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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 March 31, 2001
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
29,991,242 shares of common stock issued and outstanding as of March 31, 2001.
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PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,721 $2,057
Short Term investments 4,657 4,086
Accounts receivable 60 36
Prepaid expenses and other current assets 607 538
----------- ----------
Total current assets 9,045 6,717
Property and equipment, net 373 338
Patent and trademark rights, net 1,204 1,110
Investments in uncosolidated affiliates 2,421 2,397
Other assets 24 24
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Total assets $13,067 $10,586
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,341 $ 1,085
Accrued expenses 154 154
----------- ----------
Total current liabilities 1,495 1,239
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Commitments and contingencies
Stockholders' equity:
Common stock 30 30
Additional paid-in capital 97,984 98,532
Accumulated other comprehensive income 34 58
Treasury stock - at cost (3,910) (4,227)
Accumulated deficit (82,566) (85,046)
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Total stockholders' equity 11,572 9,347
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Total liabilities and stockholders' equity $13,067 $ 10,586
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See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three months ended
March 31,
--------------------------
(Unaudited)
2000 2001
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Revenues:
Cost recovery - clinical treatment programs $ 210 $ 127
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Costs and expenses:
Research and development 1,423 1,765
General and administrative 911 911
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Total cost and expenses 2,334 2,676
Interest and other income 152 94
Equity in loss of unconsolidated affiliate (Note 4) - (25)
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Net loss $(1,972) $ (2,480)
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Basic and diluted loss per share $ (.07) $ (.08)
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Basic and diluted weighted
average common shares outstanding 28,253,028 29,957,975
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See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three months ended
March 31,
--------------------------
(Unaudited)
2000 2001
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Cash flows from operating activities:
Net loss $ (1,972) $(2,480)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 29 35
Amortization of patents rights 63 94
Write-off of patent rights 2 29
Stock option and warrant compensation and
service expense 155 262
Equity in loss of unconsolidated affiliate 24
Changes in assets and liabilities:
Accounts receivable (19) 24
Prepaid expenses and other current assets 21 79
Accounts payable (45) (256)
Accrued expenses (265) -
Other assets (500) -
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Net cash (used in) operating activities (2,531) (2,189)
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Cash flows from investing activities:
Purchase of property and equipment (62) -
Additions to patent rights (29) (29)
Maturity of short term investments 2,153 4,613
Purchase of short term investments (2,236) (4,028)
Other investments (70) -
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Net cash (used in) provided by investing activities (244) 556
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Cash flows from financing activities:
Proceeds from issuance of common stock 2,250 110
Proceeds from exercise of warrants 7,128 176
Purchase of treasury stock (3,106) (317)
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Net cash provided by (used in) financing activities 6,272 (31)
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Net increase (decrease) in cash and cash equivalents 3,497 (1,664)
Cash and cash equivalents at beginning of period 6,396 3,721
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Cash and cash equivalents at end of period $ 9,893 $ 2,057
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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 Three Months Ended March 31, 2001
(in thousands, except share data)
Accumulated
Common Stock Additional Other Treasury Total
----------------- Paid-in Comprehensive Treasury stock Accumulated Stockholders'
Shares Amount Capital Income Stock shares deflict Equity
-------- ------- ----------- ------------- --------- -------- ----------- ------------
Balance 12/31/2000 30,367,888 $30 $97,984 $34 $(3,910) 395,646 $(82,566) $11,572
Common Stock
Issued 125,000 - 286 286
Treasury
Stock
Purchased (317) 106,000 (317)
Stock warrant
Compensation 262 262
Net Comprehensive
loss 24 (2,480) (2,456)
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Balance 3/31/2001 30,492,888 $30 $98,532 $58 $(4,227) 501,646 $(85,046) $9,347
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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.
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 2000 consolidated financial statements
included in our Form 10K statement filed with the SEC on April 3,
2001.
Prior year amounts have been reclassified to conform to current
period presentations.
NOTE 2: STOCK COMPENSATION:
The expiration date of certain non-public stock warrants were
extended by the Board of Directors. The extension produced non-cash
stock/warrant compensation of $262,000 in the three month period
ended March 31, 2001. Stock/warrant compensation expense in the
three month period ended March 31, 2000 was $155,000. Stock/warrant
compensation expense had no effect on total shareholders equity as
it is offset by an increase in additional paid in capital.
In 2001 we retained a nationally based consultant group with
expertise in executive compensation in the biotechnology sector to
analyze the compensation of both the Chairman of the Board and
Chief Executive Officer and the Chief Financial Officer. In
accordance with the review, the Company granted 376,650 warrants to
purchase our common stock to William A. Carter for services
performed and to be performed and 30,000 warrants to the Chief
Financial Officer. The Chief Financial Officer's warrants are
exercisable at $5.00 per share and 188,325 of the Chairman of the
Board and Chief Executive Officers warrants are exercisable at
$6.00 per share and 188,325 are exercisable at $9.00 per share. We
applied APB Opinion No. 25 in accounting for stock-based
compensation of our company employees and directors and,
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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.
The components of comprehensive (loss) are:
(000's omitted)
For three months ending
--------------------------------
March 31, 2000 March 31, 2001
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Net Loss $(1,972) $(2,480)
Unrealized gain on short
term investments - 24
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Total comprehensive loss $(1,972) $(2,456)
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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 ("R.E.D.") is a privately held
biotechnology company for the development of diagnostic markers
for Chronic Fatigue Syndrome and other chronic immune diseases. We
have a research collaboration agreement with R.E.D. to assist in
this development. R.E.D. is headquartered in Belgium. 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 March 31, 2001 was $645,000.
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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 and on March 7, 2001
12,000 more share of Hemispherx Biopharma, Inc. stock were issued
from the treasury to Chronix for an equity investment of $678,000.
Pursuant to a strategic alliance agreement, we provided Chronix
with $250,000 during 2000 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.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
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Certain statements in this Report on Form 10-Q ("Form 10-Q"),
constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and the
Private Securities Litigation Reform Act of 1995 (collectively, the
"Reform Act"). Certain, but not necessary all, of such forward-
looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should,"
or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy
that involve risks and uncertainties. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or
achievements of Hemispherx Biopharma, Inc. and its subsidiaries
(collectively, the "Company", "we or "us") to be materially
different from any future results, performance or achievements
expressed or implied by such forward-looking statements and other
factors referenced in this Form 10-Q. The Company does not
undertake and specifically declines any obligation to publicly
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release the results of any revisions which may be made to any
forward-looking statement to reflect events or circumstances after
the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
Overview
We are a pharmaceutical research and development Company, which
uses Nucleic Acid technologies to develop therapeutic products for
the treatment of certain viral diseases and cancers. Our strategy
is to use our proprietary drug, Ampligenr to treat diseases for
which adequate treatment is not available. Such diseases currently
include Myalgic Encephalomyelitis/Chronic Fatique Syndrome
("ME/CFS"), Hepatitis, HIV and certain cancers.
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 Ampligenr 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 and
approval. Our European subsidiary, Hemispherx Biopharma Europe, is
engaged in establishing and conducting clinical trials in Europe
for the treatment of ME/CFS.
We were incorporated in Maryland in August 1966 under the name HEM
Research, Inc. and originally served as a supplier of research
support products. We redirected our focus in the early 1980's to
the development of nucleic acid pharmaceutical technology and the
commercialization of RNA drugs. We were reincorporated in Delaware
and changed our name to HEM Pharmaceutical Corp. in January 1991.
In June, 1995 we became Hemispherx Biopharma, Inc. The Company has
three domestic subsidiaries BioPro Corp., Bioagean Corp.and Core
BioTech Corp., all of which are incorporated in Delaware. Our
foreign subsidiary, Hemispherx Biopharma-Europe was established in
1998.
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 Ampligenr for treating
various viral diseases.
We expect to continue our research and clinical efforts for the
next several years and may continue to incur losses due to clinical
costs incurred in the continued development of Ampligenr for
commercial application. Possible losses may fluctuate from quarter
to quarter as a result of differences in the timing of significant
expenses incurred and receipt of licensing fees and/or cost
recovery treatment revenues in Europe, Canada and in the United
States.
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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 our products have been approved for
commercial sale by the Food and Drug Administration or other
foreign regulatory authorities.
RISK FACTORS
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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:
Our drug and related technologies are investigational and subject
to regulatory approval
All of our drugs and associate 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 Ampligenr, which has not been approved for
commercial use. Our products, including Ampligenr 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 cannot assure you that the drug will
ultimately be demonstrated to be safe or efficacious. In addition,
while Ampligenr 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. If Ampligenr
or one of our other products does not receive regulatory approval
in the U.S. or elsewhere, our operations will be materially
adversely effected.
We may continue to incur substantial losses and our future
profitability is uncertain
We began operations in 1966 and last reported net profit
from 1985 through 1987. Since 1987, we have incurred substantial
operating losses. As of March 31, 2001 our accumulated deficit
was approximately $85,046,000. We have not yet generated
significant revenues from our products and may incur substantial
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and increased losses in the future. We cannot assure 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 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 profitability.
Additional financing requirements.
The development of our products will 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. Based on our current
operating plan, we anticipate receipt of limited revenues from the
sales of Ampligenr under the Cost Recovery Clinical Programs and
investors exercising our Class A Redeemable Warrants. The Company
may need to raise substantial additional funds through additional
equity or debt financing or from other sources in order to
complete the necessary clinical trials and the regulatory approval
processes and begin commercializing its products. There can be no
assurances that our Class A Redeemable Warrants will be exercised
or that we will raise any proceeds from possible equity financing,
which may have a material effect on our ability to develop our
products.
No regulatory agency has approved the full commercial sale of any
of the our products.
We cannot assure you that Ampligenr will ultimately be
demonstrated to be safe or efficacious. While Ampligenr 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. If Ampligenr or one of our other
products does not receive regulatory approval in the United States
or elsewhere, our operations will be significantly affected.
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
Ampligenr for a particular disease in order to obtain exclusive
rights for the commercial sale of Ampligenr for such disease. 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 expertise. We have been issued certain patents on the
use of Ampligenr and Ampligenr in combination with certain other
drugs for the treatment of HIV. We have also been issued patents
on the use of Ampligenr in combination with certain other drugs
for the treatment of chronic hepatitis B virus, chronic hepatitis
C virus, and a patent which affords protection on the use of
Ampligenr in patients with chronic fatigue syndrome. We have not
been issued any patents in the United States for the use of
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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 Ampligenr 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 Ampligenr in
combination with various other agents, including AZT, for a
particular target indication prior to us. If we cannot protect
our patents covering the use of Ampligenr for a particular
disease, or obtain additional pending patents, we may not be able
to successfully market Ampligenr.
The patent position of biotechnology and pharmaceutical firms is
highly uncertain and involves complex legal and factual questions.
To date, 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. Such litigation could requires 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 by competitors. No assurance can be given
that patents do not exist or could not be filed which would have a
materially adverse effect on our ability to market our products
or to obtain or maintain any competitive position the we may
achieve with respect to our products. Our patents also may not
prevent others from developing competitive products using related
technology.
There can be no assurance that we will have the financial
resources necessary to enforce patent rights we may hold.
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 currently 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. Certain of our
know-how and technology is not patentable, particularly the
procedures for the manufacture of our drug product which are
carried out according to standard operating procedure manuals.
We may not be profitable unless we can produce Ampligenr in
commercial quantities at costs acceptable to us.
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We have never produced Ampligenr or any other products in
large commercial quantities. Ampligenr is currently produced only
for use in clinical trials. We must manufacture our products in
compliance with regulatory requirements in 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 Ampligenr or enter
into third party agreements for its manufacture at costs
acceptable to us, our operations will be significantly affected.
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 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 licensing and marketing agreements with
certain foreign firms should provide an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand,
Canada and Austria.
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 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 these arrangements 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 the 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.
No assurance of successful product development of Ampligenr.
The development of Ampligenr and our other products is
subject to a number of significant risks. Ampligenr 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
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commercialization by proprietary rights of third parties. Our
products are in various stages of clinical and pre-clinical
development and, require further clinical studies and appropriate
regulatory approval processes before any such products can be
marketed. We do not know when, or if ever, Ampligenr will be
generally available for commercial sale for any indication for at
least the next several years, if at all. Generally, only a small
percentage of potential therapeutic products are eventually
approved by the FDA for commercial sale.
Ampligenr safety profile.
We believe that Ampligenr 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% of patients treated in our various studies. This
reaction is occasionally accompanied by rythema, a 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, thypotension, photophobia, rash,
bradycardia, transient visual disturbances, transient arrhythmias,
decreased 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.
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 may affect the chemical structure of
Ampligen and, can, among other things, require new clinical studies
and affect orphan drug status, particularly, market exclusivity
rights, if any, under the Orphan Drug Act. 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.
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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 our products or technologies obsolete or noncompetitive or
that we will be able to keep pace with technological developments.
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 FDA, HPB and
other regulatory approvals of products. Accordingly, our
competitors may succeed in obtaining FDA and HPB 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.
Limited manufacturing experience and capacity.
Ampligenr 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
we are 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 FDA and
HPB pertaining to Good Manufacturing Practices ("GMP") 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.
16
We may be subject to product liability claims from the use of
Ampligenr 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 Ampligenr or other of
our products results 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 effected 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 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.
Members of our Scientific Advisory Board may have conflicting
interests and may disclose data and technical know how to our
competitors.
All 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. Since our
business depends in large part on our ability to keep our technical
expertise confidential, any revelation of this information to a
competitor or other source could have an adverse effect on our
operations.
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 competitors.
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 because of his position as a pioneer in the field of
nucleic acid drugs, his being the co-inventor of Ampligen, and his
knowledge of the company's overall activities, including patents,
clinical trials, corporate relationships and relationships with
17
governmental agencies which regulate our business. The loss of
continuity Dr. Carter's services could have a material adverse
effect on our operations and changes for success. 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 personnel, or the
failure to recruit additional personnel as needed could have a
materially adverse effect on our ability to achieve our objectives.
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 products sufficient to realize an
appropriate return on our investment in product development.
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 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. The company does not maintain insurance
coverage against such liabilities.
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 may 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.
Litigation in Pennsylvania involving us and Manuel Asensio and
Asensio & Company,Inc.
In 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. The action
presently includes claims of defamation, disparagement, tortious
18
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 1999, Manuel P. Asensio, and Asensio & Company, Inc., and
others filed an answer and counterclaim against the Company. The
counterclaim alleges that in or around September 1998, and in
response to defendants' strong sell recommendation and other press
releases about the Company and its officers and directors, the
Company made defamatory statements about defendants, including
statements that defendants' attack 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.
The action has been transferred to Pennsylvania State Court and is
presently listed for trial in August 2001.
Litigation in New York involving us and Manuel Asensio, Asensio &
Company Inc., and Asensio.com Inc.
In May 2000, we received notice of a claim by Manuel P. Asensio
and Asensio & Company, Inc., in the Supreme Court of the State of
New York against the Company, the Chairman and Chief Executive
Officer, William A. Carter, and our prior auditors (the "first New
York Action") in which they allege that defendants defamed them in
oral and written communications made in March 2000. The allegations
of Manuel P. Asensio and Asensio & Company, Inc. in the first New
York Action are similar in substance to the alleged defamation
which are the subject of the counterclaims filed by them in the
action presently pending in Pennsylvania State Court.
In June 2000, Manuel P. Asensio, Asensio & Company, Inc. and
Asensio.com Inc.,("Asensio plaintiffs") filed a second action
against the Company and Dr. William Carter, the Company's Chairman
and Chief Executive Officer in the Supreme Court of the State of
New York. (the "second New York Action"). In September 2000, we
were served with a complaint in this action. The second New York
Action purports to seek a declaratory judgment that Asensio
plaintiffs statements regarding the Company constituted protected
speech, and that they did not engage in any actionable interference
with our existing or prospective business relations. 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 damage and, even if it does not
subject us to liability for damage, it could be time-consuming and
expensive to defend, and could result in the diversion of
management time and attention.
19
Because the risk factors referred to above could cause actual
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results or outcomes to differ materially from those expressed in
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any forward-looking statements made by us, you should not place
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undue reliance on any such forward-looking statements. Further,
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any forward-looking statement speaks only as of the date on which
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it is made and we undertake no obligation to update any forward-
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looking statement or statements to reflect events of circumstances
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after the date on which such statement is made or reflect the
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occurrence of unanticipated events. New factors emerge from time
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to time, and it is not possible for us to predict which will arise.
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In addition, we cannot assess the impact of each factor on our
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business of the extent to which any factor, or combination of
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factors, may cause actual results to differ materially from those
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contained in any forward-looking statements.
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RESULTS OF OPERATIONS
Three months ended March 31, 2001 versus Three months ended March
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31, 2000
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Our net loss was $2,480,000 for the three months ended March
31, 2001 versus a net loss of $1,972,000 for the same three month
period in 2000 reflects an increase in quarter to quarter net
losses of $508,000. This increase in loss was expected due to
increased spending for research, development and clinical trials in
the first quarter of 2001.
Research & Development ("R&D") costs were up $342,000. General and
Administrative expenses were equal and include a non-cash charge of
$262,000 in 2001 compared to $155,000 expensed in 2000. Excluding
stock/warrant compensation expense, G&A expenses were down $106,000
in the first quarter of 2001. Interest and other income was down $
58,000 and equity losses in unconsolidated subsidiaries was greater
by $25,000. Cost recovery treatment program revenues were down in
the United States primarily due to our focus on recruiting patients
for the double-blind, placebo controlled phase III ME/CFS clinical
trial and initiating new clinical studies in HIV diseas.
R&D ("R&D") costs (which includes clinical trial expenses)
increased $ 342,000 compared to R&D costs reported in the first
quarter of 2000. $213,000 of this increase was due to increased
manufacturing and quality assurance costs relating to the
production of Ampligenr to support R&D and our clinical trials.
$145,000 of the increase reflects the purchase of raw materials
for use in producing Ampligenr. Also, the 2001 expenses reflect the
costs of working with a pharmaceutical company with plant capacity
to produce Ampligenr doses in large quantities at much less cost
per dose. This effort is in the early stages and pilot production
runs are in process at this time. Costs related to the ongoing
ME/CFS phase III clinical trial were slightly lower than cost
recorded in the first quarter of 2000. The ME/CFS phase III
clinical trial is targeted to enroll 230 patients in the double-
blind, placebo controlled program to test the effect of Ampligenr.
20
Our overall effort to reduce various administrative costs paid off
in the first quarter of 2001 as computer supplies, legal fees,
investment banking fees consulting fees and other expenses were
down some $106,000 in this quarter versus the same quarter a year
ago. Stock/warrant compensation expense in the first quarter of
2001 was $262,000 compared to $155,000 expensed in the first
quarter of 2000. The first quarter 2001 charge of $262,000 was due
to a modification of the expiration date of previously issued
warrants.
Interest and other income dropped $58,000 from the same quarter a
year ago, due to lower interest rates earned on our money market
accounts as well as lower cash balances available to invest.
In mid-2000, we acquired additional equity in the California
Institute of Molecular Medicine ("CIMM"), which increased our
ownership beyond the 20% threshold and required us to use the
equity method of accounting. As of December 31, 2000 this
investment totaled $669,000. In the first quarter of 2001, some
$25,000 of this investment was record as equity losses based on our
share of CIMM"S losses in the first three months of 2001. CIMM is
conducting research toward developing a treatment for the Hepatitis
C virus.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments were $6.1
million as of March 31, 2001 compared to $8.4 million at December
31, 2000 reflecting a net decrease of cash in the amount of $2.3
million in the first three months of 2001.
Operating activities consumed $ 2.2 million reflecting major cash
outlays in support of the ME/CFS phase III clinical trial as well
as support of the European clinical efforts. 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 improve in the coming
months.
Proceeds from warrantholders exercising warrants totaled $176,000,
which is significantly lower than experienced in previous quarters.
The decline in warrantholders exercising warrants is primarily due
to the depressed market price of biotech stocks including the
market price our stock. In the first quarter of 2001, our stock
price traded in a range of $3.01 to $5.05. Our publicaly traded
class A preferred redeemable warrants are exercisable at $ 4.00 per
share and our non-public warants are exercisable at an weighted
average price $ 4.12. We expect warrantholders to continue
21
exercising both the public and non-public warrants from time to
time depending on the trading price of our common stock. The
publicaly traded class A redeemable preferred warrants expire on
November 2, 2001.
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. 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. We may also
need additional funding earlier than anticipated, and our cash
requirements, in general, may vary materially from those now
planned, for reasons including, but not limited to, changes in our
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 our clinical trials for which cost recovery from
participants has been approved.
ITEM 3: Quantitative and Qualitative Disclosures About Market
Risk
We had $6.1 million in cash, cash equivalents and short term
investments at March 31, 2001. To the extent that our 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.
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.
As amended, our complaint seeks recovery on common law theories of
intentional interference with existing and prospective business
relations, defamation, commercial disparagement, and conspiracy on
account of defendants' short selling of our stock and the
publication, by defendants Asensio and ACI, of defamatory
statements regarding the Company. In April 1999, defendants
Asensio and ACI answered the complaint and asserted defamation and
disparagement counterclaims against us seeking damages in an
unspecified amount. Defendants' counterclaims allege that we,
through our officers, defamed Asensio in oral and written
communications accusing Asensio and ACI of having engaged in
possibly criminal behavior with respect to the short selling of
22
our stock and the subsequent publication of various defamatory
statements regarding us . In May 1999, we filed an answer,
including affirmative defenses, to these counterclaims.
In June 2000, the United States District Court dismissed the
Company's complaint and the defendants' counterclaims for lack of
federal subject matter jurisdiction over the action. In July 2000,
we transferred the action to the Pennsylvania State Court. In
September 2000 defendants in the action filed preliminary
objections seeking the dismissal of the transferred action on
various grounds. Those objections were disposed of and the case in
scheduled for trial in August 2001. In August 2000, we filed a
Notice of Appeal from the decision of the United States District
Court dismissing the action. The appeal is presently pending,
although it has been stayed pending the determination of the case
in the Pennsylvania State Court.
In May 2000, Asensio and ACI filed a separate action in the
Supreme Court of the State of New York against our company, our
Chairman and Chief Executive Officer, William A. Carter and our
prior auditors ("the first New York action"). The action was
commenced by Summons. In July 2000, Asensio and ACI filed a
Complaint in which they allege that the defendants defamed them in
oral and written communications made in March 2000. Plaintiff's
allegations in the first New York action are similar in substance
to the alleged defamations which are the subject of the
counterclaim filed by them in the action presently pending in
Pennsylvania State Court. In August 2000, we filed an answer,
including affirmative defenses to these claims, and Dr. Carter
moved to dismiss the claims. In October 2000, the Company and Dr.
Carter moved to dismiss the action.
In June 2000, Asensio, ACI and Asensio.Com, Inc. filed a second
action against us and Dr. Carter in the Supreme Court of the State
of New York ("the second New York action"). The action was
commenced by Summons. In September 2000, plaintiffs filed a
Complaint in the second New York action which purports to seek a
declaratory judgment that the statements of Asensio, ACI and
Asensio.com, Inc. about the Company constituted protected speech,
and that plaintiffs did not engage in any actionable interference
with existing or prospective business relations of the Company. In
essence, the second New York action seeks to establish the
validity of the affirmative defenses asserted by the defendants in
the action now listed for trial in August 2001 in the Pennsylvania
State Court.
We intend to vigorously defend against the "claims" asserted by
Asensio, ACI and Asensio.com, Inc. in the New York actions and we
have moved to consolidate and dismiss the first New York actions.
Cook Imaging Corp. ("Cook") commenced action against us in
March 2000, which is presently pending in the United States
District Court for the Eastern District of Pennsylvania. From
approximately 1997 through 1999, Cook manufactured the drug
23
Ampligen (as well as Ampligenr placebo) for us. Cook has sued for
approximately $250,000 in unpaid invoices related to four Ampligenr
batches manufactured by Cook and delivered to us in 1999. Cook
contends that the four batches at issue were deemed to be sterile
by us and had been released for clinical use. The Company has
denied that the such amounts are owed and has asserted a
counterclaim for approximately $1 million. The basis of the
counterclaim is Cook's failure to consistently manufacture
Ampligenr in strict conformance with federal regulations known as
current good manufacturing practices ("cGMP"). We are seeking the
costs we have incurred as e result of Cook's cGMP deviations, as
well as the market value of raw materials (supplied by us) that
were lost or destroyed due to Cook's cGMP deviations. Discovery in
the action in ongoing, and on December 22, 2000, the court denied
Cook's motion for summary judgment on its claims. The case was
originally scheduled for trial in April 2001, but was re-scheduled
by the court to start in May 2001.
ITEM 2: Changes in Securities
Other investments include an initial equity investment of
$290,625 in Chronix Biomedical ("Chronix"). This initial investment
was made in May 31, 2000, by the sale by us of 50,000 of our
treasury shares, the resale of which has been registered pursuant
to a current Form S-3 registration statement. On October 12, 2000,
an additional 50,000 treasury shares and on March 7, 2001 12,000
more shares were resold to Chronix for an aggregate equity
investment of $ 678,000.
The foregoing private offerings were either private
transactions and exempt from registration under Section 4(2) of the
Securities Act pursuant to Regulation D of the Act. All investors
in the private transactions being accredited or transactions
covered by a valid registration statement filed with the SEC.
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8K
None
24
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: May 14, 2001 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: May 14, 2001 Robert E. Peterson
Chief Financial Officer