United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2001.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to _______.
Commission file number: 000-25669
IMMTECH INTERNATIONAL, INC.
----------------------------------------------------
(Name of Small Business as specified in its Charter)
Delaware 39-1523370
------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Identification No.)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (847) 573-0033
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
As of August 10, 2001, 6,005,371 shares of the Registrant's common stock, par
value $0.01 ("Common Stock"), were outstanding.
Transitional Small Business Disclosure Format: (Check One): Yes [ ] No [X]
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION..................................................1
Item 1. Condensed Financial Statements........................................1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........16
PART II. OTHER INFORMATION....................................................16
Item 1. Legal Proceedings....................................................16
Item 2. Changes in Securities................................................17
Item 3. Defaults Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security Holders..................18
Item 5. Other Information....................................................18
Item 6. Exhibits, and Reports on Form 8-K....................................18
SIGNATURES....................................................................19
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS.
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS (UNAUDITED)
---------------------------------------------------------------------------------------------------
JUNE 30, MARCH 31,
ASSETS 2001 2001
-------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,277,062 $ 2,097,718
Restricted funds on deposit 2,822,145 3,812,553
Other current assets 3,788 28,289
------------ ------------
Total current assets 4,102,995 5,938,560
PROPERTY AND EQUIPMENT - Net 249,638 210,024
OTHER ASSETS 19,848 19,848
------------ ------------
TOTAL $ 4,372,481 $ 6,168,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,030,275 $ 1,695,721
Accrued liabilities 75,862 70,862
Deferred revenue 2,645,048 3,509,194
------------ ------------
Total current liabilities 3,751,185 5,275,777
DEFERRED RENTAL OBLIGATION 31,921 33,511
------------ ------------
Total liabilities 3,783,106 5,309,288
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01 per share, 5,000,000 shares
authorized and unissued
Common stock, par value $0.01 per share, 30,000,000 shares
authorized, 6,005,371 and 5,955,245 shares issued and outstanding
as of June 30, 2001 and March 31, 2001, respectively 60,054 59,552
Additional paid-in capital 33,669,981 33,574,917
Deficit accumulated during the developmental stage (33,140,660) (32,775,325)
------------ ------------
Total stockholders' equity 589,375 859,144
------------ ------------
TOTAL $ 4,372,481 $ 6,168,432
============ ============
See notes to condensed financial statements.
-1-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
OCTOBER 15,
1984
THREE MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
---------------------------- 2001
2001 2000
REVENUES $ 1,122,838 $ 135,578 $ 4,834,698
------------ ------------ ------------
EXPENSES:
Research and development 544,294 2,177,118 25,087,348
General and administrative 969,397 595,996 15,382,157
Equity in loss of joint venture 135,002
------------ ------------ ------------
Total expenses 1,513,691 2,773,114 40,604,507
------------ ------------ ------------
LOSS FROM OPERATIONS (390,853) (2,637,536) (35,769,809)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 25,518 96,949 548,636
Interest expense (1,129,502)
Loss on sales of investment securities - net (2,942) (2,942)
Cancelled offering costs (584,707)
------------ ------------ ------------
Other income (expense) - net 25,518 94,007 (1,168,515)
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (365,335) (2,543,529) (36,938,324)
EXTRAORDINARY GAIN ON
EXTINGUISHMENT OF DEBT 1,427,765
------------ ------------ ------------
NET LOSS (365,335) (2,543,529) (35,510,559)
REDEEMABLE PREFERRED STOCK
CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (365,335) $ (2,543,529) $(33,140,660)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.06) $ (0.48)
============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE 5,998,834 5,344,119
============ ============
See notes to condensed financial statements.
-2-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------
OCTOBER 15,
1984
THREE MONTHS ENDED (INCEPTION) TO
JUNE 30, JUNE 30,
----------------------- 2001
2001 2000
OPERATING ACTIVITIES:
Net loss $ (365,335) $ (2,543,529) $(35,510,559)
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 76,723 49,516 13,327,318
Depreciation and amortization of property and equipment 22,380 26,083 467,247
Deferred rental obligation (1,590) (1,592) 31,921
Equity in loss of joint venture 135,002
Loss on sales of investment securities - net 2,942 2,942
Amortization of debt discounts and issuance costs 134,503
Extraordinary gain on extinguishment of debt (1,427,765)
Changes in assets and liabilities:
Restricted funds on deposit 990,408 (2,822,145)
Other current assets 24,501 11,200 (3,788)
Other assets (19,848)
Accounts payable (665,446) 51,667 1,359,415
Accrued liabilities 5,000 10,546 738,875
Deferred revenue (864,146) 2,645,048
------------ ------------ ------------
Net cash used in operating activities (777,505) (2,393,167) (20,941,834)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities (199,996) (1,803,469)
Proceeds from sales and maturities of investment securities 1,558,043 1,800,527
Purchases of property and equipment (61,994) (30,950) (690,361)
Investment in and advances to joint venture (135,002)
------------ ------------- ------------
Net cash (used in) provided by investing activities (61,994) 1,327,097 (828,305)
------------ ------------ ------------
FINANCING ACTIVITIES:
Advances from stockholders and affiliates 985,172
Proceeds from issuance of notes payable 2,645,194
Principal payments on notes payable (218,119)
Payments for debt issuance costs (53,669)
Payments for extinguishment of debt (203,450)
Proceeds from issuance of redeemable preferred stock 3,330,000
Net proceeds from issuance of common stock 18,843 41,808 16,562,073
------------ ------------ ------------
Net cash provided by financing activities 18,843 41,808 23,047,201
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (820,656) (1,024,262) 1,277,062
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,097,718 4,596,319
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,277,062 $ 3,572,057 $ 1,277,062
============ ============ ============
See notes to condensed financial statements.
-3-
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by
Immtech International, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments necessary for a fair
statement of results for each period shown (unless otherwise noted herein,
all adjustments are of a normal recurring nature). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to such SEC
rules and regulations. The Company believes that the disclosures made are
adequate to prevent the financial information given from being misleading.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's
previously filed Form 10-KSB/A (Amendment No. 1).
2. COMPANY BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Immtech International, Inc. (the "Company") is a
biopharmaceutical company focusing on the discovery, development and
commercialization of pharmaceutical and therapeutic drugs for the
treatment of opportunistic diseases and cancer in patients with
compromised immune responses. The Company has two separate platform
technologies for developing drugs, one for developing a new class of
molecules as pharmaceuticals and the other for developing (Through NextEra
Therapeutics, Inc., a joint-venture among the Company, Franklin Research
Group, Inc. and certain other parties. See Note 3.) a series of
biological proteins that work in conjunction with the immune system.
The Company was incorporated in 1984. The Company is in the development
stage and has directed its efforts toward research and development, hiring
scientific and management personnel, arranging for facilities and
conducting laboratory and clinical trials of product candidates. The
Company does not have any products currently available for sale, and no
products are expected to be commercially available for several years.
Going Concern Presentation and Related Risks and Uncertainties - The
accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business.
Since inception, the Company has incurred accumulated losses of
approximately $35,511,000. Management expects the Company to continue to
incur significant losses during the next several years as the Company
expands its research and development activities and clinical trial
efforts. In addition, the Company has various research and development
agreements with various entities that are thinly capitalized and are
dependent upon their ability to raise additional funds to continue their
research and development activities. The Company does not have any
products currently available for sale, and none are expected to be
commercially available for several years, if at all. There can be no
-4-
assurance that the Company's continued research will lead to the
development of commercially viable products. The Company's operations to
date have consumed substantial amounts of cash. The negative cash flow
from operations is expected to continue and to accelerate in the
foreseeable future. The Company will require substantial funds to conduct
research and development and laboratory and clinical testing and to
manufacture (or have manufactured) and market (or have marketed) its
product candidates.
The Company's working capital is not sufficient to fund the Company's
operations through the commercialization of one or more products yielding
sufficient revenues to support the Company's operations; therefore, the
Company will need to raise additional funds. The Company believes its
existing unrestricted cash and cash equivalents, and the grants the
Company has received or has been awarded and is awaiting disbursement of,
will be sufficient to meet the Company's planned expenditures through
September 2001, although there can be no assurance the Company will not
require additional funds. These factors, among others, indicate that the
Company may be unable to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to obtain profitable operations. Management's
plans for the forthcoming year, in addition to normal operations, include
continuing their efforts to obtain additional equity and/or debt financing
(see Note 7), obtain additional research grants and enter into various
research and development agreements with other entities.
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 deposits consist of cash
on deposit at a bank which is restricted for use in accordance with a
clinical research subcontract agreement with The University of North
Carolina at Chapel Hill (see Note 5).
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, the 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.
-5-
Comprehensive Loss - Comprehensive loss for the three months ended June
30, 2000 was as follows:
Net loss $(2,543,529)
Other comprehensive income (loss):
Unrealized loss on investment securities available for sale (1,764)
Reclassification adjustment for loss included in net loss 2,942
-----------
Comprehensive loss $(2,542,351)
===========
There were no differences between comprehensive loss and net loss for the
three months ended June 30, 2001.
New Accounting Standards - In 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133, as amended, was adopted on April 1,
2001 and had no impact on the Company's financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141
prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001, and applies to all
business combinations completed after June 30, 2001. There are also
transition provisions that apply to purchase business combinations
completed prior to June 30, 2001. SFAS No. 141 is effective immediately.
SFAS No. 142 is effective for the Company beginning April 1, 2002, and
applies to goodwill and other intangible assets recognized in the
Company's balance sheet as of that date, regardless of when those assets
were initially recognized. The Company has evaluated SFAS No. 142 and
anticipates that SFAS No. 142 will have no impact on its financial
statements when adopted.
Reclassifications - Certain amounts previously reported have been
reclassified to conform with the current presentation.
3. INVESTMENT IN NEXTERA THERAPEUTICS, INC.
On July 8, 1998, the Company, together with Franklin Research Group, Inc.
("Franklin") and certain other parties, formed NextEra Therapeutics, Inc.
("NextEra") to develop therapeutic products for treating cancer and
related diseases. The Company and Franklin have a research and funding
agreement with NextEra in which Franklin provided funding of $1,350,000 to
NextEra to fund the scale-up of manufacturing for and initiation of
certain clinical trials of NextEra's product candidates. The Company
contributed its rmCRP technology as well as use of its current laboratory
facilities for 330,000 common shares of NextEra. During the year ended
March 31, 2000, the Company advanced $135,000 to NextEra to fund its
operations. The Company did not advance any funds to NextEra during the
three months ended June 30, 2000 and 2001.
NextEra funded the operation of the Company's primary facility, including
certain salaries related to work on rmCRP, rent and overhead associated
with the project from July 1998 through December 1999. Since January 1,
2000, NextEra has funded only their own compensation expenses, as they
stopped funding the Company's primary facility and any associated
overhead. In addition, NextEra has funded and is required to fund the cost
of maintaining and defending the patents that are part of the intellectual
property transferred to NextEra by the Company.
-6-
NextEra has incurred accumulated losses of approximately $2,080,000 since
inception (July 8, 1998) through June 30, 2001. NextEra is expected to
continue to incur significant losses during the next several years. In
addition, as of June 30, 2001, NextEra's current liabilities exceeded its
current assets by approximately $1,505,000 and NextEra had a stockholders'
deficiency of approximately $1,484,000.
As of June 30, 2001 and March 31, 2001, the Company owned approximately
29% and 43%, respectively, of the issued and outstanding shares of NextEra
common stock.
On April 27, 2000, Franklin filed a complaint against the Company in the
United States District Court for the Southern District of Ohio, Eastern
Division alleging fraud, negligent misrepresentation and breach of the
implied covenant of good faith and fair dealing in connection with the
research and funding agreement entered into between Franklin, the Company
and NextEra. The complaint sought compensatory damages, unquantified
punitive damages, attorneys' fees, costs and expenses. On March 23, 2001,
Franklin voluntarily dismissed its complaint against the Company and
together with NextEra filed a new complaint in the Court of Common Pleas,
Franklin County, Ohio alleging fraud, negligent misrepresentation and
breach of the implied covenant of good faith and fair dealing in
connection with the research and funding agreement entered into between
Franklin, the Company and NextEra. In addition, NextEra alleged the
Company tortuously interfered with an employment agreement between NextEra
and the chief scientific officer of NextEra. The complaint sought
compensatory damages in excess of $25,000, unquantified punitive damages,
attorneys' fees, costs and expenses. On May 25, 2001, the case was
dismissed without prejudice by the Court of Common Pleas, Franklin County,
Ohio. The Company is currently in negotiations with Franklin and its
designees to resolve certain issues, including the possible restructuring
of the joint venture and relationship with NextEra to better position
NextEra in its fund raising efforts, and increasing the Company's
ownership in NextEra as consideration for servcies provided to NextEra,
expenses the Company previously incurred on behalf of NextEra and funds
previously advanced to NextEra.
NextEra's ability to continue as a going concern is dependent upon its
ability to generate sufficient funds to meet its obligations as they
become due and, ultimately, to obtain profitable operations. NextEra's
financial plans for the forthcoming year include continuing efforts to
obtain additional equity financing.
The Company has recognized an equity loss in NextEra to the extent of the
basis of its investment and the investment balance is zero as of June 30,
2001 and March 31, 2001. Recognition of any investment income on the
equity method by the Company for its investment in NextEra will occur only
after NextEra has earnings in excess of previously unrecognized equity
losses.
4. COMMON STOCK OPTIONS AND WARRANTS
On October 12, 2000, the Company's stockholders approved the issuance of
options to purchase shares of common stock to certain employees and other
nonemployees who have been engaged to assist the Company in various
research and administrative capacities as part of the 2000 Stock Incentive
Plan. The 2000 Stock Incentive Plan provides for the issuance of up to
350,000 shares of common stock in the form of incentive stock options and
non-qualified stock options. The incentive stock options must be granted
at a price at least equal to fair market value at the date of grant.
-7-
The Company has granted common stock options 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
generally expire after five or ten years. As of June 30, 2001, there were
171,500 shares available for grant, including 24,000 shares which are
reserved for issuance under certain consulting agreements with
nonemployees.
During the three months ended June 30, 2001, the Company issued options to
purchase 12,000 shares of common stock to nonemployees and recognized
expense of approximately $77,000 related to these options and certain
options issued during prior years which vest over a four year service
period. During the three months ended June 30, 2000, the Company did not
issue any options to nonemployees and recognized expense of approximately
$50,000 related to certain options issued during the year ended March 31,
1999 which vest over a four year service period.
On March 15, 2001, the Company entered into a one year agreement with The
Kriegsman Group ("Kriegsman") for assistance to be provided by Kriegsman
to the Company with respect to financial consulting, planning,
structuring, business strategy, public relations and promotions. This
agreement has been terminated by the Company effective as of September 14,
2001. As compensation for these services, the Company pays a retainer fee
to Kriegsman of $20,000 per month for the term of the engagement. The
Company has also granted Kriegsman warrants to purchase 250,000 shares of
the Company's common stock at $10.75 per share. Warrants to purchase
100,000 shares vested immediately while the remaining 150,000 warrants
will not vest unless the Company's market capitalization reaches certain
milestones. No such milestones have been met as of June 30, 2001. The
warrants are exercisable over a five year period and contain a cashless
exercise provision.
5. COLLABORATIVE RESEARCH AND DEVELOPMENT ACTIVITIES
The Company has various collaborative research agreements with commercial
enterprises. Under the terms of these arrangements, the Company has agreed
to perform best efforts research and development and, in exchange, the
Company may receive advanced cash funding and may also earn additional
fees for the attainment of certain milestones. The Company may receive
royalties on the sales of such products. The other parties generally
receive exclusive marketing and distribution rights for certain products
for set time periods in specific geographic areas.
The Company initially acquired its rights to the platform technology and
dications developed by a consortium of universities consisting of The
University of North Carolina at Chapel Hill ("UNC"), Duke University,
Auburn University and Georgia State University (the "Consortium") pursuant
to an agreement dated January 15, 1997 (as amended, the "Consortium
Agreement"), among the Company, Pharm-Eco Laboratories, Inc.
("Pharm-Eco"), and UNC (to which each of the other members of the
-8-
Consortium agreed shortly thereafter to become a party). The Consortium
Agreement commits the parties to, collectively, research, develop, finance
the research and development of, manufacture and market the technology and
compounds owned by the Consortium and then licensed or optioned to
Pharm-Eco (the "Current Compounds") and to be licensed to the Company in
accordance with the Consortium Agreement, and all technology and compounds
developed by the Consortium after the date thereof through use of
Company-sponsored research funding or National Cooperative Drug
Development grant funding made available to the Consortium (the "Future
Compounds" and, collectively with the Current Compounds, the "Compounds").
The Consortium Agreement 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
and Pharm-Eco, with respect to the Current Compounds, and the Company and
UNC, (on behalf of the Consortium), with respect to Future Compounds,
would enter into license agreements for, or assignments of, the
intellectual property rights relating to the Compounds held by Pharm-Eco
and the Consortium; 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. Pursuant to the Consortium Agreement, both
Pharm-Eco and the Consortium then became obligated to grant or assign to
the Company an exclusive worldwide license to use, manufacture, have
manufactured, promote, sell, distribute, or otherwise dispose of any
products based directly or indirectly on all of the Current Compounds and
Future Compounds.
As a result of the closing of the IPO, the Company issued an aggregate of
611,250 shares of common stock, of which 137,500 shares were issued to the
Consortium and 473,750 shares were issued to Pharm-Eco or persons
designated by Pharm-Eco.
Pursuant to the Consortium Agreement, the Company may, subject to the
satisfaction of certain conditions, be required to issue 100,000 shares of
common stock to the Consortium upon the filing by the Company of a new
drug application or an abbreviated new drug application with the Food and
Drug Administration with respect to any product covered by the Consortium
Agreement under Current Compounds. In addition, the Company will pay the
Consortium an aggregate royalty of 5% of net sales derived from the
Compounds, except that the royalty rate payable on any Compound developed
at Duke University will be determined by negotiation at the time such
Compound is developed. In the event that the Company sublicenses its
rights with respect to the Compounds, the Company will pay the Consortium,
in addition to the royalty described above, 12.5% of all signing,
milestone and other non-royalty payments made to the Company pursuant to
the sublicense agreement, unless the Company uses such payments which it
receives to fund research and clinical development of any Compounds, in
which case the Company shall pay the Consortium 2.5% of such payments.
In June 1999, the Company entered into a research and manufacturing
agreement with Pharm-Eco for Pharm-Eco to produce good manufacturing
practices quality, as defined, dicationic drugs and products for clinical
testing and for early commercialization. Pharm-Eco was unable to
manufacture certain required compounds and the Company subsequently
engaged alternate suppliers who successfully manufactured the compounds.
In August 2000, Pharm-Eco and two of its senior executives filed suit in
Delaware against the Company in connection with a dispute under the
Consortium Agreement. The Company responded by denying the allegations and
filing a counter-claim against Pharm-Eco for breach of contract.
-9-
The Company filed a Motion for Summary Judgment, which was granted on
February 21, 2001. In his Memorandum Opinion, the Vice Chancellor hearing
the proceeding dismissed all of the plaintiffs' claims against the Company
and held that Pharm-Eco had breached the Consortium Agreement by failing
to grant or assign to the Company a license for the Current Compounds. On
March 12, 2001, the Vice Chancellor signed a Final Order and Judgment
directing Pharm-Eco to execute and deliver to the Company an agreement
granting or assigning to the Company the license. On March 27, 2001,
Pharm-Eco and the Company entered into an agreement assigning the license.
No further claims against the Company remain in this proceeding, and on
May 1, 2001, a Stipulation of Dismissal was filed with the Court.
On April 20, 2001, the Company entered into a settlement agreement with
Pharm-Eco and certain other parties resolving all remaining matters
between them. Pursuant to this agreement, the Company received a cash
payment of $1,000,000; an assignment from Pharm-Eco of various contract
rights; and a termination of all of the Company's obligations to
Pharm-Eco, including, without limitation, (a) the obligation to issue an
aggregate of 850,000 warrants for shares of the Company's stock, (b) the
obligation to issue shares of common stock upon the occurrence of a
certain future event, (c) the obligation to pay a percentage of all
non-royalty payments that the Company might receive under any sublicense
that the Company might enter into with respect to certain compounds, and
(d) certain accounts payable which Pharm-Eco claimed to be owed of
approximately $159,000; and a release of any and all claims that Pharm-Eco
may have had against the Company. The cash payment received and the
accounts payable obligations which were forgiven, aggregating
approximately $1,159,000, was recorded as a credit to (reduction of)
research and development expense during the three months ended June 30,
2001; as the Company had previously expensed the estimated fair value of
the shares of common stock issued to Pharm-Eco at the time of the IPO and
the accounts payable obligations, as research and development expense.
The Company is required to make quarterly research grants in the amount of
$100,000 to UNC through April 30, 2002 and pay all costs to maintain and
defend all patents and patent applications relating to any products based
on any Compounds. During each of the three month periods ended June 30,
2001 and 2000, the Company expensed grant payments to UNC of $100,000.
Such payments were expensed as research and development costs.
In August 1999, the Company received a Small Business Innovation Research
("SBIR") grant of approximately $598,000 from the National Institutes of
Health ("NIH") to research various infections. During the three months
ended June 30, 2000, the Company recognized revenues of approximately
$136,000 from this grant and expensed payments to UNC of approximately
$38,000 for contracted research related to such grant. There is no
additional funding available to the Company under the aforementioned
grant.
In August 2000, the Company received two additional SBIR grants from the
NIH aggregating approximately $831,000. During the three months ended June
30, 2001, the Company recognized revenues of approximately $259,000 from
these grants. During the three months ended June 30, 2001, the Company
expensed payments of approximately $75,000 to UNC and certain other
Consortium universities for contracted research related to these grants.
There is additional funding available to the Company under the
aforementioned grants of approximately $244,000 as of June 30, 2001.
-10-
During the three months ended June 30, 2001 and 2000, the Company expensed
approximately $68,000 and $31,000, respectively, of other payments to UNC
and certain other Consortium universities for patent related costs and
other contracted research. Total payments expensed to UNC and certain
other Consortium universities were approximately $244,000 and $169,000
during the three months ended June 30, 2001 and 2000, respectively.
Included in accounts payable as of June 30, 2001 and March 31, 2001, were
approximately $185,000 and $250,000, respectively, due to UNC and certain
other Consortium universities.
In November 2000, the Bill & Melinda Gates Foundation awarded a
$15,114,000 grant to UNC to develop new drugs to treat Human African
Trypanosomiasis (sleeping sickness) and Leishmaniasis. On March 29, 2001,
UNC entered into a clinical research subcontract agreement with the
Company, whereby the Company is to receive up to $9,800,000, subject to
certain terms and conditions, over a five year period to conduct certain
clinical and research studies. The proceeds from this agreement are
restricted and must be segregated from the Company's other funds and used
for specific purposes. On March 29, 2001, the Company received the first
installment of $4,300,000, of which approximately $864,000 was utilized
for clinical and research purposes conducted and expensed during the three
months ended June 30, 2001. The Company has recognized aggregate revenues
of approximately $1,665,000 through June 30, 2001 for services performed
under the agreement, including approximately $864,000 during the three
months ended June 30, 2001. The remaining amount (approximately
$2,645,000) has been deferred and will be recognized as revenue over the
term of the agreement as the services are performed.
6. CONTINGENCIES
In June 2000, Technikrom, Inc. ("Technikrom") filed a claim against the
Company with the American Arbitration Association in Chicago, Illinois. In
that proceeding, Technikrom seeks to recover $124,000 in fees, interest
and costs for certain method development services provided to the Company
relating to the purification of a protein known as rmCRP. The Company has
filed a counterclaim against Technikrom for fraudulent inducement of
contract which seeks compensatory damages of at least $224,000, plus
interest and costs. The Company has also sought a declaratory judgment
that Technikrom, inter alia, failed to use its best efforts to develop a
purification method within the time parameters set by the parties. The
parties have engaged an arbitrator and are proceeding with the arbitration
process. In the opinion of management, ultimate resolution of this matter
will not have a material effect on the Company's financial statements.
The Company is involved in various other claims and litigation incidental
to its operations. In the opinion of management, ultimate resolution of
these actions will not have a material effect on the Company's financial
statements.
7. SUBSEQUENT EVENT
On July 24, 2001, the Company entered into an agreement with H.C.
Wainwright & Co., Inc. ("Wainwright"), an investment banker, to seek
investors for a private placement of up to $10,000,000 in gross proceeds
of debt, equity and/or warrant securities of the Company. The Company is
obligated to grant to Wainwright, upon the closing of any private
placement offering of the Company's securities arranged by Wainwright,
warrants to purchase 10% of the amount of securities sold in the private
placement offering. The terms of the warrants shall include an exercise
price equal to the price at which the securities are sold in the private
placement offering, a five year exercise period, and registration rights
on any underlying shares, among other items. In addition, Wainwright is
entitled to a fee of 7.5% of the aggregate cash consideration received by
the Company through their sources in connection with the private placement
offering.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report and in the documents
incorporated by reference herein, including, without limitation, statements
containing the words "believe," "anticipate," "expect" and words of similar
import, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange
Act of 1934, as amended. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include, among others,
the following: (i) the Company's history of operating losses, (ii) the Company's
need for substantial additional funds, (iii) the Company's ability to access the
capital markets and/or to secure private sources of funding, (iv) the
availability of grant money, (v) the length of time until any of the Company's
product candidates may be available for sale, (vi) the uncertainties involved in
clinical trials being performed on the product candidates the Company is
developing, (vii) the Company's dependence on third party relationships for the
manufacture of product candidates and the performance of clinical trials with
regard to its product candidates, (viii) the intense competition and rapid
technological changes in the Company's industry, (ix) the extensive and rigorous
federal and foreign regulations of the Company's testing, manufacturing and sale
of its product candidates, (x) the Company's dependence on key personnel and
contributions from scientists, researchers and technicians from
Consortium-member universities, (xi) the Company's ability to protect the
technology, patents and proprietary information on which its business relies,
(xii) the disposition of certain legal actions, and (xiii) other factors
referenced in this report. Given these uncertainties, readers of this report are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
RESULTS OF OPERATIONS
Immtech International, Inc. ("Immtech" or the "Company") has not
generated any revenue from operations and does not anticipate generating any
revenue from operations for the foreseeable future. The Company has funded, and
plans to continue to fund, its operations through research funding agreements
and grants, and the sale of debt and equity securities. For the period from
inception (October 15, 1984) to June 30, 2001, the Company incurred cumulative
net losses of approximately $35,511,000. The Company has incurred additional
losses since such date and expects to incur additional operating losses for the
foreseeable future.
-13-
Three Months Ended June 30, 2001 Compared with Three Months Ended June
30, 2000.
Revenues under collaborative research and development agreements were
approximately $1,123,000 and $136,000 for the three months ended June 30, 2001
and 2000, respectively. For the three months ended June 30, 2001 there were
revenues recognized of approximately $864,000 relating to a clinical research
subcontract agreement between the Company and The University of North Carolina
at Chapel Hill ("UNC") and grant revenues of approximately $259,000 from Small
Business Innovative Research ("SBIR") grants from the National Institutes of
Health ("NIH"), while for the three months ended June 30, 2000, revenues
consisted of an NIH grant of approximately $136,000. The clinical research
subcontract agreement relates to a grant from the Bill & Melinda Gates
Foundation to UNC.
Interest income for the three months ended June 30, 2001 was
approximately $26,000. Interest income in the three months ended June 30, 2000
was approximately $97,000. The decrease is due to a reduction in funds invested.
There was no interest expense for the three months ended June 30, 2001 and June
30, 2000.
Research and development expenses decreased to approximately $544,000
in the three months ended June 30, 2001 from approximately $2,177,000 in the
three months ended June 30, 2000. The decrease is due primarily to a settlement
agreement with Pharm-Eco Laboratories, Inc. ("Pharm-Eco"), whereby Immtech
received from Pharm-Eco a cash payment of $1,000,000. Certain accounts payable
obligations to Pharm-Eco of approximately $159,000 were also forgiven. The cash
payment received and the accounts payable obligation forgiven were recorded as a
credit to (reduction of) research and development expenses during the three
months ended June 30, 2001 because we had previously expensed in research and
development the estimated fair value of the shares of our common stock received
by Pharm-Eco at the time of our initial public offering on April 26, 1999 and
the accounts payable obligations. This decrease for the period is also
attributable to reduced spending on product development.
General and administrative expenses increased for the three months
ended June 30, 2001 to approximately $969,000 from approximately $596,000 for
the three months ended June 30, 2000. The increase was primarily due to an
increase in legal fees from approximately $79,000 in the three months ended June
30, 2000 to approximately $392,000 in the three months ended June 30, 2001. The
increased legal fees for the three months ended June 30, 2001 was primarily
attributable to ongoing legal proceedings and other corporate matters.
We incurred a net loss of approximately $365,000 for the three months
ended June 30, 2001 as compared with a net loss of approximately $2,544,000 for
the three months ended June 30, 2000. Were it not for the $1,159,000 settlement
from Pharm-Eco, the net loss for the three months ended June 30, 2001 would have
been approximately $1,524,000.
-14-
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had approximately $1,277,000 of cash
and cash equivalents, substantially all of which were invested in a money market
mutual fund.
Equipment expenditures for the three months ended June 30, 2001 totaled
approximately $62,000 as compared to approximately $31,000 for the same period
last year. No significant purchases of equipment are anticipated by the Company
during the next three months.
The Company periodically receives cash from the exercise of common
stock options. During the three months ended June 30, 2001, the exercise of
common stock options provided the Company with approximately $19,000 as compared
to approximately $42,000 for the same period last year.
We believe our existing resources, but not including proceeds from any
grants we may receive, to be sufficient to meet our planned expenditures through
September 2001, although there can be no assurance we will not require
additional funds.
We have engaged H.C. Wainwright & Co., Inc., an investment banker, to
seek investors for a private placement of the Company's debt, equity and/or
warrants for gross proceeds of approximately $10,000,000 in the aggregate. We
believe such amount, if obtained, will be sufficient to fund our operations
through November 2002, although there can be no assurance we will not require
additional funds before such time.
To date, 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
$23,047,000;
o payments from research agreements, foundation grants and SBIR grants
and Small Business Technology Transfer Program grants of
approximately $4,835,000; and
o the use of stock, options and warrants in lieu of cash compensation.
Our cash resources have been used to finance research and development,
including sponsored research, capital expenditures, expenses associated with
development of product candidates under an agreement dated January 15, 1997, as
amended (the "Consortium Agreement"), among the Company, The University of North
Carolina at Chapel Hill ("UNC"), and Pharm-Eco Laboratories, Inc. (to which each
of Duke University, Auburn University and Georgia State University agreed
shortly thereafter to become a party, and all of which, collectively with UNC,
are referred to as the "Consortium"), and 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
pre-clinical (laboratory) and clinical trials, administrative expenses to
support our research and development operations and capital expenditures for
expanded research capacity, various equipment needs and facility improvements or
relocation.
-15-
Pursuant to the Consortium Agreement, we are required to fund certain
research of the Consortium at an aggregate cost of approximately $100,000 per
quarter through April 30, 2002.
Our future working capital requirements will depend upon numerous
factors, including the progress of research and development programs (which may
vary as product candidates are added or abandoned), pre-clinical testing and
clinical trials, achievement of regulatory milestones, the Company's corporate
partners fulfilling their obligations to the Company, the timing and cost of
seeking regulatory approvals, the level of resources that the Company devotes to
the engagement or development of manufacturing capabilities, the ability of the
Company to maintain existing and to establish new collaborative arrangements
with other companies to provide funding to the Company to support these
activities, and other factors. In any event, we will require substantial funds
in addition to the present existing working capital to develop product
candidates and otherwise to meet our business objectives.
Our ability to continue as a going concern is dependent upon our
ability to generate sufficient funds to meet obligations as they become due and,
ultimately, to obtain profitable operations. Management's plans for the
forthcoming year, in addition to normal operations, include continuing their
efforts to obtain additional financing and research grants, and to enter into
various research and development agreements with other entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's cash and cash equivalents are maintained primarily in
U.S. dollar accounts and amounts payable for research and development to
research organizations are contracted in U.S. dollars. Accordingly, the
Company's exposure to foreign currency risk is limited because its transactions
are primarily based in U.S. dollars. The Company does not have any other
exposure to market risk. The Company will develop policies and procedures to
manage market risk in the future as circumstances may require.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
GERHARD VON DER RUHR AND MARC VON DER RUHR V. IMMTECH INTERNATIONAL, INC., T.
STEPHEN THOMPSON, GARY C. PARKS, AND ERIC L. SORKIN:
A description of the general background and prior developments
concerning this matter is contained in the Company's annual report on Form
10-KSB/A (Amendment No. 1) filed with the Securities and Exchange Commission on
July 6, 2001.
-16-
On June 28, 2001, the Company and certain affected officers and
directors filed a notice of removal with the United States District Court for
the Eastern District of Wisconsin requesting that the Von der Ruhr action be
removed to that court. The action is now pending in that court. On July 6, 2001,
the Company and those officers and directors filed a motion in that court to
dismiss the Von der Ruhr complaint for lack of personal jurisdiction, failure to
plead the fraud allegation with required specificity and failure to state a
claim upon which relief may be granted. On August 6, 2001, plaintiffs filed in
that court a brief in response to defendants' motion to dismiss. Defendants will
file a reply brief by August 20, 2001, rebutting plaintiffs' arguments. The
Company believes the claims are meritless and intends to vigorously defend
against this proceeding.
Except as noted above and in Note 3 and Note 6 of the Notes to the
Condensed Financial Statements set forth in Part I, Item 1, Condensed Financial
Statements, of this Form 10-Q, and in Part I, Item 3, Legal Proceedings, of the
Form 10-KSB/A (Amendment No. 1) filed on July 6, 2001, the Company is not aware
of any impending litigation.
ITEM 2. CHANGES IN SECURITIES.
The following individuals have exercised options granted to them under
the Company's stock option plan. As such, the securities are exempt from
registration pursuant to Rule 701 of the Securities Act of 1933, as amended. The
Company will use the proceeds of the sales for general corporate purposes.
CONSIDERATION NUMBER OF SHARES
DATE DESCRIPTION RECEIVED BY NAME OF OF COMMON STOCK
THE COMPANY OPTION HOLDER ISSUED
-------------- --------------- ------------- ----------------- ----------------
4/09/01 Option exercise $6,600.00 Gary C. Parks 14,195
4/09/01 Option exercise $2,598.75 Lawrence A. Potempa 7,621
4/09/01 Option exercise $4,455.00 T. Stephen Thompson 13,066
4/20/01 Option exercise $2,227.50 Lyman Davis 6,533
4/23/01 Option exercise $2,961.74 Jean L. Anderson 8,711
Pursuant to the terms of an engagement agreement entered into on July
24, 2001, with H.C. Wainwright & Co., Inc. ("Wainwright"), the Company is
obligated to grant to Wainwright, upon the closing of any private placement of
the Company's securities arranged by Wainwright, a warrant to purchase such
number of the Company's securities as is equal to ten percent of the amount of
securities sold in the private placement. The terms of the warrant shall include
an exercise price equal to the price at which the securities are sold in the
private placement, a five year exercise period, and registration rights on the
underlying securities.
-17-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS, AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports On Form 8-K.
A report on Form 8-K was filed on April 27, 2001 announcing a
favorable ruling on the Company's motion for summary judgment in regard to
litigation with Pharm-Eco Laboratories, Inc. ("Pharm-Eco") and the receipt of
$1,000,000 in resolution of various matters relating to Pharm-Eco.
-18-
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2001 IMMTECH INTERNATIONAL, INC.
By: /s/ T. Stephen Thompson
-----------------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: August 14, 2001 By: /s/ Gary C. Parks
-----------------------------------------
Gary C. Parks
Treasurer, Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)