued and outstanding share of Series C Convertible Preferred
Stock shall be entitled to 5.6561 votes (subject to adjustment) with respect to
any and all matters presented to the Company's stockholders for their action or
consideration. Except as provided by law or by the provisions establishing any
other series of preferred stock, Series C Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
Series D Convertible Preferred Stock - On January 15, 2004, the Company
filed a Certificate of Designation with the Secretary of State of the State of
Delaware designating 200,000 shares of the Company's 5,000,000 authorized shares
of preferred stock as Series D Convertible Preferred Stock, $0.01 par value,
with a stated value of $25.00 per share. Dividends accrue at a rate of 6.0% per
annum on the $25.00 stated value per share and are payable semi-annually on
April 15 and October 15 of each year while the shares are outstanding. The
Company has the option to pay the dividend either in cash or in equivalent
shares of common stock, as defined. Included in the carrying value of the Series
D Convertible Preferred Stock in the accompanying condensed consolidated balance
sheets are $80,914 and $110,657 of accrued preferred stock dividends as of March
31, 2006 and 2005, respectively. Each share of Series D Convertible Preferred
Stock may be converted by the holder at any time into shares of common stock at
a conversion rate determined by dividing the $25.00 stated value, plus any
accrued and unpaid dividends (the "Liquidation Price"), by a $9.00 conversion
price (the "Conversion Price D"), subject to certain adjustments, as defined in
the Series D Certificate of Designation. During the year ended March 31, 2004,
the Company issued 200,000 shares of Series D Convertible Preferred Stock for
net proceeds of approximately $4,571,000 (net of approximately $429,000 of cash
offering costs). On October 15, 2005, the Company issued 8,472 shares of common
stock and paid $235 in lieu of fractional common shares as dividends on the
preferred shares and on April 15, 2005, the Company issued 9,219 shares of
common stock and paid $135 in lieu of fractional common shares as dividends on
the preferred shares. On October 15, 2004, the Company issued 16,669 shares of
common stock and paid $173 in lieu of fractional common shares as dividends on
the preferred shares and on April 15, 2004, the Company issued 3,340 shares of
common stock and paid $447 in lieu of fractional common shares as dividends on
the preferred shares. During the years ended March 31, 2006, and 2005 certain
preferred stockholders converted 43,080 and 39,720 shares of Series D
Convertible Preferred Stock,
F-26
including accrued dividends, for 114,581 and 111,995 shares of common stock,
respectively. During the year ended March 31, 2004 there were no conversions.
The Company may at any time require that any or all outstanding shares of
Series D Convertible Preferred Stock be converted into shares of common stock,
provided that the shares of common stock into which the Series D Convertible
Preferred Stock are convertible are registered pursuant to an effective
registration statement, as defined. The number of shares of common stock to be
received by the holders of the Series D Convertible Preferred Stock upon a
mandatory conversion by the Company is determined by (i) dividing the
Liquidation Price by the Conversion Price D provided that the closing bid price
for the Company's common stock exceeds $18.00 for 20 consecutive trading days
within 180 days prior to notice of conversion, as defined, or (ii) if the
requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price D.
The Conversion Price D is subject to certain adjustments, as defined in the
Certificate of Designation.
The Series D Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends. Each issued
and outstanding share of Series D Convertible Preferred Stock shall be entitled
to 2.7778 votes (subject to adjustment) with respect to any and all matters
presented to the Company's stockholders for their action or consideration.
Except as provided by law or by the provisions establishing any other series of
preferred stock, Series D Convertible Preferred stockholders and holders of any
other outstanding preferred stock shall vote together with the holders of common
stock as a single class.
In connection with the Series D Preferred Stock offering, the Company
entered into a Finder's Agreement with Ace Noble Holdings Limited (the "Finder")
on January 14, 2004 to identify and introduce qualified leads, increase
financial market awareness in the Company and to assist the Company in raising
funds. As consideration for services to be performed under this agreement, the
Company was obligated to pay a cash fee of 8% of funds invested in Immtech's
Series D Preferred Stock by Non-United States persons prior to January 23, 2004
by investors introduced by the Finder and expenses not to exceed $36,000. During
the year ended March 31, 2004, fees of $350,000 and expenses of $36,000 were
paid with respect to this agreement, which are included as part of the $429,000
of cash offering costs.
Series E Convertible Preferred Stock - On December 13, 2005, the Company
completed a private placement of 133,600 shares its Series E Convertible
Preferred Stock, $0.01 par value ("Series E Stock") at $25.00 per share, which
resulted in gross proceeds to the Company of approximately, $3,340,000, or
$3,286,000 of additional equity capital (net of approximately $54,000 of cash
offering costs). Each purchaser of the Series E Stock was granted (i) an option
to purchase, at $25.00 per share, up to an additional 25% of the number of
shares of Series E Stock purchased on December 13, 2005 (the option period
terminated on March 10, 2006) and (ii) a warrant to purchase one share of common
stock for each $40 of Series E Stock purchased on December 13, 2005. The
Warrants are exercisable during the three-year period commencing on December 13,
2005, at an exercise price of $10.00, subject to adjustment for stock splits,
dividends and similar events. On March 10, 2006, the Company completed a private
placement of 27,000 shares of its Series E Stock at $25.00 per share, which
resulted in gross proceeds to the Company of approximately $675,000 of
additional equity capital as a result of Series E holders exercising their
options. During the year ended March 31, 2006 certain preferred stockholders
F-27
converted 4,000 shares of Series E Convertible Preferred Stock, including
accrued dividends, for 14,418 shares of common stock.
On December 13, 2005, the Company filed a Certificate of Designation with
the Secretary of State of the State of Delaware designating 167,000 shares of
the Company's 5,000,000 authorized shares of preferred stock as Series E
Convertible Preferred Stock, $0.01 par value, with a stated value of $25.00 per
share. Dividends accrue at a rate of 6.0% per annum on the $25.00 stated value
per share and are payable semi-annually on April 15 and October 15 of each year
while the shares are outstanding. The Company has the option to pay the dividend
either in cash or in equivalent shares of common stock, as defined. Included in
the carrying value of the Series E Convertible Preferred Stock in the
accompanying condensed consolidated balance sheets are $60,528 of accrued
preferred stock dividends as of March 31, 2006. Each share of Series E
Convertible Preferred Stock may be converted by the holder at any time into
shares of common stock at a conversion rate determined by dividing the $25.00
stated value, plus any accrued and unpaid dividends (the "Liquidation Price"),
by a $7.04 conversion price (the "Conversion Price E"), subject to certain
adjustments, as defined in the Series E Certificate of Designation.
The Company may at any time after December 1, 2006, require that any or
all outstanding shares of Series E Convertible Preferred Stock be converted into
shares of our common stock, provided that the shares of common stock into which
the Series E Convertible Preferred Stock are convertible are registered pursuant
to an effective registration statement, as defined. The number of shares of
common stock to be received by the holders of the Series E Convertible Preferred
Stock upon a mandatory conversion by us is determined by (i) dividing the
Liquidation Price by the Conversion Price E provided that the closing bid price
for the Company's common stock exceeds $10.56 for 20 out of 30 consecutive
trading days within 180 days prior to notice of conversion, as defined, or (ii)
if the requirements of (i) are not met, the number of shares of common stock is
determined by dividing 110% of the Liquidation Price by the Conversion Price E.
The Conversion Price E is subject to certain adjustments, as defined in the
Certificate of Designation.
The Series E Convertible Preferred Stock has a preference in liquidation
equal to $25.00 per share, plus any accrued and unpaid dividends, over the
common stock and is parri passu with all other outstanding series of preferred
stock. Each issued and outstanding share of Series E Convertible Preferred Stock
is entitled to 3.5511 votes (subject to adjustment) with respect to any and all
matters presented to the Company's stockholders for their action or
consideration. Except as provided by law or by the provisions establishing any
other series of preferred stock, Series E Convertible Preferred stockholders and
holders of any other outstanding preferred stock shall vote together with the
holders of common stock as a single class.
The Company will, on December 13, 2008, at the Company's election, (i)
redeem the Series E Convertible Preferred Stock plus any accrued and unpaid
interest for cash, (ii) convert the Series E Convertible Preferred Stock and any
accrued and unpaid interest into common stock, or (iii) redeem and convert the
Series E Convertible Preferred Stock in any combination of (i) or (ii).
F-28
Common Stock - On July 31, 2002, the Company entered into a one-year
agreement with The Gabriele Group, L.L.C. ("Gabriele") for assistance to be
provided by Gabriele to the Company with respect to management consulting,
strategic planning, public relations and promotions. As compensation for these
services, the Company granted Gabriele 40,000 shares of the Company's common
stock and the Company recognized approximately $187,600 as a general and
administrative expense during the year ended March 31, 2003, based on the fair
value of the shares on the date issued. The Company also granted Gabriele
warrants to purchase 30,000 shares of the Company's common stock at $6.00 per
share. These warrants vest if the price of the Company's common stock reaches
certain milestones. During the year ended March 31, 2004, the Company recognized
general and administrative expenses of approximately $247,000 because the
prescribed milestones had been reached with respect to 20,000 of the warrants to
purchase the Company's stock. The remaining 10,000 warrants may vest in the
future if the Company's common stock reaches certain milestones. This expense
was recorded based on the estimated fair value of the warrants using the
Black-Scholes option valuation model.
On March 21, 2003, the Company entered into an Investor Relations
Agreement with Fulcrum Holdings of Australia, Inc. ("Fulcrum") for financial
consulting services and public relations management to be provided over a
12-month period. As consideration for services to be performed under the
agreement, the Company issued to Fulcrum, ratably over the term in monthly
installments, 100,000 shares of common stock and warrants to purchase 350,000
shares of common stock at prices ranging from $6.00 to $15.00 per share. During
the year ended March 31, 2004, the common shares and warrants were issued, and
the related expense was recognized, on a pro-rata basis over the contract
period. During the years ended March 31, 2003 and 2004, 8,333 and 91,667 common
shares were issued and general and administrative expenses of $37,290 and
$1,031,756, respectively, were recorded based on the market value of the common
shares on the date of issuance. Also during the years ended March 31, 2003 and
2004, warrants to purchase 29,167 and 320,833 shares of common stock were issued
and general and administrative expenses of $51,835 and $1,748,411, respectively,
were recorded based on the estimated fair value of the warrants using the
Black-Scholes option valuation model.
On March 21, 2003, the Company entered into a Finder's Agreement with
Wyndham Associates Limited ("Wyndham") to identify potential strategic partners
and assist in equity financing. As consideration for services to be performed
under the agreement, the Company was obligated to issue 220,000 shares of common
stock. The agreement further provided that Wyndham would receive a cash fee for
any additional equity investments by investors introduced by Wyndham. During the
year ended March 31, 2004, 220,000 common shares were issued and non-cash
offering costs of $1,397,000 were recorded based on the market value of the
Company's common stock on the date issued in connection with the issuance of the
Series C Convertible Preferred Stock.
On July 25, 2003, the Company entered into a consulting agreement with
Fulcrum to identify and negotiate with stock exchanges to list the Company's
common stock and to assist the Company to prepare applications to list the
common stock on a stock exchange. On August 11, 2003, the Company's common stock
was listed on the American Stock Exchange. Pursuant to the agreements, the
Company issued 100,000 shares of its common stock to Fulcrum which resulted in
the recognition of general and administrative expenses of $1,400,000 during
F-29
the year ended March 31, 2004, based on the market value of the Company's common
stock on the date issued.
In September 2003, the Company entered into a second Finder's Agreement
with Wyndham to identify potential strategic partners and assist the Company in
private placements of debt or equity securities with proceeds to the Company of
not less than $20 million through December 2003. The Company advanced to Wyndham
a refundable retainer fee of $160,000 against a cash fee for Wyndham's services
equal to 8.0% of funds received by the Company from investors introduced by
Wyndham. The private placements contemplated in September 2003 were not
completed by December 2003 or at all. The Company requested, but Wyndham did not
return, the retainer fee. The Company has written off the retainer fee as a
charge to general and administrative expenses during the year ended March 31,
2004.
On July 16, 2003, the Company entered into a consulting agreement with Mr.
David Tat-Koon Shu for services to assist the Company with the formation of a
subsidiary and to gain regulatory approvals to enter into clinical trials in the
PRC. As compensation for his services, Mr. Shu was granted 10,000 shares of the
Company's common stock and a general and administrative expense of $62,900 was
recorded during the year ended March 31, 2004 based on the market value of the
common stock on the date issued.
On July 30, 2004, the Company completed a secondary public offering of its
common stock wherein the Company sold 899,999 shares of common stock resulting
in net proceeds to the Company of approximately $8,334,000. The shares were sold
to the public at $10.25 per share. Jeffries & Company, Inc. acted as the sole
book-running manager and underwriter of this offering.
In February 2006, the Company completed a secondary public offering of its
common stock which raised approximately $14,880,000 of additional equity (net of
approximately $167,000 of cash offering costs) through the issuance of 2,000,000
shares of the Company's common stock which were sold to the public at $7.44 per
share. Ferris, Baker Watts, Incorporated acted as the sole book-running manager
and underwriter of this offering.
Common Stock Options - At the stockholders' meeting held November 12,
2004, the stockholders approved the second amendment to the 2000 Stock Incentive
Plan which increased the number of shares of common stock reserved for issuance
from 1,100,000 shares to 2,200,000 shares. Options granted under the 2000 Stock
Incentive Plan that expire are available to be reissued. During the year ended
March 31, 2006, 76,834 options previously granted under the 2000 Stock Incentive
Plan expired and were available to be reissued.
The Company has granted options to purchase common stock to individuals
who have contributed to the Company in various capacities. The options contain
various provisions regarding vesting periods and expiration dates. The options
generally vest over periods ranging from 0 to 4 years and expire after five or
ten years. As of March 31, 2006, there were a total of 762,083 shares available
for grant.
Compensatory Options Granted - During the year ended March 31, 2004, the
Company issued options to purchase 22,000 shares of common stock to
non-employees and recognized
F-30
expense of approximately $267,000 related to such options and certain other
options issued in prior years which vest over a four year service period. During
the year ended March 31, 2005, the Company issued options to purchase 20,000
shares of common stock to non-employees and recognized expense of approximately
$335,000 related to such options and certain other options issued in prior years
which vest over a four-year service period. During the year ended March 31,
2006, the Company issued options to purchase 40,000 shares of common stock to
non-employees and recognized expense of approximately $53,000 related to such
options and certain other options issued in prior years which vest over a two or
four-year service period. The expense was determined based on the estimated fair
value of the options using the Black-Scholes option valuation model and
assumptions regarding volatility of the Company's common stock, risk-free
interest rates, and life of the option of the Company's common stock all at the
date such options were issued.
The activity during the years ended March 31, 2004, 2005 and 2006 for the
Company's stock options is summarized as follows:
Weighted
Number of Stock Options Average
Shares Price Range Exercise Price
------------- -------------- --------------
Outstanding as of March 31, 2003 698,474 0.34 - 11.50 4.49
Granted....................... 299,000 6.08 - 21.66 17.80
Exercised..................... (26,400) 0.46 - 11.50 2.57
Expired....................... (8,500) 2.55 - 11.50 9.56
------------- -------------- --------------
Outstanding as of March 31, 2004 962,574 0.34 - 21.66 8.63
Granted....................... 391,000 8.15 - 14.24 10.34
Exercised..................... (23,517) 0.46 - 4.42 1.30
Expired.......................
------------- -------------- --------------
Outstanding as of March 31, 2005 1,330,057 0.34 - 21.66 9.26
Granted....................... 364,001 7.29 - 12.38 8.02
Exercised..................... (62,844) 0.46 - 2.55 1.63
Expired....................... (76,834) 2.55 -21.66 9.86
------------- -------------- --------------
Outstanding as of March 31, 2006 1,554,380 $0.34 - 21.66 $9.25
============= ============== ==============
Exercisable as of March 31, 2004 567,838 0.34 - 21.66 6.02
Exercisable as of March 31, 2005 874,360 0.34 - 21.66 8.42
Exercisable as of March 31, 2006 1,115,167 0.34 - 21.66 9.56
The following table summarizes information about stock options outstanding
as of March 31, 2006:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life-Years Price Exercisable Price
--------------- ----------- ----------- --------- ------------- ---------
$0.34 - 0.46.. 106,501 1.00 $0.43 106,501 $0.43
1.74 - 2.55... 221,462 5.23 2.35 221,462 2.33
4.75.......... 68,000 1.64 4.75 67,499 4.75
6.60 - 11.50.. 823,917 6.65 9.16 410,343 10.15
12.33 - 21.66. 334,500 7.46 17.76 309,362 18.14
---------- ----------- --------- ------------- ---------
1,554,380 5.75 $9.25 1,115,167 $9.56
=========== =========== ========= ============= =========
F-31
Warrants - On January 31, 2002, the Company entered into a one year
consulting agreement with Yorkshire Capital Limited ("Yorkshire") for services
related to identifying investors and raising funds in connection with the
February 2002 private placement and assistance to be provided by Yorkshire to
the Company with respect to financial consulting, planning, structuring,
business strategy, public relations and promotions, among other items. In
connection with the closing of the private placement, the Company granted
Yorkshire warrants to purchase 360,000 shares of the Company's common stock at
prices ranging from $6.00 to $12.00 per share. The warrant to purchase 100,000
shares of the Company's common stock at an exercise price of $6.00 per share
vested upon the closing of the private placement. The remaining warrants did not
vest and were cancelled. The vested warrant expires on February 14, 2007. The
Company may, upon 30 days' notice, redeem the vested warrant for $0.10 per share
if the Company's Common Stock trades at 200% of the exercise price for 20
consecutive trading days. Yorkshire may exercise the vested warrant during such
notice period. In addition, Yorkshire received 60,000 shares of the Company's
common stock in consideration for identifying investors and raising funds in
connection with the closing of the private placement and a retainer fee of
$10,000 per month for consulting services during the term of the agreement.
In February 2002, the Company, in connection with the Series A Convertible
Preferred Stock private placement, issued warrants to purchase 400,250 shares of
the Company's common stock at an exercise price of $6.00 per share of common
stock to the purchasers of the Series A Convertible Preferred Stock. The
warrants expire in February 2007. The warrants are not detachable and the
exercise period commences upon the conversion or the redemption of the Series A
Convertible Preferred Stock that was concurrently issued to such warrant holder.
At any time, if the Company's common stock closes at $12.00 per share or above
for 20 consecutive trading days, the Company may, upon 20 days' notice, redeem
any unexercised portion of any warrants for a redemption fee of $0.10 per share
of common stock underlying the warrants. During the 20-day notice period, if the
warrants are then exercisable as a result of the conversion or redemption of the
Series A Convertible Preferred Stock, such warrant holder may then exercise all
or a portion of the warrant by tendering the appropriate exercise price. The
warrants contain certain anti-dilution provisions for stock splits, dividends
and similar events.
On February 1, 2002, the Company entered into an introductory brokerage
agreement with Ace Champion, Ltd. ("Ace") and Pacific Dragon Group, Ltd.
("Pacific Dragon") (collectively, the "Introductory Brokers") for assistance to
be provided by the Introductory Brokers to the Company with respect to obtaining
funds in connection with the aforementioned February 2002 private placement to
the purchaser of the Series B Convertible Preferred Stock (see Note 3). As
compensation for such services, Ace and Pacific Dragon received warrants to
purchase 100,000 shares and 300,000 shares, respectively, of the Company's
common stock at an exercise price of $6.00 per share, subject to certain
conditions. The Company may, after February 22, 2003, upon 30 days' notice,
redeem any unexercised warrants for $0.10 per share, as defined. The
Introductory Brokers may exercise their warrants during the 30-day notice
period. The warrants expire on February 22, 2007 and contain certain
anti-dilution provisions for stock splits, dividends and similar events.
In September 2002, in connection with the Series B Convertible Preferred
Stock private placement offering, the Company issued to the purchaser of the
Series B Convertible Preferred Stock warrants to purchase 191,812 shares of the
Company's common stock at an exercise price
F-32
of $6.125 per share of common stock. The warrants expire at various dates in
September 2007. The warrant exercise period commenced immediately upon issuance
of the warrant. The Company may, upon 20 days' notice, redeem any unexercised
portion of any warrants for a redemption fee of $0.10 per share of common stock
underlying the warrants. During the 20-day notice period, if the warrants are
then exercisable as a result of the conversion or redemption of the Series B
Convertible Preferred Stock, such warrant holder may then exercise all or a
portion of the warrants by tendering the appropriate exercise price.
On July 16, 2003, the Company entered into an agreement with China Harvest
International Ltd. ("China Harvest") for services to be provided to assist the
Company in obtaining regulatory approval to conduct clinical trials in the PRC.
As consideration for these services, the Company granted China Harvest an
immediately exercisable five year warrant to purchase 600,000 shares of common
stock from the Company at $6.08 per share. During the year ended March 31, 2004,
approximately $2,744,000 was recorded as general and administrative expenses,
based on the estimated value of the warrants using the Black-Scholes option
valuation model.
In January 2004, in connection with the Series D Convertible Preferred
Stock private placement, the Company issued to the purchasers of Series D
Convertible Preferred Stock warrants to purchase 200,000 shares of the Company's
common stock at an exercise price of $16.00 per share of common stock. The
warrants expire at various dates in January 2009. The warrant exercise period
commenced immediately upon issuance of the warrant. The Company may, upon 20
days' notice, redeem any unexercised portion of any warrants for a redemption
fee of $0.10 per share of common stock underlying the warrants provided that the
closing bid price of the Company's common stock exceeds $18.00 for 20
consecutive trading days within 180 days prior to the notice of conversion.
During the 20-day notice period, if the warrants are then exercisable as a
result of the conversion or redemption of the Series D Convertible Preferred
Stock, such warrant holder may then exercise all or a portion of the warrants by
tendering the appropriate exercise price.
The warrants issued in January 2004 to the holders of the Series D
Convertible Preferred Stock were valued using the Black-Scholes option valuation
model and the amount recorded of $1,973,287 was determined by applying the
relative fair value method in relation to the estimated fair value of Series D
Convertible Preferred Stock resulting in a $1,973,287 preferred stock deemed
dividend calculated in accordance with EITF Issue No. 00-27. The deemed dividend
on the Series D Convertible Preferred Stock was charged to deficit accumulated
during the development stage immediately upon issuance, as the preferred stock
is immediately convertible. The preferred stock deemed dividend of $1,973,287
was reported as a dividend in determining the net loss attributable to common
stockholders in the accompanying statement of operations for the year ended
March 31, 2004.
On July 20, 2004, the Company's board of directors approved a four-year
exercise extension to warrants to purchase 225,000 shares of the Company's
common stock which were originally issued to RADE Management Corporation
("RADE") on July 24, 1998. The expiration date for these warrants, which have an
exercise price of $6.47 per share, was extended from July 24, 2004 to July 24,
2008; the Company therefore recorded a non-cash charge during the year ended
March 31, 2005 of $1,032,000, determined using the Black-Scholes option pricing
model. Additionally, the Company's board of directors approved a four-year
exercise extension to warrants to purchase 750,000 shares of the Company's
common stock which were originally issued to RADE on October 12, 1998; the
Company therefore recorded a non-cash charge during the year ended March 31,
2005 of $3,498,000, determined using the Black-Scholes option
F-33
pricing model. The expiration date for these warrants, which have an exercise
price of $6.47 per share, was extended from October 12, 2004 to October 12,
2008.
In connection with secondary public offering completed on July 30, 2004,
the underwriter (Jeffries & Company, Inc.) was granted a warrant to purchase
80,100 shares of common stock at an exercise price of $12.81 per share. The
warrant is exercisable for five years from the date of grant and has
anti-dilution protection for stock splits, dividends and similar events.
On March 18, 2005, the Company's board of directors approved an exercise
extension from March 21, 2005 to December 23, 2005 on warrants to purchase
125,000 shares of the Company's common stock at $15.00 per share which were
originally issued to Fulcrum on March 21, 2003; the Company therefore recorded a
non-cash charge during the year ended March 31, 2005 of $300,000, determined
using the Black-Scholes option pricing model. On November 2, 2005, the Company's
board of directors approved a reduction in the exercise price of these warrants
from $15.00 to $8.80 while shortening the expiry date from December 23, 2005 to
November 5, 2005. The Company has recorded a non-cash charge of $125,000,
determined using the Black-Scholes option pricing model. Fulcrum exercised
35,000 warrants resulting in proceeds to the Company of $308,000. The remaining
90,000 warrants expired.
In connection with services rendered to us by Ferris, Baker Watts,
Incorporated, effective July 13, 2005, the Company issued warrants to purchase
100,000 shares of our common stock. The warrants are exercisable at $13.11 per
share (the exercise price was set by calculating a 15% premium over the
Company's common stock volume weighted average price for the 10 day period
immediately preceding July 12, 2005). The warrants are exercisable beginning on
July 13, 2006 through July 12, 2010. The Company may redeem any outstanding
warrants, at $0.01 per share underlying each warrant, upon 30 day prior notice
if at any time prior to the expiration of the warrant the market closing price
of the Company's common stock meets or exceeds $26.22 for 20 consecutive trading
days. The warrant holder may exercise the warrant, pursuant to its terms, during
the 30 day notice period.
In December 2005, in connection with the Series E Convertible Preferred
Stock private placement, the Company issued to the purchasers of Series E
Convertible Preferred Stock warrants to purchase 83,500 shares of the Company's
common stock at an exercise price of $10.00 per share of common stock. The
warrants expire on December 13, 2008. The warrant exercise period commenced
immediately upon issuance of the warrant. The Company may, upon 20 days' notice
after the first anniversary of the date of grant, redeem any unexercised portion
of any warrants for a redemption fee of $0.10 per share of common stock
underlying the warrants provided that the closing bid price of the Company's
common stock exceeds $15.00 for 20 of 30 consecutive trading days. During the
20-day notice period, if the warrants are then exercisable as a result of the
conversion or redemption of the Series E Convertible Preferred Stock, such
warrant holder may then exercise all or a portion of the warrants by tendering
the appropriate exercise price.
F-34
In connection with the Series E Convertible Preferred Stock offering of
December 13, 2005, the Company entered into an Introductory Agreement with
Ableguard Investment Limited ("Ableguard") pursuant to which Ableguard assisted
the Company to identify qualified investors. For its services, the Company
granted to Ableguard a warrant to purchase 68,000 shares of common stock. The
warrant is exercisable during the three-year period commencing on December 13,
2005, at an exercise price of $10.00, subject to adjustment for stock splits,
dividends and similar events.
The activity during the years ended March 31, 2004, 2005 and 2006 for the
Company's warrants to purchase shares of common stock is summarized as follows:
Weighted
Number of Warrants Average
Shares Price Range Exercise Price
------------- -------------- --------------
Outstanding as of March 31, 2003 2,426,227 6.00-16.00 7.11
Granted..................... 1,120,833 6.00-16.00 9.16
Exercised................... (559,350) 6.00-16.00 8.00
------------- -------------- --------------
Outstanding as of March 31, 2004 2,987,710 6.00-16.00 7.70
Granted..................... 80,100 6.00-16.00 12.81
Cancelled................... (75,000) 16.00 16.00
Exercised................... (252,400) 6.00-16.00 8.87
------------- -------------- --------------
Outstanding as of March 31, 2005 2,740,410 6.00-16.00 7.51
Granted..................... 251,500 10.00-13.11 11.24
Cancelled................... (90,000) 8.80 8.80
Exercised................... (51,800) 6.47-8.80 8.04
------------- -------------- --------------
Outstanding as of March 31, 2006 2,850,110 $6.00-16.00 $7.52
============= ============== ==============
Exercisable as of March 31, 2004 2,977,712 6.00-16.00 7.72
Exercisable as of March 31, 2005 2,730,410 6.00-16.00 7.53
Exercisable as of March 31, 2006 2,740,110 6.00-16.00 7.34
The following table summarizes information about outstanding warrants to
purchase shares of the Company's common stock as of March 31, 2006:
Warrants Expiration
Exercise Price Per Share Outstanding Date
------------------------ ----------- ----------
$ 6.00.................... 233,000 2/14/07
6.00.................... 413,500 2/22/07
6.00.................... 10,000 7/31/07
6.08.................... 600,000 7/16/08
6.13.................... 101,310 9/25/07
6.13.................... 2,500 10/28/07
6.47.................... 208,200 7/24/08
6.47.................... 750,000 10/12/08
10.00................... 151,500 12/13/08
12.81................... 80,100 7/30/09
13.11................... 100,000 7/13/10
16.00................... 200,000 1/22/09
-----------
Total Warrants Outstanding 2,850,110
===========
F-35
8. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company earns revenue under various collaborative research agreements.
Under the terms of these arrangements, the Company has generally agreed to
perform best efforts research and development and, in exchange, the Company may
receive advance cash funding, an allowance for management overhead, and may also
earn additional fees for the attainment of certain milestones.
The Company initially acquired its rights to the aromatic cation
technology platform developed by a consortium of universities consisting of
UNC-CH, Georgia State University, Duke University and Auburn University pursuant
to an agreement, dated January 15, 1997 (as amended, the "Consortium Agreement")
among the Company, UNC-CH and a third-party (to which each of the other members
of the scientific consortium shortly thereafter joined) (the "original
licensee"). The Consortium Agreement commits the parties to collectively
research, develop, finance the research and development of, manufacture and
market both the technology and compounds owned by the scientific consortium and
previously licensed or optioned to the original licensee and licensed to the
Company in accordance with the Consortium Agreement (the "Current Compounds"),
and all technology and compounds developed by the scientific consortium after
January 15, 1997, through use of Company-sponsored research funding or National
Cooperative Drug Development grant funding made available to the scientific
consortium (the "Future Compounds" and, collectively with the Current Compounds,
the "Compounds").
The Consortium Agreement contemplated that upon the completion of the
Company's initial public offering ("IPO") of shares of its common stock with
gross proceeds of at least $10,000,000 by April 30, 1999, the Company, with
respect to the Current Compounds, and UNC-CH, (on behalf of the Scientific
Consortium), with respect to Current Compounds and Future Compounds, would enter
into license agreements for the intellectual property rights relating to the
Compounds pursuant to which the Company would pay royalties and other payments
based on revenues received for the sale of products based on the Compounds.
The Company completed its IPO on April 26, 1999, with gross proceeds in
excess of $10,000,000 thereby earning a worldwide license and exclusive rights
to commercially use, manufacture, have manufactured, promote, sell, distribute,
or otherwise dispose of any products based directly or indirectly on all of the
Current Compounds and Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 162,500 shares were issued to the
Scientific Consortium and 448,750 shares were issued to the original licensee or
persons designated by the original licensee.
As contemplated by the Consortium Agreement, on January 28, 2002, the
Company entered into a License Agreement with the Scientific Consortium whereby
the Company received the exclusive license to commercialize the aromatic cation
technology platform and compounds developed or invented by one or more of the
Consortium scientists after January 15, 1997, and which also incorporated into
such License Agreement the Company's existing license with the Scientific
Consortium with regard to the Current Compounds. Also pursuant to the Consortium
Agreement, the original licensee transferred to the Company the worldwide
license and exclusive
F-36
right to commercially use, manufacture, have manufactured, promote, sell,
distribute or otherwise dispose of any and all products based directly or
indirectly on aromatic cations developed by the Scientific Consortium on or
prior to January 15, 1997 and previously licensed (together with related
technology and patents) to the third-party.
The Consortium Agreement provides that the Company is required to pay to
UNC-CH on behalf of the Scientific Consortium reimbursement of patent and
patent-related fees, certain milestone payments and royalty payments based on
revenue derived from the Scientific Consortium's aromatic cation technology
platform. Each month on behalf of the inventor scientist or university, as the
case may be, UNC-CH submits an invoice to the Company for payment of
patent-related fees related to current compounds or future compounds incurred
prior to the invoice date. The Company is also required to make milestone
payments in the form of the issuance of 100,000 shares of its common stock to
the Consortium when it files its first initial New Drug Application ("NDA") or
an Abbreviated New Drug Application ("ANDA") based on Consortium technology. We
are also required to pay to UNC-CH on behalf of the Scientific Consortium (other
than Duke University) (i) royalty payments of up to 5% of our net worldwide
sales of "current products" and "future products" (products based directly or
indirectly on current compounds and future compounds, respectively) and (ii) a
percentage of any fees we receive under sublicensing arrangements. With respect
to products or licensing arrangements emanating from Duke University technology,
the Company is required to negotiate in good faith with UNC-CH (on behalf of
Duke University) royalty, milestone or other fees at the time of such event,
consistent with the terms of the Consortium Agreement.
Under the License Agreement, the Company must also reimburse the cost of
obtaining patents and assume liability for future costs to maintain and defend
patents so long as the Company chooses to retain the license to such patents.
In July 2004, the Company was awarded a Small Business Innovation Research
("SBIR") grant from the National Institutes of Health ("NIH") of $107,000 as a
grant to research on "Aromatic Dication Prodrugs for CNS Trypanosomiasis."
During the year ended March 31, 2005, the Company recognized revenues and
expenses of approximately $63,000 from this grant. Approximately $33,000 of
these expenses were paid to UNC-CH and other Scientific Consortium universities
for contracted research related to this grant.
During the years ended March 31, 2004, 2005 and 2006, the Company expensed
approximately $630,000, $730,000, and $978,000 respectively, of other payments
to UNC-CH and certain other Scientific Consortium universities for patent
related costs and other contracted research. Total payments expensed to UNC-CH
and certain other Scientific Consortium universities were approximately
$630,000, $763,000, and $978,000 during the years ended March 31, 2004, 2005 and
2006, respectively. Included in accounts payable as of March 31, 2005 and 2006,
was approximately $136,000 and $44,000, respectively, due to UNC-CH and certain
other Scientific Consortium universities.
In November 2000, The Bill & Melinda Gates Foundation ("Foundation")
awarded a $15,114,000 grant to UNC-CH to develop new drugs to treat human
Trypanosomiasis (African sleeping sickness) and leishmaniasis. On March 29,
2001, UNC-CH entered into a clinical research subcontract agreement with the
Company, whereby the Company was to receive up to
F-37
$9,800,000, subject to certain terms and conditions, over a five year period to
conduct certain clinical and research studies related to the Foundation Grant.
In April 2003, the Foundation awarded a supplemental grant of
approximately $2,700,000 to UNC-CH for the expansion of Phase IIB/III clinical
trials to treat human Trypanosomiasis (African sleeping sickness) and improved
manufacturing processes. The Company has received, pursuant to the clinical
research subcontract with UNC-CH, inclusive of its portion of the supplemental
grant, a total amount of funding of approximately $11,700,000. Grant funds paid
in advance of the Company's delivery of services are treated as restricted funds
and must be segregated from other funds and used only for the purposes
specified. As of March 31, 2006, approximately $11,700,000, relating to the
clinical research subcontract, had been received by the Company. In March 2006,
we amended and restated the clinical research subcontract with UNC-CH and UNC-CH
in turn obtained an expanded funding commitment of $13.6 million from the
Foundation. Under the amended and restated agreement, the Company received on
May 24, 2006 the first payment of approximately $5.6 million of the five year
$13.6 million contract.
During the years ended March 31, 2004, 2005 and 2006, the Company received
installment payments under the November 2000 and April 2003 grants of
approximately $1,025,000, $2,995,000, and 0, respectively, and approximately
$2,114,000, $3,592,000, and $2,758,819 was utilized for clinical and research
purposes conducted and expensed during the years ended March 31, 2004, 2005 and
2006, respectively. The Company recognized revenues of approximately $2,114,000,
$3,592,000, and $869,000 during the years ended March 31, 2004, 2005 and 2006,
respectively, for services performed under the agreement.
On November 26, 2003, the Company entered into a testing agreement
("Testing Agreement") with Medicines for Malaria Venture ("MMV"), a foundation
established in Switzerland, and UNC-CH, pursuant to which the Company, with the
support of MMV and UNC-CH, conducted a proof of concept study of the dicationic
first drug candidate pafuramidine for the treatment of malaria.
Under the terms of the Testing Agreement, MMV committed to pay for human
clinical trials and, subject to certain milestones, regulatory preparation and
filing costs for the approvals to market pafuramidine to treat malaria. In
return for MMV's funding, the Company is required, when selling malaria drugs
derived from this research into "malaria-endemic countries," as defined, to sell
such drugs at affordable prices. An affordable price is defined in the Testing
Agreement to mean a price not to be less than the cost to manufacture and
deliver the drugs plus administrative overhead costs (not to exceed 10% of the
cost to manufacture) and a modest profit. There are no price constraints on
product sales into non-malaria-endemic countries. The Company must, however, pay
to MMV a royalty not to exceed 7% of net sales, as defined, on product sales
into non-malaria-endemic countries, until the amount funded under the Testing
Agreement and amounts funded under a related discovery agreement between MMV and
UNC-CH is refunded to MMV at face value. The Company and MMV agreed to terminate
the Testing Agreement effective as of February 10, 2006.
The Company recognized revenues of approximately $302,000, $2,275,000, and
$2,663,000 during the years ended March 31, 2004, 2005, and 2006, respectively,
for expenses
F-38
incurred related to activities within the scope of the Testing Agreement. At
March 31, 2005 and 2006, the Company has approximately $446,000 and $396,000,
respectively, recorded as deferred revenue with respect to this agreement.
9. OTHER COMMITMENTS AND CONTINGENCIES
Operating Leases - In October 2004, the Company entered into an amendment
to the lease of its main office and research facility under an operating lease
that requires lease payments starting in March 2005 of approximately $8,200 per
month through March 2008 and $8,600 from April 2008 through March 2010. The
Company is required to pay certain real estate and occupancy costs. In July
1999, the Company began leasing an additional office facility from RADE, a
consultant who previously provided services to the Company, on a month-to-month
basis, for approximately $10,100 per month. Total rent expense was approximately
$310,000, $305,000, and $252,000 for all leases during the years ended March 31,
2004, 2005, and 2006, respectively.
As of March 31, 2006, future minimum lease payments required under the
aforementioned noncancellable operating leases approximated the following:
Year Ending March 31, Lease Payments
--------------------- --------------
2007 98,000
2008 98,000
2009 103,000
2010 99,000
Total $398,000
Other Contingencies -On August 12, 2003, the Company filed a lawsuit
against Neurochem, Inc. ("Neurochem") alleging that Neurochem misappropriated
the Company's trade secrets by filing a series of patent applications relating
to compounds synthesized and developed by the Consortium, with whom Immtech has
an exclusive licensing agreement. The misappropriated intellectual property was
provided to Neurochem pursuant to a testing agreement under which Neurochem
agreed to test the compounds to determine if they could be successfully used to
treat Alzheimer's disease. Pursuant to the terms of the agreement, Neurochem
agreed to keep all information confidential, not to disclose or exploit the
information without Immtech's prior written consent, to immediately advise
Immtech if any invention was discovered and to cooperate with Immtech and its
counsel in filing any patent applications.
In its complaint, the Company also alleges, among other things, that
Neurochem fraudulently induced the Company into signing the testing agreement,
and breached numerous provisions of the testing agreement, thereby blocking the
development of the Consortium's compounds for the treatment of Alzheimer's
disease. By engaging in these acts, the Company alleges that Neurochem has
prevented the public from obtaining the potential benefit of new drugs for the
treatment of Alzheimer's disease, which would compete with Neurochem's Alzhemed
drug.
Since the filing of the complaint, Neurochem had aggressively sought to
have an International Chamber of Commerce ("ICC") arbitration panel hear this
dispute, as opposed to the federal district court in which the action was
originally filed. The Company agreed to have a
F-39
three member ICC arbitration panel (the "Arbitration Panel") hear and rule on
the dispute on the expectation that the Arbitration Panel would reach a more
timely and economical resolution.
The ICC hearing was held September 7 to September 20, 2005 and final
papers were filed by both parties on November 2, 2005. On June 9, 2006, the
International Court of Arbitration of the ICC notified the parties that (i) the
Arbitral Tribunal found that Neurochem breached the testing agreement and
awarded Immtech approximately $1.9 million in damages and attorneys' fees and
costs, and (ii) denied all of Neurochem's claims against Immtech.
In October 2003, Gerhard Von der Ruhr et al (the "Von der Ruhr
Plaintiffs") filed a complaint in the United States District Court for the
Northern District of Illinois against the Company and certain officers and
directors. The Von der Ruhr Plaintiff's complaint alleged that (i) the Company
refused to authorize the Company's transfer agent to remove the restrictive
legends from the stock certificates of the Von der Ruhr Plaintiffs, (ii) the
Company refused to honor the Von der Ruhr Plaintiffs' exercise of certain stock
options and (iii) the Company refused to honor an agreement regarding certain
technology. The Von der Ruhr Plaintiffs also allege that certain officers and
directors interfered with the Von der Ruhr Plaintiffs' contracts with the
Company. The complaint sought unspecified monetary damages and punitive damages,
in addition to equitable relief and costs. In a filing made in late February,
2005, the Von der Ruhr Plaintiffs specified damages of approximately $44.5
million in damages, which includes $42 million related to the alleged technology
agreement claim, which the Company believes is meritless. In 2005, one of the
counts in the case was dismissed upon the Company's motion for summary judgment.
The Company has filed pre-trial motions regarding the evidence to be introduced
at the trial of the remaining counts, including a motion to preclude disclosure
of evidence of Von der Ruhr's alleged damages. Those pre-trial motions are
pending. The case is likely to be set for trial sometime in 2006 or 2007.
10. OTHER RETIRED OBLIGATIONS
Recapitalization - In connection with the Recapitalization (see Note 3)
the following transactions occurred on July 24, 1998:
o Criticare, a significant stockholder of the Company, who, prior to
the Recapitalization, owned 1,000,000 shares of Series A Redeemable
Preferred Stock, 1,200,000 shares of Series B Redeemable Preferred
Stock and 198,708 shares of common stock, had advanced $597,722 to
the Company. The advances were payable on demand. Criticare
exchanged $597,722 of advances and $68,368 of related accrued
interest for 145,353 shares of common stock. The Company also had
certain notes payable to Criticare aggregating $148,777 and related
accrued interest of $43,426 that were exchanged for 35,403 shares of
common stock. The carrying value of the outstanding Criticare
indebtedness in excess of the estimated fair value of the shares of
common stock and cash exchanged was accounted for as additional
paid-in capital.
o Certain other stockholders exchanged $387,450 of advances for
196,824 shares of common stock. The Company recognized a gain on the
extinguishment of debt
F-40
of $80,404 for the outstanding indebtedness under the advances in
excess of the estimated fair value of the 196,824 shares of common
stock ($307,046).
o Certain other notes payable aggregating $1,306,673, related accrued
interest aggregating $337,290 and accounts payable aggregating
$261,597 were exchanged for 227,398 shares of common stock and
$203,450 cash. The Company recognized a gain on the extinguishment
of debt of $1,347,361 for the outstanding aggregate indebtedness
under such notes ($1,306,673), related accrued interest ($337,290)
and accounts payable ($261,597) in excess of the estimated fair
value of the shares of common stock ($354,749) and cash ($203,450)
exchanged.
o Series A and B Redeemable Preferred stockholders exchanged their
preferred shares for an aggregate 1,195,017 shares of common stock.
The difference between the initial estimated fair value of the
Series A Redeemable Preferred Stock and the aggregate redemption
value of $440,119 was a premium which was amortized by a credit to
retained earnings (deficit accumulated during the developmental
stage) and a debit to the carrying value of the redeemable preferred
stock during the period from issuance to the required redemption
date, using the interest method. In addition, while the redeemable
preferred shares were outstanding, dividends aggregating $1,783,354
were charged to retained earnings (deficit accumulated during the
development stage). The Series A and Series B Redeemable Preferred
Stock had redemption (carrying) values of $2,780,324 and $2,797,260,
respectively, as of the date of the Recapitalization. In connection
with the Recapitalization, the Series A and Series B Redeemable
Preferred stockholders agreed to accept 578,954 and 616,063 shares
of common stock, respectively, for their shares of the preferred
stock. The difference between the carrying value of the Series A and
Series B Redeemable Preferred Stock and the estimated fair value of
the common shares exchanged of $1,877,138 and $1,836,196,
respectively, was credited to deficit accumulated during the
development stage.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company did not pay any income taxes or interest during the years
ended March 31, 2004, 2005 and 2006.
Non-Cash Transactions
During the years ended March 31, 2004, 2005 and 2006, the Company issued
common stock, common stock options and warrants or modified existing
arrangements as compensation for services and also engaged in certain other
non-cash investing and financing activities. The amounts of these transactions
are summarized as follows:
F-41
Year Ended March 31,
---------------------------------
2004 2005 2006
---------- ---------- ---------
Expense related to issuance of common stock
to nonemployees as compensation for
services................................ $3,891,608 $25,820
Expense related to issuance of common stock
options as compensation for services.... 267,500 $335,412 52,683
Expense related to issuance/extension of
warrants to purchase common stock as
compensation for services............... 3,342,244 4,841,245 125,042
Issuance of common stock for offering costs 1,397,000
Convertible preferred stock dividends
recorded................................ 432,713 579,816 478,275
Issuance of common stock as payment of
convertible preferred stock dividends... 330,640 508,362 441,565
Issuance of common stock for conversions of
convertible preferred stock............. 3,850,205 1,839,971 1,787,159
Exchange of ownership interests:
Value of land-use rights exchanged........
Land-use rights........................... (3,443,867)
Minority interest......................... 296,193
Value of land-use rights acquired......... 3,547,674
* * * * * *
F-42