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 September 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.
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(Exact Name of Registrant as specified in its Charter)
Delaware 39-1523370
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(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
150 Fairway Drive, Suite 150, Vernon Hills, Illinois 60061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (847) 573-0033
Check 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 prior 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [_]
As of October 31, 2001, 6,005,371 shares of the Registrant's common stock, par
value $0.01 ("Common Stock"), were outstanding.
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.......................................12
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.................................17
Item 4. Submission of Matters to a Vote of Security Holders.............17
Item 5. Other Information...............................................17
Item 6. Exhibits, and Reports on Form 8-K...............................18
SIGNATURES..................................................................19
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements.
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS (UNAUDITED)
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SEPTEMBER 30, MARCH 31,
2001 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 530,770 $ 2,097,718
Restricted funds on deposit 2,252,239 3,812,553
Other current assets 50,000 28,289
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Total current assets 2,833,009 5,938,560
PROPERTY AND EQUIPMENT - Net 224,157 210,024
OTHER ASSETS 19,848 19,848
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TOTAL $ 3,077,014 $ 6,168,432
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
CURRENT LIABILITIES:
Accounts payable $ 1,434,380 $ 1,695,721
Accrued expenses 50,862 70,862
Deferred revenue 1,987,925 3,509,194
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Total current liabilities 3,473,167 5,275,777
DEFERRED RENTAL OBLIGATION 30,329 33,511
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Total liabilities 3,503,496 5,309,288
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STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS):
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 September 30, 2001 and March 31, 2001, respectively 60,053 59,552
Additional paid-in capital 33,755,083 33,574,917
Deficit accumulated during the developmental stage (34,241,618) (32,775,325)
------------ ------------
Total stockholders' equity (deficiency in assets) (426,482) 859,144
------------ ------------
TOTAL $ 3,077,014 $ 6,168,432
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See notes to condensed financial statements.
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IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
--------------------------------------------------------------------------------
OCTOBER 15,1984
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2001 2000 2001 2000 2001
REVENUES $ 836,584 $ 203,380 $ 1,959,422 $ 338,958 $ 5,671,282
------------ ------------ ------------ ------------ ------------
EXPENSES:
Research and development 1,236,779 1,710,759 1,781,073 3,887,877 26,324,127
General and administrative 711,605 718,705 1,681,002 1,314,701 16,093,762
Equity in loss of joint venture 135,002
------------ ------------ ------------ ------------ ------------
Total expenses 1,948,384 2,429,464 3,462,075 5,202,578 42,552,891
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,111,800) (2,226,084) (1,502,653) (4,863,620) (36,881,609)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 10,842 41,548 36,360 138,497 559,478
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 10,842 41,548 36,360 135,555 (1,157,673)
LOSS BEFORE EXTRAORDINARY ITEM (1,100,958) (2,184,536) (1,466,293) (4,728,065) (38,039,282)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 1,427,765
NET LOSS (1,100,958) (2,184,536) (1,466,293) (4,728,065) (36,611,517)
REDEEMABLE PREFERRED STOCK CONVERSION, PREMIUM
AMORTIZATION AND DIVIDENDS 2,369,899
------------ ------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $(1,100,958) $(2,184,536) $(1,466,293) $(4,728,065) $(34,241,618)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.18) $ (0.41) $ (0.24) $ (0.88)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED IN COMPUTING
BASIC AND DILUTED LOSS PER SHARE 6,005,371 5,367,769 6,002,121 5,356,009
============ ============ ============ ============
See notes to condensed financial statements.
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
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OCTOBER 15,
1984
THREE MONTHS ENDED SIX MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000 2001
OPERATING ACTIVITIES:
Net loss $ (1,100,958) $ (2,184,536) $ (1,466,293) $ (4,728,065) $(36,611,517)
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 85,101 85,152 161,824 134,668 13,412,419
Depreciation and amortization of property and
equipment 25,481 25,108 47,861 51,191 492,728
Deferred rental obligation (1,592) (1,592) (3,182) (3,184) 30,329
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 569,906 1,560,314 (2,252,239)
Other current assets (46,212) (21,711) 11,200 (50,000)
Other assets (19,848)
Accounts payable 404,105 (438,935) (261,341) (387,268) 1,763,520
Accrued expenses (25,000) 42,865 (20,000) 713,875
Deferred revenue (657,123) (1,521,269) 53,411 1,987,925
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (746,292) (2,471,938) (1,523,797) (4,865,105) (21,688,126)
------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities (199,996) (1,803,469)
Proceeds from sales and maturities of investment
securities 1,558,043 1,800,527
Purchases of property and equipment (22,451) (61,994) (53,401) (690,361)
Investment in and advances to joint venture (135,002)
------------ ------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities (22,451) (61,994) 1,304,646 (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 (103,513) 18,843 (61,705) 16,316,514
Additional capital contributed by stockholders 13,825 13,825 245,559
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities (89,688) 18,843 (47,880) 23,047,201
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (746,292) (2,584,077) (1,566,948) (3,608,339) 530,770
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,277,062 3,572,057 2,097,718 4,596,319 0
------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 530,770 $ 987,980 $ 530,770 $ 987,980 $ 530,770
============ ============ ============ ============ ============
See notes to condensed financial statements.
IMMTECH INTERNATIONAL, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared by
Immtech International, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC") and, in the
opinion of the Company, include all adjustments necessary for a fair
statement of results for each period shown (unless otherwise noted herein,
all adjustments are of a normal recurring nature). Certain information and
note 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) and Form 10-Q.
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 an individual. 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 $36,612,000. 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 certain entities that are thinly capitalized and are
dependent upon their ability to raise additional funds to continue their
research and development activities. There can be no assurance that the
Company's continued research will lead to the development of commercially
viable products. The Company's operations to date have consumed
substantial amounts of cash. The negative cash flow from operations is
expected to continue in the foreseeable future. The Company will require
substantial funds to
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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
January 2002, 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
an adverse 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 remainder of the fiscal year, in addition to normal
operations, include continuing their efforts to obtain additional equity
and/or debt financing (see Note 4), 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 deposit 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.
Comprehensive Loss - Comprehensive loss for the six months ended September
30, 2000 was as follows:
Net loss $(4,728,065)
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 $(4,726,887)
===========
There were no differences between comprehensive loss and net loss for the
three and six months ended September 30, 2001 and the three months ended
September 30, 2000.
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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 an individual, 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
six months ended September 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.
NextEra has incurred accumulated losses of approximately $2,042,000 since
inception (July 8, 1998) through September 30, 2001. NextEra is expected
to continue to incur significant losses during the next several years. In
addition, as of September 30, 2001, NextEra's current liabilities exceeded
its current assets by approximately $171,000 and NextEra had a
stockholders' deficiency of approximately $137,000.
As of September 30, 2001, June 30, 2001 and March 31, 2001, the Company
owned approximately 28%, 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 services 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 has remained zero since
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
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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.
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 zero to four years and
generally expire after five or ten years. As of September 30, 2001, there
were 131,750 shares available for grant, including 24,000 shares which are
reserved for issuance under certain consulting agreements with
nonemployees.
During the three months ended September 30, 2001, the Company did not
issue any options to nonemployees and recognized expense of approximately
$85,000 related to certain options issued prior to July 1, 2001 which vest
over four year service periods. During the six months ended September 30,
2001, the Company issued options to purchase 12,000 shares of common stock
to nonemployees and recognized expense of approximately $162,000 related
to these options and certain options issued prior to July 1, 2001 which
vest over four year service periods. During the three months and six
months ended September 30, 2000, the Company did not issue any options to
nonemployees and recognized expenses of approximately $85,000 and
$135,000, respectively, related to certain options issued prior to April
1, 2000 which vest over four year service periods. The expenses were
determined based on the estimated fair value of the options issued.
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 was terminated by the Company effective September 14, 2001. As
compensation for these services, the Company paid a retainer fee to
Kriegsman of $20,000 per month for the term of the engagement. The Company
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 did not
vest as the Company's market capitalization did not reach the required
milestones. The warrants to purchase 100,000 shares of the Company's
common stock are exercisable over a five year period and contain a
cashless exercise provision.
On July 24, 2001, the Company entered into an agreement with H.C.
Wainwright & Co., Inc. ("Wainwright"), an investment bank, to seek
investors for a private placements 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 such private placement offering at an
exercise price equal to the price at which the securities are sold in the
private placement offering, with a five year exercise period, and grant
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.
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
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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 (all four universities,
collectively, 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 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 the first
new drug application or an abbreviated new drug application with the Food
and Drug Administration for a 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
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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.
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 such a license. On March 27, 2001,
Pharm-Eco and the Company entered into an agreement assigning to the
Company the license to the Current Compounds. 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 September
30, 2001 and 2000, the Company expensed grant payments to UNC of $100,000.
During each of the six month periods ended September 30, 2001 and 2000,
the Company expensed grant payments to UNC of $200,000. 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 and
the six months ended September 30, 2000, the Company recognized revenues
of approximately $100,000 and $236,000, respectively, from this grant and
expensed payments to UNC of approximately $13,000 and $51,000,
respectively, for subcontracted research related to the 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 and six
months ended September 30, 2001, the
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Company recognized revenues of approximately $180,000 and $438,000,
respectively, from these grants. During the three and six months ended
September 30, 2000, the Company recognized revenues of approximately
$103,000, from these grants. During the three months and six months ended
September 30, 2001, the Company expensed payments of approximately $56,000
and $132,000, respectively, 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 $64,000 as of September 30, 2001. In August 2001,
the Company was awarded an additional SBIR grant of $144,000 from the NIH.
No draws were taken against this grant as of September 30, 2001.
During the three months ended September 30, 2001 and 2000, the Company
expensed approximately $104,000 and $140,000, respectively, of other
payments to UNC and certain other Consortium universities for
reimbursement of patent related costs and other contracted research. Total
payments expensed to UNC and certain other Consortium universities were
approximately $261,000 and $244,000 during the three months ended
September 30, 2001 and 2000, respectively. During the six months ended
September 30, 2001 and 2000, the Company expensed approximately $173,000
and $171,000, respectively, of other payments to UNC and certain other
Consortium universities for reimbursement of patent related costs and
other contracted research. Total payments expensed to UNC and certain
other Consortium universities were approximately $505,000 and $554,000
during the six months ended September 30, 2001 and 2000, respectively.
Included in accounts payable as of September 30, 2001 and March 31, 2001,
were approximately $314,000 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 Trypanosomiasis
(African 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 of such grant funds,
subject to certain terms and conditions, over a five year period to
conduct certain clinical and research studies in connection with such
diseases. 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 $657,000 and $1,521,000 was utilized
for clinical and research purposes conducted and expensed during the three
and six months ended September 30, 2001, respectively. The Company has
recognized aggregate revenues of approximately $2,312,000 through
September 30, 2001 for services performed under the agreement. The
remaining amount (approximately $1,988,000) 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 fees,
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.
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The Company is involved in various other claims and litigation incidental
to its operations. In the opinion of management, the ultimate resolution
of these actions will not have a material effect on the Company's
financial statements.
* * * * * *
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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, (xiii) the Company's ability to
keep its common stock listed on the NASDAQ National Market System and (xiv)
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 September 30, 2001, the Company incurred
cumulative net losses of approximately $36,612,000. The Company has incurred
additional losses since such date and expects to incur additional operating
losses for the foreseeable future.
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Three Months Ended September 30, 2001 and 2000.
Revenues under collaborative research and development agreements
were approximately $837,000 and $203,000 for the three months ended September
30, 2001 and 2000, respectively. For the three months ended September 30, 2001
there were revenues recognized of approximately $657,000 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 $180,000
from Small Business Innovative Research ("SBIR") grants from the National
Institutes of Health ("NIH"), while for the three months ended September 30,
2000, revenues consisted of an NIH grant of approximately $203,000. The clinical
research subcontract agreement relates to a grant from the Bill & Melinda Gates
Foundation ("Gates Foundation") to UNC to develop new drugs to treat
Trypanosomiasis (African sleeping sickness) and Leishmaniasis. This program was
initiated in March 2001 (fourth quarter of last fiscal year). Grant and research
and development agreement revenue is recognized as completed under the terms of
the respective agreements, according to Company estimates. Funds received prior
to completion under the terms of the respective agreements are recorded as
deferred revenues.
Interest income for the three months ended September 30, 2001 was
approximately $11,000. Interest income in the three months ended September 30,
2000 was approximately $42,000. The decrease is due to a reduction in funds
invested and a decrease in interest rates paid on the invested funds from the
prior corresponding quarter. There was no interest expense for the three months
ended September 30, 2001 and September 30, 2000.
Research and development expenses decreased to approximately
$1,237,000 in the three months ended September 30, 2001 from approximately
$1,711,000 in the three months ended September 30, 2000. The current quarter is
affected by the transition from preclinical and research and development to
clinical trials in Africa for treatment of Trypanosomiasis.
General and administrative expenses decreased for the three months
ended September 30, 2001 to approximately $712,000 from approximately $719,000
for the three months ended September 30, 2000.
We incurred a net loss of approximately $1,101,000 for the three
months ended September 30, 2001 as compared with a net loss of approximately
$2,185,000 for the three months ended September 30, 2000.
Six Months Ended September 30, 2001 and 2000.
Revenues under collaborative research and development agreements
were approximately $1,959,000 and $339,000 for the six months ended September
30, 2001 and 2000, respectively. For the six months ended September 30, 2001
there were revenues recognized of approximately $1,521,000 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
$438,000 from Small Business Innovative Research ("SBIR") grants from the
National Institutes of Health ("NIH"), while for the six months ended September
30, 2000, revenues consisted of an NIH grant of approximately $339,000. The
clinical research subcontract agreement relates to a grant from the Gates
Foundation to UNC for development of
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new drugs to treat Trypanosomiasis (African sleeping sickness) and
Leishmaniasis. The clinical research subcontract agreement with UNC was
consummated in March 2001. Grant and research and development agreement revenue
is recognized as completed under the terms of the respective agreements,
according to Company estimates. Funds received prior to completion under the
terms of the respective agreements are recorded as deferred revenues.
Interest income for the six months ended September 30, 2001 was
approximately $36,000. Interest income for the six months ended September 30,
2000 was approximately $138,000. The decrease is due to a reduction in funds
invested and a reduction in interest rates paid on the invested funds. There was
no interest expense for the six months ended September 30, 2001 and September
30, 2000.
Research and development expenses decreased to approximately
$1,781,000 in the six months ended September 30, 2001 from approximately
$3,888,000 in the six months ended September 30, 2000. The decrease for the
period is primarily attributable to an April 20, 2001 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 six months ended
September 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. The six months ended September 30, 2000 had
significant spending on preclinical studies required for regulatory filings
which were not required in the same period this year.
General and administrative expenses increased for the six months
ended September 30, 2001 to approximately $1,681,000 from approximately
$1,315,000 for the six months ended September 30, 2000. The increase was
primarily due to an increase in professional fees from approximately $465,000
for the six months ended September 30, 2000 to approximately $799,000 for the
six months ended September 30, 2001. The increased professional fees for the six
months ended September 30, 2001 was primarily attributable to ongoing legal
proceedings and other corporate matters.
We incurred a net loss of approximately $1,466,000 for the six
months ended September 30, 2001 as compared with a net loss of approximately
$4,728,000 for the six months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, the Company had approximately $531,000 of
cash and cash equivalents, substantially all of which were invested in a money
market mutual fund.
There were no equipment expenditures for the three months ended
September 30, 2001 as compared to approximately $22,000 for the same period last
year. During the six months ended September 30, 2001 and 2000, equipment
purchases were approximately $62,000 and $53,000, respectively. No significant
purchases of equipment are anticipated by the Company during the next three
months.
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The Company periodically receives cash from the exercise of common
stock options. During the three months ended September 30, 2001, there were no
options exercised.
We believe our existing resources, but not including proceeds from
any grants we may receive, to be sufficient to meet our planned expenditures
through January 2002, although there can be no assurance we will not require
additional funds.
We have engaged H.C. Wainwright & Co., Inc., an investment bank,
to seek investors for a private placement of the Company's debt, equity and/or
warrants. We believe the private placement financing, if obtained, will be
sufficient to fund our operations through December 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 $5,672,000; 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 preclinical (laboratory) and clinical (human) 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.
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
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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 our 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
remainder of the fiscal 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
("SEC") on July 6, 2001 and in the Company's quarterly report on Form 10-Q filed
with the SEC on August 14, 2001.
On July 6, 2001, the Company and certain affected officers and
directors filed a motion in the United States District Court for the Eastern
District of Wisconsin 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. On August 20, 2001, defendants filed a reply brief rebutting
plaintiffs' arguments. The parties are currently awaiting a ruling from the
court on the arguments. The Company believes plaintiffs' claims are meritless
and intends to vigorously defend against this proceeding.
Except as noted above and in the Notes to the Condensed Financial
Statements set forth in Part I, Item 1, Condensed Financial Statements, of this
Form 10-Q, in Part I, Item 3, Legal Proceedings, of the Form 10-KSB/A (Amendment
No. 1) filed on July 6, 2001, and in
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Part II, Item 1, Legal Proceedings, of the Form 10-Q filed on August 14, 2001,
the Company is not aware of any impending litigation.
Item 2. Changes in Securities.
Pursuant to the terms of an engagement agreement entered into on
July 24, 2001, with H.C. Wainwright & Co., Inc. an investment bank
("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.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Annual Meeting.
The Company's 2001 annual meeting of stockholders will be held more
than 30 days after the date of its 2000 annual meeting. Our 2000 annual meeting
was held on October 12, 2000 and we have selected December 17, 2001 as the date
for our 2001 annual meeting. As such, the date for submission of Stockholder
proposals for the 2001 annual meeting was extended from April 27, 2001 to July
2, 2001.
Our Common Stock May Be Delisted From the NASDAQ National Market System.
On October 9, 2001, we were notified by the NASDAQ staff that our
common stock may be delisted from the NASDAQ National Market System ("NMS") as a
result of our failure to meet certain NMS maintenance standards. Pursuant to
NASDAQ Marketplace Rule 4310(c)(8)(C), the Company was provided 30 calendar days
to regain compliance by regaining a $50 million market capitalization for 10
consecutive trading days. On November 8, 2001 the 30 day period expired without
the Company regaining a $50 million market capitalization. On November 12, 2001
we were notified by NASDAQ that the Company had failed to regain compliance and
that our common stock would be delisted unless we were to appeal the NASDAQ
staff's decision. We have until November 19, 2001 to file an appeal with the
NASDAQ Listing Qualifications Panel or apply for listing on the NASDAQ SmallCap
Market. It is our intention to appeal the staff's decision. During the appeals
process our common stock will remain listed on the NASDAQ NMS.
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To increase the Company's net tangible assets and in order to help
ensure our compliance with NASDAQ maintenance standards, we have had discussions
with existing stockholders and have engaged H.C. Wainwright & Co., Inc., an
investment bank ("Wainwright"), to seek investors for private placements. We
believe there is significant interest among existing and new investors and we
believe we will be successful in raising sufficient funds to satisfy the NMS
maintenance standards and to operate our business. We believe the private
placements will enable us to satisfy the NMS net tangible asset requirement for
a substantial time.
In the event our appeal to the NASDAQ Listing Qualifications Panel
is unsuccessful and we are unable to maintain our listing on the NASDAQ NMS we
intend to apply to list our common stock on the NASDAQ SmallCap Market. If we
apply for listing on the NASDAQ SmallCap Market and our application is not
accepted, then our common stock may be traded on the "pink sheets" and be deemed
to be "penny stocks." If the Company's common stock is considered penny stock,
it would be subject to rules that impose additional regulation on broker-dealers
who sell the Company's securities. For example, broker-dealers must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Also, a
disclosure schedule must be prepared before any transaction involving a penny
stock, and disclosure is required about (1) sales commissions payable to both
the broker-dealer and the registered representative and (2) current quotations
for the securities. Monthly statements are also required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock. Because of these additional obligations,
some brokers may not effect transactions in penny stocks. This could have an
adverse effect on the liquidity of the our common stock.
If the Company's securities are delisted from the NASDAQ NMS, there
can be no assurances that the Company will be able to satisfy the requirements
for listing on the NASDAQ SmallCap Market and its failure to do so may have a
material adverse effect on the business, financial conditions and results of
operations of the Company. The Company believes that its securities will be
delisted from the NASDAQ NMS if sufficient funds to satisfy the NASDAQ NMS net
asset or stockholder equity requirements are not secured and if it otherwise
does not comply with NASDAQ NMS maintenance standards. There can be no
assurances that the Company will be able to raise sufficient funds and satisfy
the other conditions to continued listing imposed upon the Company by NASDAQ,
and the Company believes that its failure to do so may have a material adverse
effect on the business, financial condition and related financial statements of
the Company.
Item 6. Exhibits, and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports On Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2001 IMMTECH INTERNATIONAL, INC.
By: /s/ T. Stephen Thompson
---------------------------------
T. Stephen Thompson
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ Gary C. Parks
---------------------------------
Gary C. Parks
Treasurer, Secretary and
Chief Financial Officer
(Principal Financial and
Accounting Officer)