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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 September 30, 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
30,534,882 shares of common stock issued and outstanding as of September 30,
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, September 30,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,721 $2,859
Short Term investments 4,657 1,236
Accounts receivable 60 13
Prepaid expenses and other current assets 607 324
----------- ----------
Total current assets 9,045 4,432
Property and equipment, net 373 274
Patent and trademark rights, net 1,204 986
Investments in unconsolidated affiliates 2,421 2,366
Other assets 24 54
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Total assets $13,067 $ 8,112
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,341 $ 1,063
Accrued expenses 154 186
----------- ----------
Total current liabilities 1,495 1,249
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 30 31
Additional paid-in capital 97,984 100,779
Accumulated other comprehensive income 34 16
Treasury stock- at cost (3,910) (4,429)
Accumulated deficit (82,566) (89,534)
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Total stockholders' equity 11,572 6,863
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Total liabilities and stockholders' equity $13,067 $ 8,112
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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
September 30,
--------------------------
(Unaudited)
2000 2001
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Revenues:
Cost recovery - clinical treatment programs $ 225 $ 76
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Costs and expenses:
Research and development 1,864 1,589
General and administrative 549 673
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Total cost and expenses 2,413 2,262
Interest and other income 144 68
Equity in loss of unconsolidated
affiliate (Note 4) (22) (27)
---------- ----------
Net loss $(2,066) $(2,145)
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Basic and diluted loss per share $ (.07) $ (.07)
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Basic and diluted weighted
average common shares outstanding 29,523,470 30,528,322
========== ==========
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 Nine months ended
September 30,
--------------------------
(Unaudited)
2000 2001
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Revenues:
Cost recovery - clinical treatment programs $ 651 $ 304
---------- ----------
Costs and expenses:
Research and development 4,886 4,765
General and administrative 2,271 2,677
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Total cost and expenses 7,157 7,442
Interest and other income 456 248
Equity in loss of unconsolidated
affiliate (Note 4) (48) (78)
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Net loss $(6,098) $ (6,968)
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Basic and diluted loss per share $ (.21) $(.23)
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Basic and diluted weighted
average common shares outstanding 29,043,784 30,202,583
========== ==========
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 Nine months ended
September 30,
(Unaudited)
2000 2001
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Cash flows from operating activities:
Net loss $(6,098) $(6,968)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 96 99
Amortization of patents rights 227 290
Write-off of patent rights 32 29
Stock option and warrant compensation and
service expense 322 673
Equity in loss of unconsolidated affiliate 48 77
Changes in assets and liabilities:
Accounts receivable (7) 47
Prepaid expenses and other current assets (38) 259
Accounts payable (323) (278)
Accrued expenses (265) 32
Other assets (374) 3
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Net cash (used in) operating activities (6,380) (5,737)
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Cash flows from investing activities:
Purchase of property and equipment (110) -
Additions to patent rights (126) (100)
Maturity of short term investments 2,153 4,613
Purchase of short term investments (2,282) (1,220)
Investments in unconsolidated affiliates (411) (22)
Other investments (34) -
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Net cash (used in) provided by investing activities (810) 3,271
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Cash flows from financing activities:
Proceeds from issuance of common stock 2,250 73
Proceeds from exercise of warrants 8,549 2,050
Purchase of treasury stock (3,107) (519)
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Net cash provided by financing activities 7,692 1,604
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Net increase (decrease) in cash and cash equivalents 502 (862)
Cash and cash equivalents at beginning of period 6,396 3,721
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Cash and cash equivalents at end of period $6,898 $2,859
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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 Nine Months Ended September 30, 2001
(in thousands, except share data)
Accumulated
Common Stock Additional Other Treasury Treasury Total
--------------- Paid-In Comprehensive Stock Stock Accumulated Stockholders'
Shares Amount Capital Income shares deflict Equity
------- ------- ----------- ------------- --------- -------- ----------- -------------
Balance 12/31/2000 30,367,888 $30 $97,984 $34 395,646 $(3,910) $(82,566) $11,572
Common Stock Issued 672,300 1 2,122 2,123
Treasury Stock
Purchased 109,660 (519) (519)
Stock issued for R&D
expenses 87 87
Stock warrant
Compensation 586 586
Net Comprehensive
loss (18) (6,968) (6,986)
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Balance 9/30/2001 31,040,188 $31 $100,779 $16 505,306 $(4,429) $(89,534) $ 6,863
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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 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 year 2000 consolidated
financial statements included in our annual report on
Form 10-K for the year ended December 31, 2000, as
amended on Form 10K/A, second amendment, filed with the
SEC on June 19, 2001.
Prior year amounts have been reclassified to conform to
current period presentations.
NOTE 2: STOCK COMPENSATION:
Stock compensation expense for the three months ending
September 30, 2001 was $78,000. This charge consists of
the fair market value of warrants issued to outside
parties for services rendered on behalf of the Company.
On a year to date basis, stock compensation expense
totals $673,000 including the calculated cost of
extending the expiration date of certain non-public
warrants and the granting of warrants to outside
parties for services performed. Stock/Warrant
compensation expense has no effect on shareholder
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. The 376,650 warrants granted to the Chairman
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of Board and CEO consist 188,325 that are exercisable
at $6.00 per share and 188,325 that 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, accordingly, no
compensation expense has been recognized for stock
warrants rights issued to employees and directors in
the financial statements because the exercise prices of
the warrants exceeded the quoted market price of our
stock on the dates of grant.
Note 3: INVESTMENTS:
Investments in unconsolidated affiliates:
In 1998, we invested $1,074,000 for a 3.3% equity
interest in R.E.D. Laboratories ("R.E.D."). 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 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, 2001 was $592,000.
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, we issued an additional
50,000 shares of Hemispherx Biopharma, Inc. common
stock and on March 7, 2001 we issued 12,000 more
shares of Hemispherx Biopharma, Inc. common stock from
our the treasury to Chronix for an aggregate equity
investment of $700,000. 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.
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Note 4: LIQUIDITY:
Our publicly traded class A Redeemable warrants were to
expire as of November 2, 2001, however, due to the
disruptive events of September 11, 2001 and related
difficulties, the expiration date for exercising the
warrants was extented to November 21, 2001. Trading for
the warrants on the American Stock Exchange ceased on
November 2, 2001. During the period of October 1, 2001
through November 6, 2001 we received proceeds of some
$5.7 million from warrantholders exercising Class A
Redeemable warrants. These proceeds plus our current
cash, cash equivalents and current income stream should
fund operations for the next 15 months or more. Most of
our funding in the past few years has been provided by
warrantholders exercising warrants. In the event that
warrantholders do not, from time to time, exercise
warrants at the level of funding needed to support
future operations, we may seek access to the private or
public equity market for operating capital needed. We
may also raised additional capital from licensing
agreements into territories not considered as part of
own core business/market development model. Any
additional equity funding obtained 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 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, including but not limited to, the risk factors
discussed below, 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
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not undertake and specifically declines any obligation
to publicly 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 multinational Biopharmaceutical company
headquartered in Philadelphia, Pennsylvania that
focuses on the development of nucleic acid compounds
that enhance the natural immunological anti-viral
defense systems of the human body. Our lead product,
Ampligen, is an investigational drug and is part of a
new class of specially configured ribonucleic acid
compounds designed to treat diseases that have various
immunological dysfunctions such as Myalgic
Encephalonyelitis/Chronic Fatique Syndrome ("ME/CFS"),
HIV, Hepatitis B, Hepatitis C and certain cancers such
as renal cell carcinoma and melanoma. These disease
have various immunological dysfunctions. Nucleic acid
compounds represent a potential new class of
pharmaceutical products that are designed to act at the
molecular level in the treatment of human diseases. One
of our double stranded RNA drug products, Ampligen, is
administered intravenously and is in Phase II and Phase
III human clinical development for various disease
indications. Currently, we are focused on FDA
authorized clinical trials designed to evaluate the
efficacy of Ampligen in treating patients with ME/CFS
and HIV. Based on the result of past clinical trials,
we believe Ampligen may have broad-spectrum anti-viral
and anti-cancer properties. We have two clinical trials
in progress involving the use of Ampligen therapy to
treat patients affected with ME/CFS:
* An open-label study treating ME/CFS patients with
Ampligen on a cost recovery basis. This study was
authorized in the U.S. by the FDA in 1997. Patients
treated under this protocol pay for the cost of the
drug used. A similar program was implemented in
Belgium in 1993 and has treated over 150 patients.
* A multi-center, double-blind, randomized, placebo
controlled Phase III clinical trial to evaluate the
efficacy of Ampligen in the treatment of more than
200 patients afflicted with ME/CFS. Eleven
clinical/medical centers located throughout the
United States are currently participating in this
study.
The Food and Drug Administration recently authorized us
to commence two phase IIb clinical trials designed to
evaluate the use of Ampligen in augmenting immunologic
gains in patients receiving intense antiviral therapy
for HIV disease. We expect to enroll over 200 patients
in these clinical trials, which may be partly conducted
in Europe.
Since the September 11, 2001 events in global
terrorism, the company has initiated broad ranging
experimental programs to determine the potential value
of its platform technology in strengthening the body's
"first line of defense" against threats associated with
biological warfare and new pathogenic materials being
introduced into the environment.
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Our research and clinical efforts may continue for the
next several years and we may continue to incur losses
due to clinical costs incurred in the development of
Ampligen 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.
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. At this time, none of our products have been
approved for commercial sale by the Food and Drug
Administration or other foreign regulatory authorities.
RISK FACTORS
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 report. 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
Ampligen, which has not been approved for commercial
use. 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
cannot assure you that the drug will ultimately be
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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. If
Ampligen 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
September 30, 2001 our accumulated deficit was
approximately $89,534,000. We have not yet generated
significant revenues from our products and may incur
substantial 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
revenues from the sales of Ampligen under the Cost
Recovery Clinical Programs and additional capital
infusions provided by investors exercising our Class A
Redeemable and other 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 Gproducts.
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 various 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 Ampligen or one of our other
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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 Ampligen for a particular disease in order
to obtain exclusive rights for the commercial sale of
Ampligen 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 Ampligen and Ampligen in
combination with certain other drugs for the treatment
of HIV. We have also been issued patents on the use
of Ampligen 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 Ampligen in patients with
chronic fatigue syndrome. We have not yet 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. However, we have
obtained proprietary protection in certain instances
from Orphan Drug designation as well as "mechanism of
action" patents issued in the U.S. and elsewhere. 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.
The patent position of biotechnology and
pharmaceutical firms is 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 newer 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 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 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
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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
Ampligen or other products in commercial quantities
at costs acceptable to us.
Our lead product Ampligen is currently produced
for use in clinical trials. Assuming that we choose
to manufacturing and market by ourselves, we must
manufacture our products in compliance with regulatory
requirements in large 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.
If our distributors do not market our product's
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 treatment
IND 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.
Our partners may be 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 our domestic 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
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effect on us. 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
Ampligen.,Oragen or other products
The development of Ampligen and our other
products is subject to a number of significant risks.
Ampligen 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 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, Ampligen
or the other products 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 which
enter Phase I clinical trials are eventually approved
by the FDA for commercial sale.
Ampligen safety profile and Scientific Literature.
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% of patients treated in our various
studies. This reaction is occasionally accompanied by
erythema, 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, hypotension, 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
<page> 16
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.
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 or less effective and less or more
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 limited 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.
Ampligen is currently produced only in limited
quantities for use in our clinical trials and we are
dependent upon certain third party suppliers for key
<page> 17
components of our products. The failure to continue
these arrangements or to achieve other such
arrangements on satisfactory terms could have a
material adverse affect on us. Also, 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 necessarily adequate for the production of our
proposed products for large-scale commercialization,
and we currently do not have adequate personnel in
house 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.
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 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, 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
<page> 18
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 governmental agencies which regulate
our business. The loss of Dr. Carter's services could
have a material adverse effect on our operations and
chances 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
<page> 19
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.
Litigation involving us versus Manuel Asensio and
Asensio & Company,Inc.
In 1998, we filed a complaint against Manuel P.
Asensio, and Asensio & Company, Inc., ("Asensio"). The
action includes claims of defamation, disparagement,
tortious interference with existing and prospective
business relations and conspiracy, arising out of
Asensio's false and defamatory statements in
connection with a deceptive and unlawful short-selling
scheme between August, 1998, and the present. In 1999,
Asensio filed an answer and counterclaim alleging that
in response to Asensio's strong sell recommendation
and other press releases, the Company made defamatory
statements about Asensio. We have denied the
allegations and are vigorously defending against the
counterclaim. In May 2001, Asensio moved for a summary
judgement on all counts of our complaint. The motion
was denied. A trial date has been set for January 2002
in the Pennsylvania State Court.
In May 2000, we received notice of a claim by
Asensio in the Supreme Court of the State of New York
against us, our Chairman and Chief Executive Officer,
William A. Carter, and our prior auditors in which
they allege that we defamed them in oral and written
communications made in March 2000 ("the first New York
action"). In June 2000, we received notice of a second
claim in New York ("the second New York action"). The
allegations of Asensio in the New York actions were
similar in substance to the alleged defamation which is
the subject of the counterclaims filed by them in the
action presently pending in Pennsylvania State Court.
In March 2001, Dr. Carter's motion to dismiss him from
the first New York action was granted. In July 2001,
the company moved to dismiss the first New York action
based on the prior pendency of the action of the
Pennsylvania State Court, and in August 2001, Asensio
cross-moved for summary judgment. Both motions are
presently pending. In the meantime, in June 2001,
Asensio voluntarily withdrew the second New York
action. We intend to vigorously defend against the
claims and/or counterclaims asserted in the remaining
First New York action.
We intend to vigorously defend against the claims
asserted in the counterclaim in the Pennsylvania State
Court action and the remaining First New York action.
However, this litigation could subject us to
significant liability for damages 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. (Refer to Part II, item 1: Legal Proceedings
of this report for more details.)
<page> 20
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 or circumstances after the date on which such
statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to
time, and it is not possible for us to predict which
will arise. In addition, we cannot assess the impact
of each factor on our business of the extent to which
any factor, or combination of factors, may cause actual
results to differ materially from those contained in
any forward-looking statements.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 versus Three
months ended September 30, 2000
Our net loss for the three months ended September
30, 2001 was $2,145,000 or approximately $79,000 more
than recorded for the same period in 2000. While
Overall costs and expenses were lower by some $151,000,
income from our cost recovery treatment programs and
interest income was also down by $225,000.
Revenues from Cost Recovery Clinical Treatment programs
("cost recovery")in the U.S. and Europe were down
$149,000. Lower revenues from the U.S. cost recovery
program account for 74% of the total variance. U.S.
cost recovery efforts have been reduced during the year
2001 due to our focus and efforts to recruit and enroll
ME/CFS patients for the double blind, placebo
controlled phase III ME/CFS clinical trial. The
enrollment of patients in this trial is nearing
completion. In addition, interest income was down
$76,000 when compared to the same three months in 2000.
This shortfall can be contributed to lower interest
rates earned on short term money market securities and
a lower amount of funds available to invest.
Overall Research and Development costs in the three
months ended September 30, 2001 were lower by $275,000
compared to the same period in 2000. These lower costs
basically reflect the effect of four factors. First of
all, the costs associated with the Cost Recovery
clinical treatment program revenues were down by
$114,000. Secondly, our ME/CFS Phase III clinical trial
cost was lower as the clinical trial nears completion.
The double blind segment is the most costly portion of
the clinical trial. Thirdly, research and development
costs were down $330,000 due to a reduction in
scientific research preformed in conjunction with the
ME/CFS and Hepatitis projects. The three month period
ended September 30, 2000 includes a one-time funding in
the amount of $250,000 to Chronix Biomedical for gene
re-arrangement research. The fourth factor consist of
an increase in manufacturing cost of $206,000 primarly
due to the purchase of raw material (polymers) needed
to produce Ampligen and build-up inventory. All
materials and cost of producing Ampligen is expensed
as incurred.
<page> 21
General and Administrative expenses were $673,000 in
the three months ended September 30, 2001 compared to
$549,000 for the same period in 2000. The net increase
in expenses of $124,000 basically reflects $38,000
increase in insurance premiums and other administrative
expenses and a $78,000 (non-cash) increase stock in
compensation expense. There was no stock compensation
expense in the same period in 2000. Stock Compensation
expense is a non-cash expense that reflects the fair
value of common stock or warrants granted to non-
employees of the Company. Other noteable variances
include an increase in public relations expenses of
$84,000 which was basically offset by a decrease in
legal and audit fees in the amount of $97,000. In the
three months ended September 30, 2001 we engaged the
services of a new public relations firm and revamped
our public relations program. The decrease in legal and
audit fees was due to lower legal costs primarily
related to the Asensio Litigation.
Nine months ended September 30, 2001 versus nine months
ended September 30, 2000
Our net loss (including non-cash) was approximately
$6,968,000 for the nine months ended September 30,
2001. This reflects an increase in losses in the amount
of $870,000 compared to the same period in 2000.
Elements contributing to the increase in losses include
lower cost recovery treatment ("cost recovery")
revenues totaling $347,000, lower interest income
totaling $208,000 and, higher stock (non-cash)
compensation (non-cash) expenses of $349,000. Lower
Research & Development costs of $121,000 provided a
degree of offset.
ME/CFS Cost Recovery Treatment Revenues were $304,000
in the nine months ended September 30, 2001 compared to
$651,000 in the same period in 2000. This decline in
revenue is reflected in the U.S. as well in Europe.
U.S. revenues were down primarily due to our focus on
recruiting ME/CFS patients for the Phase III ME/CFS
clinical trial. Efforts to accelerate the enrollment of
ME/CFS patients in the phase III clinical trial
decreased the enrollment of patients in the cost
recovery treatment program. Enrollment in the Belgium
program was reduced in order to permit the clinical
investigator to compile and review the clinical data
collected in the treatment of approximately 150
patients over the past several years. These data, when
finalized, will be used to supplement the data
collected from the ongoing Phase III ME/CFS and HIV
clinical trials in the U.S. when we eventually submit
an application for drug approval in the United States
and Europe. Our European personnel are working to
establish ME/CFS and HIV cost recovery treatment and
HIV treatment programs in other European countries.
Presently we also have patients enrolled in similar
programs in the U.K. and Austria.
Research & Development costs were $4,765,000 in the
nine months ended September 30, 2001 versus $4,886,000
for the same period in 2000. This decrease of $121,000
consists of several factors. Costs related to Cost
Recovery Clinical Treatment program revenues were down
$245,000 due to lower revenues in 2001. Research,
<page> 22
clinical and manufacturing costs were up $124,000 on a
year to date basis. This increase basically reflects
$319,000 in additional raw materials purchased to build
product inventory in 2001 somewhat offset by lower R&D
costs. The nine months ended September 30, 2000
included a one time expense of $250,000 for R&D expense
relating to our alliance with Chronic Biomedical.
Clinical trial expenses were down on a year to date
basis primarily due to lower costs associated with the
Phase III ME/CFS clinical trials, as a greater
proportion of patients complete the clinical trial.
General and Administrative Expenses before charges for
stock compensation, were $2,006,000 in the nine months
ended September 30, 2001 compared to expense of
$1,949,000 for the same period in 2000. While, these
expenses basically remained flat compared to the nine
month period ended September 30, 2000, there were
variances in some expenses. Professional fees were up
$89,000. Insurance premiums increased some $53,000 due
to higher D&O insurance premiums. Other expenses
including travel, telephone, transfer agent fees and
temporary help costs were down by approximately
$71,000.
Stock Compensation (non-cash) expense of $673,000 in
the nine months ended September 30, 2001 is $349,000
higher than recorded for the same period in 2000. The
2001 expense includes a cost of $262,000 due to the
extension of the expiration dates of certain warrants
granted to officers and directors.
Interest income of $248,000 in the nine months end
September 30, 2001 was down by $208,000 due to lower
interest rates earned on money market instruments as
well as lower funds available to invest over the nine
month period.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments
were $4,095,000 as of September 30, 2001 compared to
$8,378,000 million at December 31, 2000 reflecting a
net decrease of cash in the amount of $4,283,000 in
the first nine months of 2001.
Operating activities consumed $5,737,000 million
reflecting major cash outlays in support of the ME/CFS
phase III clinical trial as well as the Phase IIb HIV
trials now underway. In addition we have heavily
invested in expanding our capacity to manufacture
liquid Ampligen doses through outside suppliers as
well as expended funds to increase our supply of
Ampligen. These expenditures were made to assure an
adequate and stable supply of Ampligen to support the
ongoing clinical trials as well as provide the
capacity to manufacture Ampligen in commercial
quantities. Some portion of these costs are expected
to be recovered under the expanded access, cost-
recovery, programs authorized by FDA and various
regulatory bodies in other countries. Overall,
clinical trial costs should decline somewhat over the
next six months as the phase III ME/CFS clinical trial
winds down. The costs of the Phase IIb HIV trials
<page> 23
should increase as patients are recruited. However the
timing and costs of the HIV trials should produce
lower overall clinical costs due to certain inherent
effeciancies of running the two clinical trial in
parallel. Other expenditure include $519,000 for the
company's stock buy-back program and some $100,000
invested in new patent applications and renewals. In
the first nine months of 2001, we acquired 109,660
shares of our common stock on the open market. These
treasury shares will be used in connection with
contract negotiations with certain suppliers and
strategic alliances.
Proceeds from the exercise of warrants totaled
$2,050,000 in the first nine months of 2001 which is
significantly lower than experienced in the first nine
months of 2000. The decline in warrants being exercised
is primarily due to the depressed market price of
biotech stocks including ours. In the nine months ended
September 30, 2001, our stock price traded in a range
of $4.03 to $7.00. As of September 30, 2001, we had
3,915,708 outstanding publicly traded Class A
Redeemable Warrants exercisable at $4.00 per share and
7,046,010 non-public warrants outstanding that are
exercisable at an weighted average price of $4.57. The
shares of common stock underlying 4,269,000 shares of
the oustanding non-public warrants have been registered
for sale under the Securities Act of 1933, as amended,
by the holders thereof. For the past several years a
major source of operating funds came from
warrantholders exercising warrants. We expect
warrantholders to continue exercising both the public
and non-public warrants from time to time depending on
the trading price of our common stock. Our publicly
traded Class A Redeemable warrants were to expire as of
November 2, 2001, however, due to the disruptive events
of September 11, 2001 and related logistical and
communications difficulties, the expiration date for
exercising the warrants was extended to November 21,
2001. Trading for the warrants on the American Stock
Exchange ceased on November 2, 2001.
Between October 1, 2001 and November 9, 2001 we have
received some $5.7 million from warrantholders
exercising about 1,425,000 Class A Redeemable warrants.
Our current cash (including the warrants exercised),
cash equivalents and anticipated income should fund
operations for the next 15 months or more. In the event
that additional funding is needed to support our
operations, we are confident that such funding will be
made available by one or more of the following: 1) a
private or public placement of equity, 2) funds derived
from the granting of licensing agreements or 3)
proceeds from warrantholders exercising warrants. Any
additional equity 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 our clinical trials for which cost recovery
from participants has been approved.
<page> 24
New Accounting Pronouncements
- -----------------------------
In June 2001, the Financial Accounting Standards Board
finalized FASB Statements No. 141, Business
Combinations (SFAS 141), and NO. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires
the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
142, that the Company reclassify the carrying amounts
of intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that companies
no longer amortize goodwill, but instead test goodwill
for impairment at least annually. In addition, SFAS
142 requires that the Company identify reporting units
for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite
useful life. An intangible asset with an indefinite
useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when
those assets were initially recognized. SFAS 142
requires the Company to complete a transitional
goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the
useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's investment in CIMM was accounted for
using the equity method. As of September 30, 2001, the
net carrying amount of goodwill included in the
investment balance was $494,000. Other intangible
assets are primarly patents which currently have a net
value of $986,000. Amortization expense of goodwill
and patents during the nine-month period ended
<page> 25
September 30, 2001 was $27,000 and $290,000
respectively. Currently, the Company is assessing but
has not yet determined how the adoption of SFAS 141
and SFAS 142 will impact its financial position and
results of operations.
The Financial Accounting Standards Board has issued
FASB 143, Accounting for Retirement Obligations, to
account for asset retirement obligations and
associated retirement costs of long-lived assets and
FASB 144, Accounting for impairment or disposal of
long-lived assets. The Company has not yet determined
the future impact, if any, of FASB 143 and 144.
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk
We had $4,095,000 in cash, cash equivalents and short
term investments at September 30, 2001. Since September
30, 2001 we have received some $5.7 million from the
exercise of warrants. To the extent that our cash and
cash equivalents exceed our near term funding needs, we
invest 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.,
("ACI") 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 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.
<page> 26
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 May 2001, the defendants moved for summary
judgement on all counts. The motion was denied. A full
trial of the action is scheduled for January, 2002.
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 alleged that the defendants
defamed them in oral and written communications made
in March 2000. In June 2000, Asensio, ACI and
Asensio.Com, Inc. filed a second action in the Supreme
Court of the State of New York ("the second New York
action")seeking Declaratory Judgment that they were
insulated against claims for defamation under the
First Amendment. Asensio and ACI's allegations in the
first New York actions 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
the first New York action, and Dr. Carter moved to
dismiss the claims. In March 2001, Dr. Carter motion
to dismiss was granted. In July 2001, the Company
moved to dismiss the action based on the prior
pendency of the Pennsylvania State Court. Plaintiffs
have responded with a cross-motion for summary
judgment. Both motions are presently pending. Asensio
voluntarily withdrew the second New York in June 2001.
We intend to vigorously defend against the
counterclaim in the Pennsylvania State court action
and the remaining First New York action.
ITEM 2: Changes in Securities
On October 2, 2001, we announced that we had advised
the American Stock Exchange, the Securities and
Exchange Commission and our transfer agent that the
company's outstanding Class A Redeemable warrants
would expire and not be exercisable after the close of
business on November 2, 2001. This expiration date was
originally announced in August, 2000 and re-confirmed
on October 2, 2001. Subsequently, because of the
disruptive events of September 11, 2001, the
expiration date for exercising the warrants was
extended to November 21, 2002.
ITEM 3: Defaults in Senior Securities
None
<page> 27
ITEM 4: Submission of Matters to a Vote of Security
Holders
On August 24, 2001, we held an annual meeting to adopt
several resolutions by consent of the majority of our
shareholder, 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:
William A. Carter, M.D.
Richard Piani
Ransom W. Etheridge
William M.Mitchell
All four directors term of office continued after the
meeting.
ii) ratified the selection by us of BDO Seidman,
LLP, independent public accountants, to audit
our financial statements for the year ending,
December 31, 2001
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
In July 2001 we entered into an oral agreement with a
health services management company to facilitate
further enrollment in our HIV trials and to examine
certain patients coinfected with other viruses
including hepatitis C. Prior to formalization of a
written agreement additionally obtained information
indicated that it would not be in the Company's best
interest to have these functions performed by others.
Accordingly we discontinued further relationships with
the health services entity and entered into
relationships to have these functions performed with
others in the states of Pennsylvania and Florida.
<page> 28
ITEM 6: Exhibits and Reports on Form 8K
(a)Exhibits
3.1* Amended and Restated Certificate of Incorporation
of the Company, as amended, along with Certificates
of Designations
3.1.1** Series E Preferred Stock
3.2 By-laws of Registrant, as amended and restated
4.1* Specimen certificate representing our common stock
4.2* Form of Class A Redeemable Warrant Certificate
4.3* Form of Underwriter's Unit Option Purchase Agreement
4.4* Form of Class a Redeemable Warrant Agreement
with Continental Stock and Transfer and Trust Company
10.1 Amended and Restated Employment Agreement by
and between the Company and Dr. William A.
Carter, dated as of December 3, 1998
10.2 Amended and Restated Engagement Agreement by
and between the Company and Robert E.
Peterson, dated April 1, 2001.
* These exhibits were filed with the Securities and Exchange Commission
("SEC") as exhibits to the Company's Form S-1 Registration Statement
(No. 33-93314) or amendments thereto and are hereby incorporated
by reference.
**This exhibit was filed with the SEC as Exhibit 3.1.1 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and
is hereby incorporated by reference.
(b) Reports on Form 8-K
None
<page> 29
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, 2001 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: November 14, 2001 Robert E. Peterson
Chief Financial Officer