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 September 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
29,588,052 shares of common stock issued and outstanding as of September 30,
2000.
2
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 6,396,423 $6,899,237
Short Term investments 2,152,966 2,282,103
Accounts receivable 75,350 82,825
Stock subscription receivable 2,250,000 -
Prepaid expenses and other current assets 142,950 191,509
----------- ----------
Total current assets 11,017,689 9,455,674
Property and equipment, net 333,360 347,037
Patent and trademark rights, net 1,362,709 1,229,198
Investments in unconsolidated affiliates(Note 4) 1,413,000 1,775,848
Other assets 40,982 735,425
----------- ----------
Total assets $14,167,740 $13,543,182
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,091,023 718,172
Accrued expenses 419,853 185,213
----------- ----------
Total current liabilities 1,510,876 903,385
Commitments and contingencies
Stockholders' equity:
Common stock 27,975 29,953
Additional paid-in capital 84,875,289 93,298,697
Deferred compensation (310,455) -
Accumulated other comprehensive gain - 6,583
Treasury stock at cost
(167,935 and 365,146 shares respectively) (1,018,712) (3,680,533)
Accumulated deficit (70,917,233) (77,014,903)
----------- ----------
Total stockholders' equity 12,656,864 12,639,797
----------- ----------
Total liabilities and stockholders' equity $14,167,740 13,543,182
=========== ==========
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
September 30,
--------------------------
1999 2000
---------- ----------
Revenues:
Cost recovery - clinical treatment programs $ 167,978 $ 225,176
---------- ----------
167,978 225,176
---------- ----------
Costs and expenses:
Research and development 1,056,740 1,640,110
General and administrative 749,272 772,556
Stock compensation expense 358,744 -
---------- ----------
Total cost and expenses 2,164,756 2,412,666
Interest and other income 118,059 143,964
Equity in CIMM's loss (Note 4) - (22,298)
---------- ----------
Net loss $(1,878,719) $(2,065,824)
========== ==========
Basic and diluted loss per share $ (0.07) $ (0.07)
========== ==========
Basic and diluted weighted
average common shares outstanding 26,318,100 29,523,470
========== ==========
See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine months ended
September 30,
--------------------------
1999 2000
---------- ----------
Revenues:
Cost recovery - clinical treatment programs $ 454,298 $ 650,763
---------- ----------
Total revenues 454,298 650,763
---------- ----------
Costs and expenses:
Research and development 3,943,850 4,383,826
General and administrative 3,148,146 2,450,352
Stock compensation expense 1,068,170 322,055
---------- ----------
Total cost and expenses 8,160,166 7,156,233
Interest and other income 372,803 455,952
Equity in CIMM's loss (Note 4) - (48,152)
---------- ----------
Net loss $(7,333,065) $(6,097,670)
========== ==========
Basic and diluted loss per share $ (0.28) $ (0.21)
========== ==========
Basic and diluted weighted
average common shares outstanding 26,276,582 29,043,784
========== ==========
See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine months ended
September 30,
--------------------------
1999 2000
---------- ----------
Cash flows from operating activities:
Net loss $(7,333,065) (6,097,670)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 71,091 96,043
Amortization of patents rights 104,021 227,254
Write-off of patent rights 64,030 32,237
Stock issued in settlement of debt 60,000 -
Stock option compensation expense 1,068,170 322,055
Equity in CIMM's loss - 48,152
Changes in assets and liabilities:
Accounts receivable (9,925) (7,475)
Prepaid expenses and other current assets 11,091 (38,092)
Accounts payable 1,021,041 (323,553)
Accrued expenses (43,473) (264,640)
Other assets (121,776) (373,918)
--------- ---------
Net cash used in operating activities (5,108,795) (6,379,607)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (168,624) (109,720)
Additions to patent rights (192,128) (125,980)
Marketable securities matured 1,591,378 2,152,966
Investments in unconsolidated affiliates (375,000) (411,000)
Purchase of marketable securities (983,088) (2,282,103)
Other investments - (33,784)
--------- ---------
Net cash used in investing activities (127,462) (809,621)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock - 2,250,000
Proceeds from exercise of warrants 1,041,130 8,549,107
Purchase of treasury stock (1,038,298) (3,107,065)
--------- ---------
Net cash provided by financing activities 2,832 7,692,042
--------- ---------
Net (decrease) increase in cash and cash equivalents (5,233,425) 502,814
Cash and cash equivalents at beginning of period 12,025,073 6,396,423
--------- ---------
Cash and cash equivalents at end of period $6,791,648 $6,899,237
========= =========
See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000
Accumulated
Common Stock Deferred Other Total
--------------------- Additional Compen- Accumulated Comprehensive Treasury Stockholders'
Shares Amount Paid-In Capital sation Deficit Gain 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 1,978,691 1,978 8,409,637 122,905 8,534,520
Treasury Stock
Invested In Chronix
Biomedical (5,649) 296,275 290,626
Treasury Stock
Purchased (3,107,065) (3,107,065)
Treasury Stock Used
In Settlement Of Debt 7,820 26,064 33,884
Stock Compensation 11,600 310,455 322,055
Net Loss (6,097,670) 6,583 (6,091,087)
--------- ---------- --------------- -------- ----------- ------------- -------- -------------
Balance 9/30/00 29,953,198 $29,953 $93,298,697 $ $(77,014,903) $ 6,583 $(3,680,533) $12,639,797
========= ========== =============== ======== =========== ============= ======== =============
See accompanying notes to condensed consolidated financial statements.
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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 presenta-
tion 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 and as amended on August 11,
2000.
NOTE 2: STOCK COMPENSATION:
We recorded stock/warrant compensation expense of $358,744 during the
quarter ended September 30, 1999 for warrants granted to purchase Common
stock to non-employees of the Company. There was no such expense for the
quarter ended September 30, 2000. 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 greater than the market 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 Company employees and
directors and, accordingly, no compensation expense has been recognized for
stock purchase rights issued to employees and directors 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 nine months ending
-----------------------------------------
September 30, 1999 September 30, 2000
------------------ ------------------
Net Loss $(7,333,065) $(6,097,670)
Unrealized gain on short
term investments 6,702 10,467
Unrealized loss on Daxor
Corp. investment - (3,884)
------------------ -------------------
Total comprehensive loss $(7,326,363) $(6,091,087)
================== ===================
Note 4: INVESTMENTS:
Investments in unconsolidated affiliates:
We invested $1,074,000 for a 3.3% equity 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 September 30, 2000 was
$701,848.
Other Investments:
Other investments include an initial equity investment of $290,625 in
Chronix Biomedical ("Chronix"). Chronix focuses upon the development of
diagnostics for chronic diseases. This initial investment was made in May
31, 2000 by the issuance of 50,000 shares of Hemispherx Biopharma, Inc.
common stock from the treasury. On October 12, 2000, an additional 50,000
shares of Hemispherx Biopharma, Inc. common stock were issued from the
treasury to Chronix toward a total equity investment of $700,000. Pursuant
to a strategic alliance agreement, we provided Chronix with $250,000 to
conduct research in an effort to develop intellectual property on potential
new products for diagnosing and treating various chronic illnesses such as
chronic fatigue syndrome. The strategic alliance agreement provides us
certain royalty rights with respect to certain diagnostic technology
developed from this research and a right of first refusal to license certain
therapeutic technology developed form this research.
Note 5: Foreign Currency Translations:
The assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates, and revenues and
expenses are translated at average exchange rates for the year. Transaction
gains and losses that arise from exchange rate fluctuations are included in
the results of operations as incurred.
ITEM 2:Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
Overview
We are a biopharmaceutical company, which currently operates three domestic
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subsidiary divisions and two foreign subsidiaries as product development
centers. Our 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. We have a global patent estate consisting of more than 300
issued patents and conduct clinical tests worldwide through subsidiary
companies and affiliates. Since 1980, we have devoted significant resources
to research and development programs primarily focused on developing our
lead drug trade named Ampligen for treating various viral diseases.
A Food and Drug Administration 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 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 CFS.
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.
Our research, development, clinical trials and the manufacturing and
marketing of the Company's 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 or other foreign regulatory authorities.
Recent Developments
In July, 2000 we entered into a marketing agreement with AOP Orphan
Pharmaceuticals domiciled in Vienna, Austria. This licensing agreement
covers certain western and eastern European markets. AOP Orphan
Pharmaceuticals is well established for new drug introduction in Eastern
Europe.
In August, 2000 we announced the modification of the expiration date of our
Class A Redeemable Warrants. These publicly traded warrants were originally
termed to expire no later than November 2, 2000. These warrants now expire
on the earlier of November 2, 2001 or the redemption date as defined in the
Warrant Agreement. Each public warrant may, prior to redemption or
expiration date, be exercised to purchase one share of common stock at a
price of $4.00.
In September, 2000 we received FDA approval to conduct an advanced multi-
center clinical study in drug resistant HIV patients. The study is designed
to involve 100 patients in the United States and evaluate the use of
Ampligen with other antiviral drugs in treating HIV patients exhibiting
multi-drug resistance to other antiviral drugs that are currently used in
treating HIV patients.
In October, 2000, we announced that we had become involved in the fast
growing area of human genomics by entering into a strategic alliance with
Chronix Biomedical Inc. Pursuant to the strategic alliance, research will
be conducted in an effort to develop intellectual property on potential new
products for diagnosing and treating the various stages of gene reshuffling
using a panel of screening tests for Chronic Fatigue Syndrome and other
maladies including Gulf War Syndrome. Chronix Biomedical Inc. is
headquartered in San Francisco.
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Forward-Looking Statements and Risk Factors
All of 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 throughout 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:
1. We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profits form 1985 through
1987, we have incurred substantial operating losses. As of September 30,
2000 our accumulated deficit was approximately $77,014,903. We have not yet
generated significant revenues from our products and may incur substantial
and increased losses in the future. We cannot assure you that we will ever
achieve significant revenues from product sales or become profitable. We
require, and will continue to require, the commitment of substantial
resources to develop our products. We cannot assure you that our product
development efforts will be successfully completed or that required
regulatory approvals will be obtained or that any products will be
manufactured and marketed successfully, or become profitable.
2. Additional financing requirements.
The development of our products has required and will continue to require
the commitment of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials that are necessary
to bring pharmaceutical products to market, and to establish commercial-sale
production and marketing capabilities. Based on our current operating plan,
we anticipate that receipt of limited revenues from the sales of Ampligen
11
under the cost recovery clinical programs and investors exercising our Class
A redeemable warrants together with our current assets, will be sufficient
to meet our capital requirements for the near future. We may need to raise
substantial additional funds through additional equity or debt financing,
collaborative arrangements with corporate partners, off balance sheet
financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing our
products. If adequate funds are not available from operations, as is
anticipated, and if we are not able to secure additional sources of
financing on acceptable terms, our business will be materially adversely
affected. Because of our long-term capital requirements, we may seek to
access the public equity market whenever conditions are favorable, even if
we do not have an immediate need for additional capital at that time.
3. We recently received a Food and Drug Administration warning letter in
connection with our web site.
We received a warning letter from the Food and Drug Administration regarding
the contents of our corporate website. The Food and Drug Administration
letters referenced two "hyperlinks" (visualized as "icons") within the
corporate website. One of the referenced hyperlinked "icons" had been
discontinued by us approximately four months prior to receipt of the notice.
These hyperlinked, but separate, websites (which were wholly owned and
operated by individuals separate from us) contained information which was
deemed "promotional" in nature, i.e., imputing safety and efficacy of an
unapproved and experimental medication. Our two "hyperlinks" (i.e.,
facilitated communications) with distal or remote websites were deemed to
be potentially a Food and Drug Administration violation; accordingly, we
undertook immediate steps to cooperate fully and eliminate all "hyperlinks",
whether scientific, medical or business in nature to any other websites on
the worldwide web. We also requested a comprehensive "Standard Operating
Procedure" from our hyperlinks webmaster in an effort to insure that no
alterations to our corporate website including, without limitation, the
introduction of hyperlinks are effectuated without the express consent of
our Executive Committee. The full text of the Food and Drug Administration
letters can be obtained at the Food and Drug Administration website at
www.FDA.com.
4. We recently received a letter from the Food and Drug Administration
objecting to three press releases of ours.
The Food and Drug Administration objected to three recent press releases
which described certain ex vivo (outside the body) results with Ampligen
and 14 already 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
publications 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 our website),
regardless of the specific scientific/medical content. We believe that all
of our own corporate statements cited in the Food and Drug Administration
letters were materially correct in technical content and that the deletion
of the hyperlinks is in compliance with the intent of regulatory guidelines
regarding the dissemination of publicly available information on our
experimental drug development programs.
5. Uncertainty of additional funding.
There can be no assurance that any additional funding will be available to
us on terms which are acceptable, if at all. Any additional funding may
result in significant dilution to our stockholders and could involve the
issuance of securities with rights which are senior to those of existing
stockholders. We may also need additional funding earlier than anticipated,
and our cash requirements in general may vary materially from those now
planned, for reasons which include, but not limited to, changes in our
research and development programs, clinical trials, competitive and
technological advances, the regulatory process, and higher than anticipated
12
expenses, and lower than anticipated revenues from certain of our clinical
trials as to which cost recovery from participants has been approved.
6. No regulatory agency has approved the full commercial sale of any of our
products.
We cannot assure you that Ampligen will ultimately be demonstrated to be
safe or efficacious. While Ampligen is authorized for use in clinical
trials in the United States and in 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;
* that we will complete our clinical trials; or
* 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 United States or elsewhere, our operations will be
significantly affected.
The Company has not received a "Fast-Track" designation for any of its
potential therapeutic indications. The Company's application for
"Fast-Track" designation for the use of Ampligen for the treatment of Chronic
Fatigue Syndrome has not been approved by the Food and Drug Administration
at this time, the Food and Drug Administration stating that there is
insufficient available information to date to meet the statutory criteria
for "Fast-Track" designation, and advising the Company that the Food and
Drug Administration would be happy to discuss with the Company the inclusion
in its application of an "interim analysis" of the Company's ongoing
controlled clinical study (AMP-516). The Company is considering the
implementation of this proposal. A "Fast-Track" designation by the Food and
Drug Administration, while not affecting any clinical development time per
se, has the potential effect of reducing the regulatory review time by 50
percent (50%) from the time that a commercial drug application is actually
submitted for final regulatory review. The Company will continue to present
data in support of obtaining a "Fast-Tract" designation. There are no
assurance that such designation will be granted, or if granted, there are
no assurances that such designation will materially increase the prospect
of a successful commercial application.
7. We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to acquire enforceable patents covering the use of Ampligen for a
particular disease in order to obtain exclusive rights for the commercial
sale of Ampligen for such use. Our success depends, in large part, on our
ability to obtain patent protection for our products and to obtain and
preserve our trade secrets and know-how. We have been issued certain patents
on the use of Ampligen and in combination with certain other drugs for the
treatment of HIV chronic hepatitis B virus, chronic hepatitis C virus, and
a patent, which affords protection on the use of Ampligen in patients with
chronic fatigue syndrome. We have not been issued any patents in the United
States for the use of Ampligen as a sole treatment for any of the cancers
which we have sought to target. Our applications for United States patents
for the use of Ampligen in the treatment of renal cell carcinoma and lung
cancer are currently pending. We cannot assure you that any of these
applications will be approved or that our competitors will not seek and
obtain patents regarding the use of Ampligen in combination with various
other agents. If we cannot protect our patents covering the use of Ampligen
for a particular disease, or obtain additional pending patents, we may not
be able to successfully market Ampligen .
13
8. The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
No consistent policy has emerged regarding the breadth of protection
afforded by pharmaceutical and biotechnology patents. There can be no
assurance that patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will
afford meaningful protection against competitors with similar technology.
It is generally anticipated that there may be significant litigation in the
industry regarding patent and intellectual property rights and that such
litigation could require substantial resources from us. No assurance can be
made that our patents will provide competitive advantages for our products or
will not be successfully challenged or circumvented by our competitors. No
assurance can be given that patents do not exist or could not be filed which
would have a materially adverse affect on our ability to market our products
or to obtain or maintain any competitive position we may achieve with respect
to our products.
9. Inability to enforce our patent rights could result in our needing to
acquire licenses which may not be available.
If we cannot enforce the patent rights we currently hold we may be required
to obtain licenses from others to develop, manufacture or market our
products. There can be no assurance that we would be able to obtain any such
licenses on commercially reasonable terms, if at all. We license certain
proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information
developed. No assurances can be given that such third parties will
adequately enforce any rights they may have or that the rights, if any,
retained by the government will not adversely affect the value of our
license.
10. We do not expect to be profitable unless we receive final regulatory
approval for Ampligen and it is successfully commercialized.
Ampligen has not been approved for commercial use in the United States or
elsewhere. We do not expect to be profitable unless we receive final
regulatory approval and can successfully commercialize Ampligen or one of
our other products. Our products, including Ampligen , are subject to
extensive regulation by numerous governmental authorities in the United
States and other countries, including, but not limited to, the Food and Drug
Administration in the United States, the Health Protection Branch of
Canada's Department of Health and Welfare, a federal regulatory agency in
Canada, and the European Medical Evaluation Agency in Europe. Obtaining
regulatory approval 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 efficacious for its intended
use 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.
11. We may not be profitable unless we can produce Ampligen in commercial
quantities at costs acceptable to us.
We have never produced Ampligen or any other product in large commercial
quantities. Ampligen is currently produced only for use in clinical trials.
We must manufacture our products in compliance with regulatory requirements
at commercial quantities and at acceptable costs in order for us to be
profitable. We intend to utilize third-party manufacturers and/or facilities
if and when the need arises or, if we are unable to do so, to build or
acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be
significantly affected.
12. If our distributors do not market our product successfully, we may not
generate significant revenues or become profitable.
We have limited marketing and sales capability. We need to enter into
marketing agreements and third party distribution agreements for our
products in order to generate significant revenues and become profitable.
To the extent that we enter into co-marketing or other licensing
14
arrangements, any revenues received by us will be dependent on the efforts
of third parties, and there is no assurance that these efforts will be
successful. Our agreement with Gentiva Health Services offers the potential
to provide significant marketing and distribution capacity in the United
States, while Bioclones, Ltd. will be responsible for fielding an adequate
sales force in South America, Africa, United Kingdom, Australia and New
Zealand.
Gentiva Health Services is able to deliver treatment and services to chronic
disease patients including infusion services, home nursing and other medical
services through a national network of more than 500 locations. We cannot
assure you that Gentiva Health Services or our foreign marketing partners
will be able to successfully distribute our products, or that we will be
able to establish future marketing or third party distribution agreements
on terms acceptable to us, or that the cost of establishing these
arrangements will not exceed any product revenues. The failure to continue
this arrangement or to achieve other such arrangements on satisfactory terms
could have a materially adverse effect on us. We are dependent upon certain
third party suppliers for key components of our proposed products and for
substantially all of the production process. If we cannot enter into future
marketing and distribution agreements at terms acceptable to us, or if these
distributors cannot effectively market and distribute our products, our
operations will be negatively affected.
13. No Assurance of Successful Product Development.
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at an
early stage of research or development may not reach the market for a number
of reasons. Potential products may be found to be ineffective or to have
adverse side effects, fail to receive necessary regulatory clearances, be
difficult to manufacture on a commercial scale, be uneconomical to market
or be precluded from commercialization by proprietary rights of third
parties. Our products are in various stages of clinical and pre-clinical
development. Each product will need to progress through further clinical
studies and appropriate regulatory approval processes before any such
products can be marketed. We do not know when, if ever, Ampligen will be
available for commercial sale for any implication, if at all. Generally,
only a small percentage of potential therapeutic products are eventually
approved by the Food and Drug Administration for commercial sale. The
transition from limited production of pre-clinical and clinical research
quantities to production of commercial quantities of our products will
involve distinct management and technical challenges and will require
additional management and technical personnel and capital to the extent such
manufacturing is not handled by third parties. There can be no assurance
that our efforts will be successful or that any given product will be
determined to be safe and effective, capable of being manufactured
economically in commercial quantities or successfully marketed.
14. There is no assurance that successful manufacture of a drug on a limited
scale basis for investigational use will lead to a successful
transition to commercial, large-scale production.
Small changes in methods of manufacturing may affect the chemical structure
of Ampligen and other such RNA drugs, as well as their safety and efficacy.
Changes in methods of manufacture, including commercial scale-up, can, among
other things, require new clinical studies.
15. Rapid Technological Change.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from
pharmaceutical and biotechnology companies, universities, governmental
entities and others diversifying into the field is intense and is expected
to increase. Most of these entities have significantly greater research and
development capabilities than us, as well as substantial marketing,
financial and managerial resources, and represent significant competition
for us. There can be no assurance that developments by others will not
render the our products or technologies obsolete or noncompetitive or that
we will be able to keep pace with technological developments.
15
16. Substantial Competition.
Competitors have developed or are in the process of developing technologies
that are, or in the future may be, the basis for competitive products. Some
of these products may have an entirely different approach or means of
accomplishing similar therapeutic effects to products being developed by us.
These competing products may be more effective and less costly than our
products. In addition, conventional drug therapy, surgery and other more
familiar treatments will offer competition to our products. Furthermore,
many of our competitors have significantly greater experience than us in
pre-clinical testing and human clinical trials of pharmaceutical products
and in obtaining regulatory approvals of products. Accordingly, our
competitors may succeed in obtaining product approvals more rapidly than us.
If any of our products receive regulatory approvals and we commence
commercial sales of our products, we will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which we have
no experience. Our competitors may possess or obtain patent protection or
other intellectual property rights that prevent, limit or otherwise
adversely affect our ability to develop or exploit our products.
17. Limited Manufacturing Experience and Capacity.
Ampligen is currently produced only in limited quantities for use in our
clinical trials. To be successful, our products must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. To the extent we are involved in the production process,
our current facilities are not adequate for the production of our proposed
products for large-scale commercialization, and we currently do not have
adequate personnel to conduct commercial-scale manufacturing. We intend to
utilize third-party facilities if and when the need arises or, if it is
unable to do so, to build or acquire commercial-scale manufacturing
facilities. We will need to comply with regulatory requirements for such
facilities, including those of the U.S. Food and Drug Administration and The
Canadian Health Protection Branch pertaining to Good Manufacturing Practices
regulations. There can be no assurance that such facilities can be used,
built, or acquired on commercially acceptable terms, that such facilities,
if used, built, or acquired, will be adequate for our long-term needs.
18.We may be subject to product liability claims from the use of Ampligen or
other of our products which could negatively affect our future
operations.
We face an inherent business risk of exposure to product liability claims
in the event that the use of Ampligen or our other products result in
adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical
companies or others manufacturing these products on our behalf. Our future
operations may be negatively affected from the litigation costs, settlement
expenses and lost product sales inherent to these claims. While we will
continue to attempt to take appropriate precautions, we cannot assure you
that we will avoid significant product liability exposure. Although we
currently maintain worldwide product liability insurance coverage in the
amount of $1,000,000, there can be no assurance that this insurance will
provide adequate coverage against product liability claims. While no product
liability claims are pending or threatened against us to date, a successful
product liability claim against us in excess of our insurance coverage could
have a negative effect on our business and financial condition.
19.Members of our Scientific Advisory Board may have conflicting interests and
may disclose data and technical know-how to our competitors.
Some of our Scientific Advisory Board members are employed by other
entities, which may include our competitors. Although we require each of our
Scientific Advisory Board members to sign a non-disclosure and non-competition
agreement with respect to the data and information that he or
she receives from us, we cannot assure you that members will abide by them.
If a member were to reveal this information to outside sources, accidentally
or otherwise, our operations could be negatively effected.
16
Since our business depends in large part on our ability to keep our
know-how confidential, any revelation of this information to a competitor
or other source could have an adverse effect on our operations.
20.There is no guarantee that our trade secrets will not be disclosed or known
by our competitors.
To protect our rights, we require certain employees and consultants to enter
into confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will
not otherwise become known or be independently developed by our competitors.
21. The loss of Dr. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A. Carter.
The loss of Dr. Carter's services could have a material adverse effect on
our operations. While we have an employment agreement with Dr. William A.
Carter, and have secured key man life insurance in the amount of $2 million
on the life of Dr. Carter, the loss of Dr. Carter or other key personnel,
such as Dr. David Strayer or Dr. Carol Smith, or the failure to recruit
additional personnel as needed could have a materially adverse effect on our
ability to
achieve our objectives.
22. Possible impact of potential AMEX delisting on marketability of our
securities.
Our common stock and Class A warrants are trading on the American Stock
Exchange. If we were to continue to incur operating losses, we might be
unable to maintain the standards for continued listing and the listed
securities could be subject to delisting from AMEX. If our securities are
delisted, trading in the delisted securities could thereafter be conducted
on the NASD Bulletin Board or in the over-the-counter market in what is
commonly referred to as the "pink sheets." If this were to occur, an
investor would find it more difficult to dispose of our securities or to
obtain accurate quotations as to the price of our securities and it could
have an adverse effect on the coverage of news concerning us and the ability
to sell our shares.
23. Uncertainty of Health Care Reimbursement and Potential Legislation.
Our ability to successfully commercialize our products will depend, in part,
on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and from time to time legislation is
proposed, which, if adopted, could further restrict the prices charged by
and/or amounts reimbursable to manufacturers of pharmaceutical products. We
cannot predict what, if any, legislation will ultimately be adopted or the
impact of such legislation on us. There can be no assurance that third party
insurance companies will allow us to charge and receive payments for our
products sufficient to realize an appropriate return on our investment in
product development. Our potential products represent a new mode of therapy
and we expect that the costs associated with purchasing and administering
our products will be substantial. There can be no assurance that our
proposed products, if successfully developed, will be considered cost
effective to third-party payors, that reimbursement will be available or,
if available, that the timing and amount of such payors reimbursement will
not adversely affect our ability to sell our products on a profitable basis.
24. Hazardous Materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such
materials comply in all material respects with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
17
these materials cannot be completely eliminated. In the event of such an
accident or the failure to comply with applicable regulations, we could be
held liable for any damages that result, and any such liability could be
significant. We do not maintain insurance coverage against such liabilities.
25. Exercise of Class A Redeemable Warrants May Have Dilutive Effect on Market.
Holders of the Class A redeemable warrants may exercise the Class A
redeemable warrants and purchase the underlying common stock at a time when
we might be able to obtain capital by a new offering of securities on terms
more favorable than that provided by such Class A redeemable warrants, in
which event our ability to obtain additional capital would be affected
adversely.
26.Government Regulation.
We are subject to a variety of laws and regulations relating to occupational
health and safety, environmental protection, hazardous substance control,
and waste management and disposal. Pharmaceutical products and their
manufacture are subject to continued review following regulatory approval,
and later discovery of previously unknown problems may result in the
imposition of restrictions on such products or their manufacture, including
withdrawal of the products from the market. Failure to comply with
applicable regulatory requirements could, among other things, result in
fines, suspension of regulatory approvals, operating restrictions and
criminal prosecution. We cannot predict the extent to which current or
future government regulations might have a materially adverse effect on the
production, marketing and sale of our products. Such regulations may delay
or prevent clinical trials, regulatory approval, and the manufacture or
marketing of our potential products. In addition, such regulation may impose
costly procedures upon our activities or furnish a competitive advantage to
other companies more experienced in regulatory affairs than us and may
deplete our liquidity and capital resources.
27. Ampligen Safety Profile.
We believe that Ampligen has been generally well tolerated with a low
incidence of clinical toxicity, particularly given the severely debilitating
or life threatening diseases that have been treated. A mild flushing
reaction has been observed in approximately 15 percent of patients treated
in our various studies. This reaction is occasionally accompanied by
erythema, tightness of the chest, tachycardia, anxiety, shortness of breath,
subjective reports of "feeling hot," sweating and nausea. The reaction is
usually infusion-rate related and can generally be controlled by slowing the
infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, urticaria (swelling of the skin),
bronchospasm, transithypotension, photophobia, rash, bradycardia, transient
visual disturbances, arrhythmias, decrease visual activity in platelets and
white blood cell counts, anemia, dizziness, confusion, elevation of kidney
function tests, occasional temporary hair loss and various flu-like
symptoms, including fever, chills, fatigue, muscular aches, joint pains,
headaches, nausea and vomiting. These flu-like side effects typically
subside within several months.
28. Litigation in Pennsylvania involving us and Manuel Asensio and Asensio &
Company, Inc.
In September, 1998, we filed a multi-count compliant against Manuel P.
Asensio, Asensio & Company, Inc. and others in the United States District
Court for the Eastern District of Pennsylvania. In October 1998 and August
1999, we amended the complaint to add additional counts and to add
Asensio.com, Inc. (formerly known as Asensio Holding, 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
18
statements. The complaint further alleges that defendants defamed and
disparaged us in furtherance of a manipulative, deceptive and unlawful
short-selling scheme between August, 1998, and the present.
In April 1999, Manuel P. Ansensio, Ansensio & Company, Inc. and others,
filed an answer and counterclaim against us. The counterclaim alleges that
we on or about September, 1998, in response to defendants' strong sell
recommendation and other press releases about Hemispherx and its officers
and directors, made defamatory statements about defendants, including
statements that defendants' attacks and manipulative short-selling scheme
may have constituted criminal wrongdoing on the part of defendants. We
denied the material allegations of the counterclaim and are vigorously
defending against the counterclaim. On June 6, 2000, the court granted the
defendants' motion to dismiss for lack of Federal Jurisdiction. On July 31,
2000 we transferred the action to the Court of Common Pleas of Philadelphia
County. In August, 2000 we filed a notice of appeals from the decision of
the United States District Court dismissing the action for lack of Federal
Jurisdiction. The appeal is presently pending.
29. Litigation in New York involving us and Manuel Asensio, Asensio & Company
Inc., and Asensio.com Inc.
On June 8, 2000, Manual P. Asensio and Asensio & Company, Inc., filed a
complaint in the Supreme Court of the State of New York against us, our
Chairman and Chief Executive Officer William A. Carter and KPMG Peat Marwick
in the first New York action in which they allege that the defendants
defamed them in oral and written communications made in March, 2000. On
July 27, 2000, we were served with a complaint in this action. On August
25, 2000, we filed an answer, including Affirmative Defenses to these
claims. The allegations of Manual P. Asensio and Asensio & Company, Inc.,
in the first New York action are similar in substance to the alleged
defamations which are the subject of the counterclaims filed by them in the
action presently on appeal in Federal Court in Pennsylvania and pending in
Pennsylvania state court.
On September 25, 2000, we were served notice that Manual P. Asensio, Asensio
& Company, Inc. and Asensio.com Inc., had filed a second action against us
and Dr. William Carter, our
Chairman and Chief Executive Officer in the Supreme Court of the State of
New York. The second New York action purports to seek a declaratory judgment
that their statements regarding us constituted protected speech, and that
they did not engage in any actionable interference with our existing or
prospective business relations. On October 12, 2000 we filed a motion to
dismiss the second New York action.
We intend to vigorously defend against the claims asserted in both the First
and Second New York actions, however, this litigation could subject us to
significant liability for damages and, even if not meritorious, could be
time consuming, expensive to pursue and result in the diversion of
management time and attention.
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.
19
RESULTS OF OPERATIONS
Three months ended September 30, 2000 versus Three months ended September
- -------------------------------------------------------------------------
30, 1999
- ---------
The Company's net loss was $2,065,824 for the three months ended September
30, 2000 versus a net loss of $1,878,719 for the same three month period in
1999 reflects an increase in quarter to quarter net losses of $187,105.
Several factors contributed to the increase in loss in 2000.
Revenues produced from the Company's CFS cost recovery treatment programs
underway in the United States and Europe were up $57,198 for the three
months ended in September 30, 2000. In this period, cost recovery treatment
program revenues were $225,176 of which $159,900 originated in the United
States. The Food and Drug Administration approved the CFS cost recovery
treatment program in the United States in 1997. 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 $583,370 compared to the same
period in 1999. In the United States, the company incurred R&D costs of
$1,209,399 for an increase of $180,229. This increase reflects the cost of
increased patient enrollment and activity of the Protocol Amp 516 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 $153,141. HEM-Europe, established in 1998, to
pursue drug approval in Europe, expects to expand the cost recovery
treatment program, currently authorized in England and Belgium, to other
European countries. Pursuant to a strategic alliance agreement with Chronix
Biomedical Corporation, $250,000 was invested for research in diagnostic and
therapeutic technology for Chronic Fatigue Syndrome, Gulf War Syndrome and
Human Herpes Virus-6. Manufacturing costs, included in research and
development, were up by $124,841 compared to the same period in 1999. This
increase is primarily due to the fact that the Company purchased raw
materials in the three month period ended September 30, 2000 compared to
1999. As an experimental drug, Ampligen production costs are expensed as
they are incurred and not carried as inventory on the balance sheet.
General and administrative expenses were up $23,284 for the three months
ended September 30, 2000. Legal and related expenses were down $108,304 due
to an overall reduction of legal expenses as well as recovery of certain
legal costs incurred on the Asensio litigation from insurance coverage.
Expenses for consultants and financing activities were down $65,000 due to
company action designed to reduce such costs. Effort to research and prepare
documents in support of filing a new application with the European Medical
Evaluation Authority for approval of Ampligen in treatment of CFS was up
$173,000. All other G&A expenses were up some $23,000.
There was no stock compensation expense for the third quarter ended
September 30, 2000 as opposed to $358,744 in the third quarter ended
September 30, 1999. Stock Compensation Expense in 1999 reflects the charge
to earnings for the calculated value of Stock Warrants granted to outside
parties for services performed.
The Company's investment of $750,000 in CIMM requires that the company
record their share of CIMM's quarterly earnings/losses. In the three months
ended September 30, 2000, the company recorded an equity loss of $22,298 in
CIMM.
Interest income for the three months revised ended September 30, 2000 was
$143,964 versus $118,059 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 during the third quarter.
20
Nine months ended September 30, 2000 versus Nine months ended September 30,
- ---------------------------------------------------------------------------
1999
- ------
In the first nine months of 2000, the company incurred a net loss of
$6,097,670 versus a net loss of $7,333,065 for the same period in 1999. The
reduced loss of $1,235,395 is a result of the following factors.
The Company's CFS cost recovery treatment programs in the United States and
Europe produced revenues totaling $650,763 in the nine month period ended
September 30, 2000 versus $454,298 in 1999 for an increase of 43.2%.
Research & Development costs were approximately $440,000 higher in the first
nine months of 2000 versus the same period in 1999. The costs of the
company's AMP 516 CFS clinical trials increased $742,935 in 2000 versus 1999
reflecting the increased clinical costs of enrolling and treating a greater
number of patients in the program. The AMP 516 program was in the early
development stage in 1999.The company plans to eventually enroll 230
patients in the FDA approved Phase III clinical trials. These increased
costs were expected and planned. Expanded efforts in Europe increased costs
$438,135 in the first nine months of 2000 versus 1999. HEM-Europe,
established in 1998 to pursue drug approval in Europe, expects to expand the
cost recovery treatment programs, currently authorized in Belgium and
England, to other European countries. Pursuant to the strategic alliance
agreement with Chronix Biomedical Corporation, $250,000 was invested for
research in diagnostic and therapeutic technology for Chronic Fatigue
Syndrome, Gulf War Syndrome and Human Herpes Virus-6. This Research Project
is expected to continue through 2001. Manufacturing costs were down
$1,115,667 in the first nine 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
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 nine
months of 1999, the company expended over $1,253,114 in the purchase of raw
materials for 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.
General and administrative costs were lower in the nine months ended
September 30, 2000 by $697,794 versus the same period in 1999. Legal and
related costs were down $410,018 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 $251,636 as fewer financial and management consultants were employed
in the first nine months of 2000. Efforts to reduce Public Relations and
related expenses produced lower costs by $149,932. Temporary help for
increased clinical support and other costs related to supporting the EMEA
application increased by $166,000.
Stock compensation expense was down by $746,115 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.
The Company's investment of $750,000 in CIMM requires that the Company
record it's share of CIMM's quarterly earnings/losses. In the nine months
ended September 30, 2000, the Company recorded an equity loss of $48,152.
Interest income was $455,952 in the first nine months of 2000. This is an
increase of $83,149 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 $9.2 million at
September 30, 2000 compared to $8.5 million at December 31, 1999. This
increase of $.7 million reflects the net increase from financing activities,
investing activities and net cash used in operations in the first nine
months of 2000.
Net operating activities consumed $6,379,607 in the first nine months of
2000 reflecting major outlays of cash in support of the CFS phase III
clinical trials as well as the support of the European clinical efforts.
Investing activities include the expenditure of $97,720 for capital
equipment primarily for use at the company's Rockville, Maryland Quality
21
Assurance facility. Approximately $12,000 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 nine months of 2000, the Company received $8,549,107 from
warrant holders exercising 1,978,691 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 products in the Canadian territories subject to
certain terms and conditions.
In the first nine 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 cost recovery
treatments are expected to continue to increase in the coming months.
The Company expects warrant holders to continue exercising both the Class
A redeemable warrants and private warrants from time to time depending on
the trading price of the Company common stock. As of September 30, 2000,
the Company has 4,129,198 Class A 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. The publicly traded Class A Redeemable Warrants were to
expire no later than November 2, 2000, however, the Company recently amended
the expiration date to no later than November 2, 2001. Non-public warrants
outstanding total 7,738,667 with a weighted average exercise price of $4.07.
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
The Company had $8.5 million in cash and equivalents at December 31, 1999.
To the extent that the Company's cash and cash equivalents exceed it's near
term funding needs, the Company invests the excess cash in three to six
month high quality financial instruments. The Company employs established
policies and procedures to manage any risks with respect to investment
exposure.
22
Part II OTHER INFORMATION
ITEM 1: Legal Proceedings
In September, 1998, we 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. In October 1998 and August
1999, we amended the complaint to add additional counts and to add
Asensio.com, Inc. (formerly known as Asensio Holding, Inc.), the holding
company of the 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.
In April 1999, Manuel P. Asensio, Asensio & Company, Inc., and others 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 the Company and its officers
and directors, made defamatory statements about defendants, including
statements that defendants' attacks and manipulative short-selling scheme
may have constituted criminal wrongdoing on the part of defendants. The
Company denied the material allegations of the counterclaim and is
vigorously defending against the counterclaim. On June 6, 2000, the court
granted the defendants' motion to dismiss for lack of Federal Jurisdiction.
On July 31, 2000 we transferred the action to the Court of Common Pleas of
Philadelphia County. In August, 2000 we filed a notice of appeals from the
decision of the United States District Court dismissing the action for lack
of Federal Jurisdiction. The appeal is presently pending.
On July 27, 2000, we were served with a complaint filed by Manuel P. Asensio
and Asensio & Company, Inc., filed a complaint in the Supreme Court of the
State of New York against the Company, the Company's Chairman and Chief
Executive Office, William A. Carter and KPMG, LLP in the in the first New
York action in which they allege that the defendants defamed them in oral
and written communications made in March, 2000. On August 25, 2000, we
filed an Answer, including Affirmative Defenses to these claims. The
allegations of Manuel P. Asensio and Asensio & Company, Inc., in the first
New York action are similar in substance to the alleged defamation's which
are the subject of the counterclaims filed by them in the action presently
on appeal in Federal Court in Pennsylvania and pending in Pennsylvania state
court.
On June 26, 2000, Manuel P. Asensio, Asensio & Company, Inc. and Asensio.com
Inc., filed a second action against us and Dr. William Carter, our Chairman
and Chief Executive Officer in the Supreme Court of the State of New York.
On September 25, 2000, we were served with a complaint in this action. The
second New York action purports to seek a declaratory judgment that their
statements regarding us constituted protected speech, and that they did not
engage in any actionable interference with our existing or prospective
business relations. On October 12, 2000 were filed a motion to dismiss this
action. We intend to vigorously defend against the claims asserted in both
the First and Second New York actions, however, this litigation could
subject us to significant liability for damages and, even if not
meritorious, could be time consuming, expensive to pursue and result in the
diversion of management time and attention.
In October, 1998, we contacted the SEC regarding what we 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, we
were 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
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." We continue to cooperate with the investigation.
23
We have 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. We are 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 us in
the United States District Court for the Eastern District of Pennsylvania.
Cook Imaging Corp. asserts that we refused to pay for certain Ampligen
manufacturing efforts by Cook. The Company has responded to the complaint
and asserted a counterclaim seeking in excess of $1.5 million. 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 and the matter is
scheduled for court ordered mediation on November 21, 2000. We are unable
to express any opinion as to the likely outcome of the act of the matter.
ITEM 2: Changes in Securities
In April, 1999, we filed a Registration Statement with the Securities and
Exchange Commission to register the common stock privately placed in July,
1998. In addition, certain warrants and underlying common stock was
included in the Registration.
In June 1999, we 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. We 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, we 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 we 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.
In August, 2000, we extended the expiration date of the Class A Redeemable
Warrants for a period of one year. These publicly traded securities were
originally termed to expire on November 2, 2000.
On October 18, 2000, we filed a Form S-3 with the SEC for the purpose of
registering shares of our common stock, warrants and underlying common stock
on behalf of certain selling shareholders.
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.
24
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
On July 26, 2000, we held an annual meeting to adopt three resolutions by
consent of the majority of our shareholders, acting pursuant to the General
Corporation Law of the State of Delaware. Pursuant to the resolutions we:
i) elected the following four members to our Board of Directors to serve until
their respective successors are elected and qualified:
Election of Directors For: Withheld:
* William A. Carter, M.D. 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
All four directors term of office continued after the meeting.
ii) ratified the selection by us of BDO Siedman, LLP, independent public
accountants, to audit our financial statements for the year ending,
December 31, 2000;
For: Against: Abstain:
16,035,816 17,374 15,880; and
iii) to transact such other matters as may properly come before our meeting or
any adjournment thereof.
The board of directors solicited proxies in connection with the adoption of
these resolutions and proxies were requested from our stockholders.
ITEM 5: Other Information
ITEM 6: Exhibits and Reports on Form 8K
On July 12, 2000 we filed an amendment to Form 8K in connection with a
change in our independent auditors.
On July 13, 2000 we amended our form 8K to include a letter dated July 13,
2000 from our prior independent auditors in support of our original Form 8K
filed on May 10, 2000 due to a change in auditors.
On June 6, 2000 we filed Form 8K to notify the SEC of our engagement of the
new auditors, BDO Siedman, LLP.
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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: November 14, 2000 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: November 14, 2000 Robert E. Peterson
Chief Financial Officer