1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2000
Commission File Number: 0-27072
HEMISPHERx BIOPHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 988-0080
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
29,447,064 shares of common stock issued and outstanding as of June 30, 2000.
PART I - FINANCIAL INFORMATION
2
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,396,423 $ 8,249,618
Short Term investments 2,152,966 2,236,769
Accounts receivable 75,350 88,300
Stock subscription receivable 2,250,000 -
Prepaid expenses and other current assets 142,950 367,640
----------- ----------
Total current assets 11,017,689 10,942,327
Property and equipment, net 333,360 390,101
Patent and trademark rights, net 1,362,709 1,292,330
Investments in unconsolidated affiliates 1,413,000 1,798,146
Other assets 40,982 854,201
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Total assets $14,167,740 $15,277,105
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,091,023 $ 1,084,395
Accrued expenses 419,853 160,629
----------- ----------
Total current liabilities 1,510,876 1,245,024
Commitments and contingencies
Stockholders' equity:
Common stock 27,975 29,812
Additional paid-in capital 84,875,289 92,631,880
Deferred compensation (310,455) -
Treasury stock at cost
(167,935 and 365,146 shares respectively) (1,018,712) (3,680,532)
Accumulated deficit (70,917,233) (74,949,079)
----------- ----------
Total stockholders' equity 12,656,864 14,032,081
----------- ----------
Total liabilities and stockholders' equity $14,167,740 $15,277,105
=========== ==========
See accompanying notes to condensed consolidated financial statements.
3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three months ended
June 30,
--------------------------
1999 2000
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Revenues:
Cost recovery - clinical treatment programs $ 154,592 $ 215,525
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154,592 215,525
---------- ----------
Costs and expenses:
Research and development 1,351,612 1,478,044
General and administrative 1,133,760 764,554
Stock compensation expense 331,347 166,828
---------- ----------
Total cost and expenses 2,816,719 2,409,426
Interest and other income 107,834 159,965
Equity in CIMM's loss - (25,854)
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Net loss $(2,554,293) $(2,059,790)
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Basic and diluted loss per share $ (0.10) $ (0.07)
========== ==========
Basic and diluted weighted
average common shares outstanding 26,237,453 29,031,926
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six months ended
June 30,
--------------------------
1999 2000
---------- ----------
Revenues:
Cost recovery - clinical treatment programs $ 286,320 $ 425,287
Cost recovery other - 97,804
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Total revenues 286,320 523,091
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Costs and expenses:
Research and development 2,887,110 2,841,220
General and administrative 2,398,874 1,677,796
Stock compensation expense 709,426 322,055
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Total cost and expenses 5,995,410 4,841,071
Interest and other income 254,744 311,988
Equity in CIMM's loss - (25,854)
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Net loss $(5,454,346) $(4,031,846)
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Basic and diluted loss per share $ (0.21) $ (0.14)
========== ==========
Basic and diluted weighted
average common shares outstanding 26,255,479 28,801,993
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six months ended
June 30,
--------------------------
1999 2000
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Cash flows from operating activities:
Net loss $(5,454,346) $(4,031,846)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 45,379 62,392
Amortization of patents rights 56,898 132,240
Write-off of patent rights 40,235 2,235
Stock issued in settlement of debt 51,555 -
Stock option compensation expense 709,426 322,055
Equity in CIMM's loss - 25,854
Changes in assets and liabilities:
Accounts receivable 5,575 (12,950)
Prepaid expenses and other current assets (24,548) (224,690)
Accounts payable 1,094,709 12,670
Accrued expenses (49,976) (259,224)
Advances to Affiliates - (500,000)
Other assets (31,049) 16,840
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Net cash used in operating activities (3,556,142) (4,454,424)
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Cash flows from investing activities:
Purchase of property and equipment (164,719) (119,132)
Additions to patent rights (108,521) (64,096)
Marketable securities matured 1,595,412 2,152,966
Investments in unconsolidated affiliates (375,000) (411,000)
Purchase of marketable securities - (2,236,769)
Other investments - (33,785)
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Net cash provided by (used in) investing activities 947,172 (711,816)
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Cash flows from financing activities:
Proceeds from issuance of common stock - 2,250,000
Exercise of warrants 520,480 7,989,322
Purchase of warrants - (112,822)
Purchase of treasury stock (839,160) (3,107,065)
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Net cash (used in) provided by financing activities (318,680) 7,019,435
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Net (decrease) increase in cash and cash equivalents (2,927,650) 1,853,195
Cash and cash equivalents at beginning of period 12,025,073 6,396,423
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Cash and cash equivalents at end of period $9,097,423 $ 8,249,618
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See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the six months ended June 30, 2000
Common Additional Deferred Accumulated Total stockholders'
stock shares Par value paid-in capital Compensation deficit Treasury stock equity
------------ --------- --------------- ------------ ----------- -------------- -------------------
Balance 12/31/99 27,974,507 $27,975 $84,875,289 $(310,455) $(70,917,233) $(1,018,712) $12,656,864
Common stock
issued 1,837,703 1,837 7,849,993 122,905 7,974,735
Purchase of
warrants (112,822) (112,822)
Treasury stock
invested in Chronix
Biomedical 296,275 296,275
Treasury stock
purchased (3,107,064) (3,107,064)
Treasury stock used
in settlement of
debt 7,820 26,064 33,884
Stock compensation 11,600 310,455 322,055
Net loss (4,031,846) (4,031,846)
------------ --------- --------------- ------------ ----------- -------------- -------------------
Balance 6/30/00 29,812,210 $29,812 $92,631,880 $ -- $(74,949,079) $(3,680,532) $14,032,081
============ ========= =============== ============ =========== ============== ===================
See accompanying notes to condensed consolidated financial statements.
7
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Hemispherx BioPharma, Inc., a Delaware corporation
and all its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Our interim consolidated financial statements are unaudited.
In the opinion of management, all adjustments necessary for a
fair presentation of such consolidated financial statements
have been included. Such adjustments consist of normal
recurring items. Interim results are not necessarily
indicative of results for a full year.
The interim consolidated financial statements and notes thereto
are presented as permitted by the Securities and Exchange
Commission, and do not contain certain information which will
be included in our annual consolidated financial statements and
notes thereto.
These consolidated financial statements should be read in
conjunction with our 1999 consolidated financial statements
included in our Form 10K statement filed with the SEC on March
29, 2000.
NOTE 2: STOCK COMPENSATION:
We recorded stock/warrant compensation expense of $166,828
during the quarter ended June 30, 2000 and $331,347 during the
quarter ended June 30, 1999 for warrants granted to purchase
Common stock to non-employees of the Company. This expense had
no effect on shareholder equity as it was offset by an increase
in additional paid-in capital.
In 1999, we granted 200,000 stock warrants to the members of
the board of directors in recognition of services performed and
services to be performed. These warrants are exercisable at
the fair value price on the date of issuance ranging from
$6.50-$8.00 per share. We applied APB Opinion No. 25 in
accounting for stock-based compensation of its employees and,
accordingly, no compensation expense has been recognized for
stock purchase rights issued to employees in the financial
statements.
NOTE 3: COMPREHENSIVE INCOME:
In January, 1998, we adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement
130"), Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on our
net loss or stockholders' equity. Comprehensive income is
defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by
owners and distributions to owners. The term "other
comprehensive income" refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are
included in comprehensive income but excluded from net income.
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The components of comprehensive (loss) are:
For the six months ending
-------------------------------
June 30, 1999 June 30, 2000
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Net Loss $(5,454,346) $(4,031,846)
Unrealized gain on short
term investments 4,034 -
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Total comprehensive loss $(5,450,312) $(4,031,846)
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Note 4: INVESTMENTS:
Investments in unconsolidated affiliates:
We invested $1,074,000 for a 3.3% interest in R.E.D.
Laboratories. R.E.D. Laboratories is a privately held
biotechnology company for the development of diagnostic markers
for Chronic Fatigue Syndrome and other chronic immune diseases.
The investment has been recorded at cost.
On May 11, 1999, we acquired a 15% interest in California
Institute of Molecular Medicine ("CIMM") for $375,000. On May
16, 2000, we also acquired an additional 15% interest in CIMM
for an additional $375,000. The Company currently has a total
interest of 30% in CIMM for a total of $750,000. CIMM is
developing therapy for Hepatitis C virus. The investment has
been recorded by the equity method. The balance at June 30,
2000 was $724,146.
Other Investments:
Other investments include $296,274 for an investment in Chronix
Biomedical ("Chronix"). Chronix was formed to develop
diagnostics for the management of chronic diseases. The
investment was acquired by the issuance of 50,000 shares of
Hemispherx Biopharma, Inc. common stock from the treasury.
ITEM 2:Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Overview
Hemispherx is a biopharmaceutical company, which currently
operates three domestic subsidiary divisions and one foreign
subsidiary as product development centers. The overall
corporate mandate is to clinically develop nucleic acid drugs,
a new class of potential medicinal products, for chronic viral
and immune disorders such as severe Chronic Fatigue Syndrome
(CFS), AIDS and hepatitis B/C. Hemispherx has a global patent
estate consisting of more than 300 issued patents and conducts
clinical tests worldwide through its subsidiary companies and
affiliates. Since 1980, the Company has devoted significant
resources to research and development programs primarily
focused on developing it's lead drug trade named "Ampligen" for
treating various viral diseases.
In, addition, we are in the early pre-clinical stages of
developing Oragen drugs, a nucleic acid technology related to
Ampligen. Oragen drugs are low molecular weight RNA compounds,
which we believe, by virtue of their small size, have the
potential for becoming oral, broad-spectrum treatments for
various viral diseases such as HIV infection and chronic HBV
infection. The technology for these products has been
developed in part by us and has also been developed in part by
Temple University, which has licensed to us certain technology
for commercial use on an exclusive basis, subject to certain
limited exceptions. No clinical trials of Oragen drugs have
been conducted, and authorization to conduct such trials cannot
be sought or obtained until such time as sufficient pre-clinical
work has been completed.
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An FDA authorized, randomized, double-blind, placebo-controlled
Phase III clinical trial is currently underway at multiple
locations in the United States to test the efficacy of Ampligen
in the treatment of 230 patients afflicted with ME/CFS. Upon
completion, we will evaluate the clinical data collected and
submit the results to the FDA for review. Our European
subsidiary, Hemispherx Biopharma Europe, is engaged in
establishing and conducting clinical trials in Europe for the
treatment of ME/CFS.
Our research, development, clinical trials and the
manufacturing and marketing of its products are subject to
extensive regulation by numerous governmental agencies in the
United States and other countries. None of the Company's
products have been approved for commercial sale by the Food and
Drug Administration ("FDA") or other foreign regulatory
authorities.
Ampligen Safety Profile
In 1992, the FDA noted that various side effects of Ampligen
had been observed during the Phase II ME/CFS clinical trial and
in 1993, the FDA raised issues regarding possible side effects
which grew out of the agency's review of an animal study
conducted in 1987. The 1992 clinical trial side effects
included severe liver toxicity, swelling and itching of
extremities, chest pain, muscle cramps and flu-like symptoms.
The company observed that many of the side effects described
were regarded by both the company and the treating physicians
of the patients as unrelated to the Ampligen treatment. We
advised the FDA that the data form the Phase II ME/CFS study
indicated that Ampligen appeared to have a favorable
risk/benefit ratio for treating ME/CFS. The FDA subsequently
authorized a Phase II/III Study on the basis that it is
reasonably safe for initiation of a future clinical trial. The
potential side effects issue involving the Beagle Dog Study
focused on the inflammation of the outer lining (epicarditis)
of the animal's heart. The meaning of these findings in the
animals and how such relates to human clinical experience is
unknown. Because these conditions were not observed in studies
on other animal studies or in the human clinical trials
conducted in previous years, the company believes these
findings may be restricted to Beagle Dogs. We complied with
the FDA's request to include these and the observations derived
from other toxicity studies on informed consent forms given to
patients. Subsequent examinations of selected patients show no
evidence of epicarditis in these patients.
We believe that we have complied with the FDA's requests and
concerns and believes that these safety issues will not have a
material effect to obtain approval for Ampligen as a treatment
for ME/CFS, although no assurances can be given.
Recent Developments
In April 2000, we announced that we would be providing Ampligen
to certain HIV treatment specialists in the United States for
FDA authorized emergency treatment of individuals with AIDS who
are developing resistance to currently approved treatment
regimens. Also we reported that ex vivo tests conducted at the
University of California Irvine may provide new insight into
the possible treatment of the newly emerging types of HIV virus
which mutate into drug-resistance forms.
In May 2000, we reported that our licensing partner, Bioclones
(PTY) Limited, Republic of South Africa, had initiated Ampligen
treatment of patients with a severe case of ME/CFS in
Australia, South Africa and Great Britain.
In June 2000, we reported that we had retained the services of
Anderson Clinical Research, Inc. with respect to designing and
implementing a Phase II/III clinical trial to test the safety
and efficacy of Ampligen in the treatment of patients with HIV.
10
On June 26, 2000, we announced that we received FDA
Authorization to conduct a major Phase II/III clinical study to
involve 100 HIV patients exhibiting resistance to treatment
with existing antiviral drugs and combinations of drugs.
In July 2000, we received two "warning letters" from the FDA
regarding the contents of our (a) corporate website and (b)
three recent press releases. Specifically, the FDA letters
referenced two "hyperlinks" (visualized as "icons") within the
corporate website. One of the referenced hyperlinked "icons"
had been discontinued by us approximately 4 months prior to
receipt of the notice. These hyperlinked, but separate,
websites (which were wholly owned and operated by individuals
separate from the Company) contained information which was
deemed "promotional" in nature, i.e., imputing safety and
efficacy of an unapproved (experimental) medication. Imputing
safety and efficacy on an experimental medication still in
Phase 3 clinical trials, when attributed to the corporate
owner/sponsor of the medication may constitute "false and
misleading statements" under present FDA regulations which
establish "safety and efficacy" parameters in humans of drug
products for commercial sales. Our two "hyperlinks" (i.e.,
facilitated communications) with distal or remote websites were
deemed to be potentially such a violation; accordingly, we
undertook immediate steps to eliminate all "hyperlinks",
whether scientific, medical or business in nature, to any other
websites on the worldwide web to avoid potential for confusion
regarding our position on these matters. Further, we requested
a comprehensive "Standard Operating Procedure" from its
"webmaster" in an effort to insure that no alterations to its
corporate website, including without limitation the
introduction of "hyperlinks," are effectuated without the
express consent of our Executive Committee. The full text of
the referenced FDA letters can be obtained at the FDA website
designation "FDA.com."
Additionally, the FDA objected on the same general grounds, in
a second letter, to three recent press releases which described
certain ex vivo (outside the body) results with Ampligen and
14 already FDA approved antiretroviral medications. The
experimental results were conducted by independent researchers
at the University of California and were being presented at
various scientific meetings under independent peer review. To
avoid a potential misunderstanding of the Company's publication
of these independent ex vivo results as imputing potential
human safety and potential efficacy of an experimental
medication still in Phase 2/3 clinical trials, we initiated a
program to utilize a broad-based disclaimer with all subsequent
press releases (and within its website), regardless of the
specific scientific/medical content. The disclaimer states in
part that "all medications and technologies of the Company are
experimental in nature and have not been determined to be safe
and effective by any regulatory authority and are only legally
available to certain persons through clinical trials with the
referenced disorders." According to our independent regulatory
counsel, such disclaimer statements have been consistently
deemed by the Courts as adequate to remove any uncertainties or
ambiguities regarding the regulatory status and perceived
benefits, if any, of various referenced experimental
medications. We believe that all of our own corporate
statements, cited in the referenced FDA letters, were
materially correct in technical content and that the deletion
of the referenced "hyperlinks" and consistent introduction of
the referenced disclaimer will insure full compliance with the
intent of regulatory guidelines regarding the dissemination of
publicly available information on its experimental drug
development programs.
In July 2000, we reported that we had entered into a marketing
agreement with AOP Orphan Pharmaceuticals domiciled in Vienna,
Austria for facilitating product introduction of Ampligen, its
potential ME/CFS treatment drug.
On July 6, 2000, after much study and consideration, we decided
to retain 100% ownership of our wholly owned subsidiary, Core
Biotech Corp. In December 1998, we announced a plan to spin-off
Core Biotech as a "Targeted" or "Trailing" stock. Core
Biotech has the rights to develop and market Ampligen for the
treatment of Hepatitis in the Northern Hemisphere.
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Forward-Looking Statements and Risk Factors
All of the our drugs and associated technologies are
investigational and must receive prior regulatory approval by
appropriate regulatory authorities for general use and are
currently legally available only through clinical trials with
specified disorders. Our principal development efforts are
currently focused on Ampligen, which has not been approved for
commercial use in the U.S. or elsewhere. Our products,
including Ampligen are subject to extensive regulation by
numerous governmental authorities in the U.S. and other
countries, including, but not limited to, the Food and Drug
Administration in the U.S., the Health Protection Branch of
Canada, and the European Medical Evaluation Agency in Europe.
Obtaining regulatory approvals is a rigorous and lengthy
process and requires the expenditure of substantial resources.
In order to obtain final regulatory approval of a new drug, we
must demonstrate to the satisfaction of the regulatory agency
that the product is safe and effective for its intended uses
and that we are capable of manufacturing the product to the
applicable regulatory standards. We require regulatory
approval in order to market our products and receive product
revenues or royalties. No regulatory agency has approved the
full commercial sale of any of our products. We cannot assure
you that the drug will ultimately be demonstrated to be safe or
efficacious. In addition, while Ampligen is authorized for use
in clinical trials in the United States and other countries, we
cannot assure you that additional clinical trial approvals will
be authorized in the United States or in other countries, in a
timely fashion or at all, or that we will complete these
clinical trials. Moreover, we cannot assure you that Ampligen
will be commercially successful in any country that may approve
its use. If Ampligen or one of our other products does not
receive regulatory approval in the U.S. or elsewhere, our
operations will be significantly affected.
Any statements in this Quarterly Report on Form 10Q about our
expectations, beliefs, plans objectives, assumptions or future
events or performance are not historical facts and are forward-
looking statements. These statements are often, but not
always, made through the use of words or phrases such as "will
continue," "anticipate," "estimate," "intend," "plan,"
"projection," "would," "should," and "outlook." Accordingly,
these statements involve estimates, assumptions and
uncertainties which could cause actual results to differ
materially from those expressed in them. Any forward-looking
statements are qualified in their entirety by reference to the
factors discussed throughtout this Report and our Annual Report
on Form 10-K, as amended, for the year ended December 31, 1999.
The following cautionary statements identify important factors
that could cause our actual results to differ materially from
those projected in the forward-looking statements made in this
prospectus. Among the key factors that have a direct bearing
on our results of operations are:
* General economic and business conditions; the existence or
absence of adverse publicity; changes in, or failure to
comply with, government regulations; changes in marketing
and technology; change in political, social and economic
conditions;
* Increased competition in the biopharmaceutical industry;
general risk of biopharmaceutical industry;
* Success of acquisitions and operating initiatives; changes in
business strategy or development plans; management of
growth;
* Availability, terms and deployment of capital;
* Construction schedules; costs and other effects of legal and
administrative proceedings;
* Dependence on senior management; business abilities and
judgement of personnel; availability of qualified
personnel; labor and employee benefit costs;
* Development risks; risks relating to the availability of
financing; and
* The following and other factors referenced in this Report and
referenced and expanded upon in the Form 10-K, as amended,
including:
12
Our Dependence on Ampligen; Expiration of our Patents; No
Assurance of Regulatory Approval of our Products; Government
Regulations; The Company's Additional Financing Requirements,
Lack of Liquidity and Uncertainty of Additional Funding;
Uncertainty Regarding Patents and Proprietary Rights; History
of Losses; Uncertain Future Profitability; No Assurance of
Successful Product Development; Limited Manufacturing
Experience and Capacity; Lack of Marketing Experience and
Capacity; Rapid Technological Change and Substantial
Competition; Dependence upon Qualified and Key Personnel;
Dependence on Third Parties; Impact of Potential AMEX Delisting
on Marketability of our Securities; Product Liability Exposure;
Uncertainly of Health Care Reimbursement and Potential
Legislation; Hazardous Materials; Possible Volatility of our
Stock Price; Exercise of our Class A Redeemable Warrants May
Have Dilutive Effect on Market; Conflicts of Interest; Ampligen
Safety Profile.
Because the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed
in any forward-looking statements made by us, you should not
place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the
date on which it is made and we undertake no obligation to
update any forward-looking statement or statements to reflect
events of circumstances after the date on which such statement
is made or reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us
to predict which will arise. In addition, we cannot assess the
impact of each factor on our business of the extent to which
any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking
statements.
RESULTS OF OPERATIONS
Three months ended June 30, 2000 versus Three months ended June 30, 1999
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The Company's net loss was $2,059,789 for the three months
ended June 30, 2000 versus a net loss of $2,554,293 for the
same three month period in 1999 reflects a reduction in quarter
to quarter net losses of $494,504. Several factors contributed
to this reduction in loss in 2000.
Revenues produced from the Company ME/CFS cost recovery
treatment programs underway in the United States and Europe
were up $60,933 (39%) for the three months ended in June 30,
2000. In this period cost recovery treatment program revenues
were $215,525 of which 67% originated in the United States.
The Federal Drug Administration approved the ME/CFS cost
recovery treatment program in the United States in 1998. This
program allows the company to recover the cost of Ampligen from
a limited number of patients that qualify for the treatment.
Proceeds from this program are used to further develop
Ampligen.
Research and development (R&D) costs were up $126,432 (9%)
compared to the same period in 1999. In the United States, the
company incurred R&D costs of $1,163,987 for an increase of
$468,993. This increase reflects the cost of increased patient
enrollment and activity of the Protocol Amp 516 ME/CFS
randomized double-blind placebo controlled phase III clinical
trial now well underway at multiple locations in the United
States. These increased costs were expected and planned.
Efforts in establishing the European operation accelerated and
increased by $165,178. HEM-Europe has been established to
pursue drug approval and conduct any necessary clinical efforts
in Europe with respect to achieving that objective. HEM-Europe
expects to introduce the cost recovery treatment program in
other Europe countries. Currently, the program has been
authorized in England and Belgium. Manufacturing costs,
included in research and development, were down by some
$418,000 compared to the same period in 1999. This reduction
is primarily due to the fact that the Company invested heavily
in the purchase of raw materials and production of Ampligen in
the three month period ended June 30, 1999 compared to 2000.
As an experimental drug, Ampligen production costs are expensed
as they are incurred and not carried as inventory on the
balance sheet. Throughout 1999, the company significantly
13
increased the supply of Ampligen on hand to assure sufficient
supplies to meet the needs of the ME/CFS clinical trials now
underway and cost recovery treatment programs.
General and administrative expenses were down $367,206 for the
three months ended June 30, 2000. This is a reduction of some
of some 33%. Legal and related expenses were down $178,819 due
to an overall reduction of legal expenses as well as recovery
of certain legal costs from insurance coverage. Public
Relations and financial service expenses were down $76,328
primarily due to reduced activity in these areas. Temporary
help expense was up by $22,887 due to increased clinical
support activity as well as additional assistance needs to
prepare new documents for the EMEA application. Expenses
related to stock market fees and registration statement filing
fees were down $31,289 primarily due to less activity.
Stock Compensation expense declined by $164,519 in the three
months ended June 30, 2000. This reduction reflects fewer stock
warrant grants to outside parties for service rendered.
The Company's investment in CIMM increased to 30% in the second
quarter, 2000 thereby requiring that the company record their
share of CIMM's quarterly earnings/losses. In the three months
ended June 30, 2000, the company recorded an equity loss of
$25,854 in CIMM.
Interest income for the three months revised ended June 30,
2000 was $159,965 versus $107,834 for the same period in 1999.
This increase reflects an improved rate of return on money
market securities in 2000 versus 1999. Also, the company had
slightly more surplus funds invested in the money market.
Six months ended June 30, 2000 versus Six months ended June 30,
- ---------------------------------------------------------------
1999
- -----
In the first six months of 2000, the company incurred a net
loss of $4,031,846 versus a net loss of $5,454,346 for the same
period in 1999. The reduced loss of $1,422,500 is a result of
several factors.
The Company's ME/CFS cost recovery treatment programs in the
United States and Europe produced revenues totaling $425,587 in
the six month period ended June 30, 2000 versus $286,320 in
1999 for an increase of 49%. In addition, the company received
$97,804 for research services to be conducted in Europe.
Research & Development costs were approximately $46,000 lower
in the first six months of 2000 versus the same period in 1999.
The costs of the company's AMP 516 ME/CFS clinical trials
increased $748,350 in 2000 versus 1999 reflecting the increased
clinical costs of enrolling and treating a greater number of
patients in the program. The company plans to eventually
enroll 230 patients in the FDA approved Phase III clinical
trials. These increased costs were expected and planned.
Clinical efforts in Europe increased $438,308 in the first six
months of 2000 versus 1999. HEM-Europe was established in 1998
for the purpose of facilitating the European ME/CFS cost
recovery treatment program as well as conduct ME/CFS clinical
trials in connection with eventually obtaining European
approval by the European Medical Evaluation Agency ("EMEA").
Manufacturing costs were down $1,240,507 in the first six
months of 2000 versus the same period in 1999. This reduction
was primarily due to the significant build-up of drug supplies
in 1999 in anticipation of Ampligen needs to support the AMP
516 ME/CFS clinical trials now underway in the United States
and the Company's cost recovery treatment programs in the U.S.
and Europe. In the first six months of 1999, the company
expended over 1.1 million in the purchase of raw materials and
production of Ampligen. This supply of Ampligen is now being
shipped in support of the clinical trials. The company has
engaged the services of a major pharmaceutical facility to
produce scaled-up runs of Ampligen. The first production runs
from this facility will be used to fulfill FDA requirements for
validation of the manufacturing process.
14
General and administrative costs were lower in the six months
end June 30, 2000 by $721,078 versus the same period in 1999.
Legal and related costs were down $301,715 due to decreased
attorney fees relating to legal activity as well as some
insurance recovery on legal expenses incurred on the Asensio
litigation. Outside consultants and related expenses were less
by $151,444 as fewer financial and management consultants were
employed in the first six months of 2000. Efforts to reduce
Public Relations and related expenses produced lower costs
totaling $128,443. Premiums for insurance coverage were up
slightly and most other expenses were in line with those
experienced in the first six months of 1999.
Stock compensation expense was down by $387,371 in 2000 versus
1999. This reduction reflects the company's efforts to better
control and monitor stock warrants granted to outside parties
for services rendered.
Interest income was $311,988 in the first six months of 2000.
This is an increase of $57,244 over the same period in 1999
reflecting better rates on money market securities. Also, the
company had more surplus funds invested in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments totaled 10.5
million at June 30, 2000 compared to 8.5 million at December
31, 1999. This increase of 2.0 million reflects the net
increase from financing activities, investing activities and
net cash used in operations in the first six months of 2000.
Net operating activities consumed $4,454,424 in the first six
months of 2000 reflecting major outlays of cash in support of
the ME/CFS phase III clinical trials as well as the support of
the European clinical efforts. Investing activities include
the expenditure of $119,132 for capital equipment primarily for
use at the company's Rockville, Maryland facility.
Approximately $20,000 was used to acquire equipment for the
European operation. In addition, the Company invested another
$375,000 in CIMM to fulfill its subscription agreement which
brings the company's equity ownership up to 30% of CIMM. The
Company had already acquired a 15% ownership in CIMM for
$375,000 in May, 1999.
In the first six months of 2000, the company received
$7,989,322 from warrant holders exercising 1,839,249 stock
warrants. In addition, the company received $2,250,000 from
the Biovail Corp.("Biovail") for the private purchase of
285,714 shares of common stock. Biovail is an international,
full-service corporation headquartered in Toronto, Canada and
has entered into an agreement with the company for the
exclusive right to distribute the company's product in the
Canadian territories subject to certain terms and conditions.
In the first six months of 2000, the company expended
$3,107,065 for the purchase of 270,300 shares of the company's
stock on the open market pursuant to the stock buyback program
approved by the Board of Directors. These treasury shares plus
other treasury shares will be used to facilitate future
business needs.
All clinical trial drug products were fully expensed although
some are expected to be sold under the expanded access, cost-
recovery, pre-marketing programs authorized by FDA and various
regulatory bodies in other countries. As the clinical testing
effort in the United States accelerates and the European market
development activity increases, the operating burn rate may
increase periodically. However, certain of the operating, as
well as the non-operating cash outlays are of a one time nature
and are expected to decline significantly. Also revenues from
expanded access product sales is expected to continue to
increase in the coming months.
The Company expects warrant holders to continue exercising the
Class A redeemable warrants and private warrants from time to
time depending on the trading price of the Company common
stock. As of June 30, 2000, the Company has 4,260,198 Class A
15
redeemable warrants outstanding. These warrants can be
exercised at $4.00 per share. In addition, there are 462,000
Class A redeemable warrants outstanding at an exercise price of
$6.60 per share. Non-public warrants outstanding total
7,668,567 with a weighted average exercise price of $4.03. The
Class A Redeemable Warrants must be exercised or redeemed by
November 2, 2000 as these Warrants expire on that date.
Because of the Company's long-term capital requirements, it may
seek to access the public equity market whenever conditions are
favorable, even if it does not have an immediate need for
additional capital at that time. Any additional funding may
result in significant dilution and could involve the issuance
of securities with rights, which are senior to those of
existing stockholders. The Company may also need additional
funding earlier than anticipated, and the Company's cash
requirements in general may vary materially from those now
planned, for reasons including, but not limited to, changes in
the Company's research and development programs, clinical
trials, competitive and technological advances, the regulatory
process, and higher than anticipated expenses and lower than
anticipated revenues from certain of the Company's clinical
trials for which cost recovery from participants has been
approved.
ITEM 3:Quantitative and Qualitative Disclosures About Market Risk
For a description of the Company's market risks, see Item 7a
"Quantitative and Qualitative Market Risk" in the Company's
Annual Report of Form 10-K for the fiscal year ended December 31, 1999.
Part II OTHER INFORMATION
ITEM 1: Legal Proceedings
On September 30, 1998, the Company filed a multi-count
complaint against Manuel P. Asensio, Asensio & Company, Inc.,
and others in the United States District Court for the Eastern
District of Pennsylvania. On October 22, 1998, the Company
amended the complaint to add additional counts and to conform
the complaint to agreed upon dismissals without prejudice as to
certain of the defendants. On August 13, 1999, the Company
amended and supplemented the complaint for a second time to
conform the complaint to court ordered dismissals of certain
counts of the complaint and parties, to add Asensio.com, Inc.
(formerly known as Asensio Holdings, Inc.), the holding company
of defendant Asensio Company Inc., and to add a conspiracy
charge against the remaining defendants and certain unnamed John Does.
The action presently includes claims of defamation,
disparagement, and tortious interference with existing and
prospective business relations and conspiracy, arising out of
the current defendants' false and defamatory statements. The
complaint further alleges that defendants defamed and
disparaged the Company in furtherance of a manipulative,
deceptive and unlawful short-selling scheme between August,1998,
and the present.
On April 19, 1999, defendants Asensio and Asensio & Company,
Inc., filed an answer and counterclaim against the Company.
The counterclaim alleges that on or about September, 1998, and
in response to defendants' strong sell recommendation and other
press releases about Hemispherx and its officers and directors,
the Company made defamatory statements about defendants,
including that defendants' attacks and manipulative short-
selling scheme may have constituted criminal wrongdoing on the
part of defendants. The Company has denied the material
allegations of the counterclaim and is vigorously defending
against the counterclaim. In May, 2000, the company and the
Asensio defendants each filed a motion for default and default
judgement, and the Asensio defendants filed a motion to dismiss
for lack of subject matter jurisdiction. On June 6, 2000, the
court granted the Asensio defendant's motion to dismiss. On
June 15, 2000, the company filed a motion for reconsideration
requesting that the court reverse its decision of dismissal and
reinstate the action in federal court, on June 23, 2000, the
court heard oral argument on the motion, and on July 17, 2000,
the court denied the company's motion for reconsideration.
16
The company intends to transfer the action to Pennsylvania state
court and proceed to trial as promptly as possible.
On July 27, 2000 Manuel P. Asensio, et al filed a complaint
against the Company, William A. Carter and KPMG, LLP in the
Supreme Court of the State of New York, County of New York.
The complaint alleges that the Company and the other defendants
defamed the plaintiffs by publication of false and defamatory
written materials. The Company intends to seek dismissal of
this complaint on the grounds that it alleges the same
defamatory cause of action, which the Company is vigorously
defending, as that alleged in the action which the Company is
in the process of transferring to the Pennsylvania state
courts.
In October, 1998, the Company contacted the SEC regarding what
it believed may have been illegal short selling and unlawful
market manipulation in furtherance of the short selling of
Manuel P. Asensio and others. In April, 1999, the Company was
advised by the Securities and Exchange Commission ("SEC") of a
private investigation into various allegations of
misrepresentations by the Company and its officers.
Specifically, the SEC sought information relating to
allegations about the Company's investigational drug
application for treatment of various diseases, results of
clinical research, incidence of ME/CFS in the United States,
the Company's patents, and Ampligen's safety and efficacy.
These allegations had also been included by Asensio & Co. in
its various "research reports." The SEC has declined to be
more specific about the nature or substance of the
investigation. The Company is cooperating fully with the
investigation.
The Company has also been advised that the NASD has initiated
an investigation into the short selling of Hemispherx
Securities (Enf-303). Asensio has admitted, in deposition
testimony in the Company's litigation against him, that he and
his company was the subject of such an investigation.
Hemispherx is also cooperating with the NASD in its
investigation of the short selling of its stock.
On March 6, 2000, Cook Imaging Corp, et al, filed a complaint
against the Company in the United States District Court for the
Eastern District of Pennsylvania. Cook Imaging Corp. asserts
that the Company refuses to pay for certain Ampligen
manufacturing efforts by Cook. The Company has responded to
the complaint. In essence, the Company maintains that Cook
Imaging Corp. did not perform as required by the contract under
GMP (Good Maintenance Practices) conditions. On June 5, 2000,
the court entered a scheduling order, which provides for the
completion of discovery in September, 2000, and trial in or
about December, 2000. The parties are presently engaged in
discovery. The company is unable to express any opinion as to
the likely outcome of the act of the matter.
ITEM 2: Changes in Securities
In February, 1998, the Company filed a Registration Statement
with the Securities and Exchange Commission (SEC) to register
the common stock placed in the September 1997 private
placements. The statement included common stock underlying
certain stock purchase warrants with registration rights.
In July, 1998, the Company's Common Stock and Class A Warrants
were listed on the Berlin Stock Exchange. The shares and
warrants will trade under the symbols HXB and HXBA
respectively. The listing on the Berlin Stock Exchange has
been facilitated by Berliner Freiverkehr, a major German
investment banking and brokerage firm, with assistance from
Value Management & Research, GmbH, a European based Research
and Investment Firm.
In April, 1999, the Company filed a Registration Statement with
the Securities and Exchange Commission (SEC) to register the
common stock privately placed in July, 1998. In addition,
certain warrants and underlying common stock was included in
the Registration.
17
In June 1999, the Company filed a registration statement on
Form S-3 with the SEC registering certain warrants and the
shares of Common Stock underlying those warrants on behalf of
certain warrantholders. The Company has entered into
agreements with certain of the warrantholders providing for,
among other things, (a) an escrow and conditional lockup of one
year from the effective date of the registration statement; and
(b) the sale of such warrantholders' warrants during such one-
year lockup through an agent or by the Company at prices set by
the warrantholders. On September 19, 1999, the Registration
Statement was amended. This amended document became effective
October 1, 1999.
In 1999, the Company acquired 290,811 shares of Common Stock on
the open market at an average cost of $6.76 per share. This
acquisition is part of the share buy back program authorized by
the Board of Directors. These shares may be retired in part
thereby reducing the number of shares outstanding. Certain
shares of the Company's Treasury Stock may be utilized to fund
acquisitions, strategic alliances, or to obtain equity
positions in other companies in order to potentially increase
the breadth and depth of the Company's drug technology
portfolio including the Company's potential position in the
emerging area of human genomics.
In January, February, and March, 2000 the Company acquired
270,300 shares of Common Stock on the open market at an average
cost of $11.92 per share. This acquisition is part of the
share buy back program authorized by the Board of Directors.
The foregoing private offerings were private transactions and
exempt from registration under Section 4(2) of the Securities
Act pursuant to Regulation D of the Act. All investors in
these transactions are accredited.
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
The Company's Annual Shareholder Meeting was held in
Philadelphia, Pennsylvania at The Crown Plaza in Center City on
Wednesday, July 26, 2000. Shareholders by Proxy and attending
voted to re-elect the following members of The Board of
Directors and ratify the selection of BDO Seidman, LLP as the
Company's Independent Accountants. The following persons, who
received the votes set forth opposite their names, were duly
elected directors to serve until the next annual meeting of
shareholders
Votes in Favor Votes Against
-------------- -------------
Of Nominee Nominee
---------- -------
Nominees
William A.Carter 16,028,013 41,057
Richard C. Piani 16,028,013 41,057
Ransom W. Etheridge 16,028,013 41,057
William M. Mitchell 16,028,013 41,057
The following votes were cast for the ratification of the
appointment of BDO Seidman, LLP as the Company's independent
accountants:
Votes in Favor Votes Against Abstain
-------------- ------------- -------
16,035,816 17,374 15,880
18
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8K
On May 10, 2000 the Company filed Form 8K notifying the SEC of
a change in Registrant's Independent Auditors.
On May 18, 2000 the Company amended the original Form 8-K
filing to include a letter dated May 12, 2000 from the prior
auditors.
On July 12, 2000 the Company amended the original 8K to include
specific information requested by the SEC.
On July 13, 2000 the Company amended the above 8K to include a
letter dated July 13, 2000 from the prior auditors.
On June 6, 2000 the Company filed Form 8K to notify the SEC of
the engagement of the new auditors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the
registrant has duly caused this report to be signed on its
behalf by the
undersigned thereunto duly authorized.
HEMISPHERx BIOPHARMA,
INC.
/S/ William A. Carter
---------------------------
Date: August 11, 2000 William A. Carter, M.D.
Chief Executive Officer &
President
/S/ Robert E. Peterson
--------------------------
Date: August 11, 2000 Robert E. Peterson
Chief Financial Officer