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, 2005
Commission File Number: 0-27072
HEMISPHERx BIOPHARMA, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 988-0080
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- ------------------------------------------------------------------------------
(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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). /X/ Yes // No
50,345,290 shares of common stock were issued and outstanding as of May 5, 2005.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31, March 31,
------------ ---------
2004 2005
---- ----
ASSETS
Current assets:
Cash and cash equivalents $8,813 $6,689
Short term investments 7,924 7,718
Inventory, net (Note 4) 2,148 1,939
Accounts and other receivables (Note 5) 139 139
Prepaid expenses and other current assets 266 304
------------- -------------
Total current assets 19,290 16,789
-------------- -------------
Property and equipment, net 3,303 3,343
Patent and trademark rights, net 908 866
Investment (Note 3) 35 35
Deferred financing costs 319 224
Advance receivable (Note 7) 1,300 1,300
Other assets 17 17
-------------- --------------
Total assets $ 25,172 $ 22,574
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 526 $ 485
Accrued expenses (Note 5) 1,012 599
Current portion of long-term debt, net 3,248 4,034
---------------
--------------
Total current liabilities 4,786 5,118
-------------- ----------------
Long-Term Debt-net of current portion (Note 7) 305 181
Commitments and contingencies
(Notes 6, 7, 8 and 9)
Stockholders' equity (Note 8):
Common stock 50 50
Additional paid-in capital 158,024 158,440
Accumulated other comprehensive income (10) (177)
Accumulated deficit (137,983) (141,038)
-------------- --------------
Total stockholders' equity 20,081 17,275
-------------- --------------
Total liabilities and stockholders' equity $25,172 $22,574
============== =============
See accompanying notes to condensed consolidated financial statements.
<page>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share data)
Three months ended March 31,
2004 2005
---- ----
Revenues:
Sales of product net $ 259 $ 229
Clinical treatment programs 49 29
----------------- -----------------
Total Revenues: 308 258
Costs and expenses:
Production/cost of goods sold 601 98
Research and development 964 1,268
General and administrative 2,844 982
----------------- -----------------
Total costs and expenses 4,409 2,348
Interest and other income 11 230
Interest expense (101) (106)
Financing costs (Note 7) (3,851) (1,089)
----------------- -----------------
Net loss $ (8,042) $ (3,055)
================= =================
Basic and diluted loss per share $ (.20) $ (.07)
======= =======
Weighted average shares outstanding 40,668,478 42,596,087
========== ==========
See accompanying notes to consolidated financial statements.
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholder Equity
For the Three Months Ended March 31, 2005
(in thousands, except per share data)
Additional Accumulated Total
other
Common stock paid-in Comprehensive Accumulated Stockholders'
------------
Shares Amount capital Income (Loss) deficit Equity
---------- -------- -------- ------------- ----------- ------------
Balance as of December 31, 2004 49,631,766 $ 50 $ 158,024 $ (10) $ (137,983) $20,081
Shares issued in payment of accounts payable and private
placement 68,599 (29) (29)
Shares issued for debt payments 216,040 333 333
Shares issued for interest on convertible debt
63,026 112 112
Net Loss (167) (3,055) (3,222)
----------- ------- --------- ------------ ----------- ------------
Balance as of March 31, 2005 49,979,431 $ 50 $ 158,440 $(177) $ (141,038) $17,275
----------- ------- --------- ------------ ----------- ------------
See accompanying notes to financial statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2005
(in thousands)
2004 2005
---- ----
Cash flows from operating activities:
Net loss $ (8,042) $( 3,055)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and
Equipment 23 30
Amortization of patent and
Trademark rights 134 84
Amortization of deferred
Financing costs 2,905 1,089
Financing cost related to
redemption obligation 946 -
Stock warrant compensation
Expense 1,769 -
Interest expense - 112
Changes in assets and liabilities:
Inventory 111 209
Accounts and other receivables 2 -
Deferred revenue 497 -
Prepaid expenses and other
Current assets 30 (38)
Accounts payable 21 (70)
Accrued expenses (118) (413)
---------------- ----------------
Net cash used in operating
Activities (1,722) (2,052)
---------------- ----------------
Cash flows from investing activities:
Purchase of land and building (143) -
Purchase of property and
Equipment, net - (69)
Additions to patent and trademark
Rights (99) (43)
Maturity of short term
Investments 1,496 7,934
Purchase of short term
Investments (3,986) (7,894)
---------------- ----------------
Net cash used in
Investing Activities $ (2,732) $ (72)
---------------- ----------------
(CONTINUED)
<page>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the Three Months Ended March 31, 2004 and 2005
(in thousands)
2004 2005
---- ----
Cash flows from financing activities:
Proceeds from long-term borrowing 4,000 -
Advance receivable (305) -
Proceeds from exercise of stock
Warrants 244 -
--------------- --------------
Net cash provided by financing
Activities 3,939 -
--------------- --------------
Net decrease in cash and cash
equivalents (515) (2,124)
Cash and cash equivalents at beginning of period
3,764 8,813
--------------- --------------
Cash and cash equivalents at end of period
$3,249 $6,689
====== ======
Supplemental disclosures of cash flow information:
Issuance of common stock for
accounts payable and accrued
expenses $ 85 $ 29
==== ====
Issuance of Common Stock for
Purchase of building $ 1,626 $ -
======= ====
Issuance of Common Stock for
Debt Conversion Interest
Payments and debt payments $3,641 $ 333
====== =====
See accompanying notes to consolidated financial statements.
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 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 (SEC), 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
consolidated financial statements included in our annual report on Form 10-K for
the year ended December 31, 2004, as filed with the SEC on March 16, 2005.
NOTE 2: STOCK BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards(SFAS) No. 123,
"Accounting for Stock-Based Compensation." We chose to apply Accounting
Principal Board Opinion 25 and related interpretations in accounting for stock
options granted to our employees.
The Company provides pro forma disclosures of compensation expense under the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure."
The weighted average assumptions used for the period presented are as follows:
March 31,
2004 2005
Risk-free interest rate - 4.81%
Expected dividend yield - -
Expected lives - 5 years
Expected volatility - 58.78%
Had compensation cost for the Company's option plans been determined, using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the Three months ended March 31, 2004 and 2005 would have
been as follows:
(In Thousands)
Three Months Ended
March 31,
-----------
2004 2005
Net (loss) as reported $(8,042) $(3,055)
Add: Stock based employee
compensation expense
Included in reported net loss 1,769 -
Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards - (27)
------- ------
Pro forma net loss $(6,273) $(3,082)
======= =======
Basic and diluted loss
per share
As reported $(.20) $(.07)
Pro forma $(.15) $(.07)
Note 3: INVESTMENT IN UNCONSOLIDATED AFFILIATES
Investments include an equity investment of $35,000 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 the Company's common stock from the treasury. On October 12,
2000, the Company issued an additional 50,000 shares of its common stock and on
March 7, 2001 the Company issued 12,000 more shares of its common stock from the
treasury to Chronix for an aggregate equity investment of $700,000. The
percentage ownership in Chronix is approximately 5.4% and is accounted for under
the cost method of accounting. During the quarter ended December 31, 2002, we
recorded a non-cash charge of $292,000 with respect to our investment in
Chronix. The Company recorded an additional non-cash charge of $373,000 during
the quarter ended September 30, 2004, due to evidence of a further decline in
Chronix's market value. This impairment reduces our carrying value to reflect a
permanent decline in Chronix's market value based on its then proposed
investment offerings.
NOTE 4: INVENTORIES
The Company uses the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.
Inventories consist of the following:
December 31, 2004 March 31, 2005
----------------- --------------
Raw materials-work in process $ 1,711,000 $1,711,000
Finished goods,
net of $225,000 reserve 437,000 228,000
------- --------
$ 2,148,000 $1,939,000
=========== ==========
The Company's reserve for potentially stale inventory as of March 31, 2005,
totaled $225,000 for Alferon N finished goods that may not be sold prior to
their 18 month shelf-life expiration. Also, the Company may consume some or all
of this potentially stale inventory in its R&D efforts. The Company completed
tests in 2004 to extend the product shelf life to 24 months. The Company filed
its annual report with the FDA in December 2004 including documentation for the
extension of shelf-life to 24 months. The Company plans to file with the FDA
requesting approval to relabel 2,000 vials of Alferon N Injection(R) within
finished goods. We anticipate a response from the FDA by the end of June 2005.
NOTE 5: REVENUE AND LICENSING FEE INCOME
The Company executed a Memorandum of Understanding (MOU) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOU required the Company to file the full
report on the results of the Company's AMP 516 Clinical Trial with Fuji by May
31, 2004. If the full report was not provided to Fuji by May 31, 2004 and Fuji
did not wish to exercise its option, The Company would have been required to
refund one half of the 400,000 Euro fee. The Company submitted their initial
report to Fuji on May 28, 2004 and responded to subsequent inquiries for
additional information. The option period ends 12 weeks after the later of
Fuji's review of the full report on the results of the Company's Amp 516
clinical trial and Fuji's meeting with three of the trial's principal
investigators. The Company received an initial fee of 400,000 Euros
(approximately $497,000 US). If the Company did not provide them with the full
report by December 31, 2004 and Fuji did not wish to exercise its option, the
Company would be required to refund the entire fee. On November 9, 2004, the
Company and Fuji terminated the MOU by mutual agreement. The Company did not
agree on the process to be utilized in certain European Territories for
obtaining commercial approval for the sale of Ampligen(R) in the treatment of
patients suffering from Chronic Fatigue Syndrome (CFS). Instead of a centralized
procedure, and in order to obtain an earlier commercial approval of Ampligen(R)
in Europe, the Company has determined to follow a decentralized filing procedure
which was not anticipated in the MOU. The Company believes that it now is in the
best interest of our stockholders to potentially accelerate entry into selected
European markets whereas the original MOU specified a centralized registration
procedure. Pursuant to mutual agreement of the parties the Company refunded
200,000 Euros to Fuji. The Company has recorded the remaining 200,000 Euros as
an accrued liability as of December 31, 2004. The Company is currently holding
the 200,000 Euros pending further developments in accordance with the mutually
agreed upon termination with Fuji.
Revenues for non-refundable license fees are recognized under the Performance
Method-Expected Revenue. This method considers the total amount of expected
revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.
Upon receipt, the upfront non-refundable payment is deferred. The non-refundable
upfront payments plus non-refundable payments arising from the achievement of
defined milestones are recognized as revenue over the performance period based
on the lesser of (a) percentage of completion or (b)non-refundable cash earned
(including the upfront payment).
This method requires the computation of a ratio of cost incurred to date to
total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.
During the period ended March 31, 2005, the Company did not receive any grant
monies from local, state and or Federal Agencies.
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues from the sale of product are recognized when the product is shipped, as
title is transferred to the customer. The Company has no other obligation
associated with its products once shipment has occurred.
Note 6: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC. ("ISI")
On March 11, 2003, the Company acquired from ISI, ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, use,
marketing and sale of this product. As partial consideration, the Company issued
487,028 shares of its common stock to ISI Pursuant to their agreements with ISI,
the Company registered these shares for public sale and ISI has reported that it
has sold all of these shares. The Company also agreed to pay ISI 6% of the net
sales of ALFERON N Injection(R).
On March 11, 2003, the Company also entered into an agreement to purchase from
ISI all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, the
Company agreed to issue to ISI an additional 487,028 shares and to issue 314,465
shares and 267,296 shares, respectively to the American National Red Cross and
GP Strategies Corporation, two creditors of ISI. The Company guaranteed the
market value of all but 62,500 of these shares to be $1.59 per share on the
termination date. As discussed below, the Company issued all of these shares and
ISI, GP Strategies and the American National Red Cross have reported that they
have sold all of their shares.
The Company also agreed to satisfy other liabilities of ISI which were past due
and secured by a lien on ISI's real estate and to pay ISI 6% of the net sales of
products containing natural alpha interferon.
On May 30, 2003, the Company issued the shares to GP Strategies and the American
National Red Cross. Pursuant to our agreements with ISI and these two creditors,
we registered the foregoing shares for public sale. The Company guaranteed the
market value of all but 62,500 of these shares to be $1.59 per share. As a
result at December 31, 2003 the guaranteed value of these shares ($491,000),
which had not been sold by these two creditors, were reclassified to redeemable
common stock. At December 31, 2004, all shares had been sold by these two
creditors and the redeemable common stock was reclassed to equity.
On November 6, 2003, the Company acquired and subsequently paid, the outstanding
ISI property tax lien certificates in the aggregate amount of $457,000 from
certain investors. These tax liens were issued for property taxes and utilities
due for 2000, 2001 and 2002.
In March 2004, the Company issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well as its
production facility in New Brunswick, New Jersey. ISI has sold all of its
shares. The aggregated cost of the land and buildings was approximately
$3,316,000. The cost of the land and buildings was allocated as follows:
Land $ 423,000
Buildings 2,893,000
---------
Total cost $ 3,316,000
===========
The Company accounted for these transactions as a Business Combination under
SFAS No. 141 Accounting for Business Combinations.
Note 7: DEBENTURE FINANCING
Long term debt consists of the following:
(in thousands)
December March
31, 2004 31, 2005
-------- --------
October 2003 Debenture $2,072 $2,072
January 2004 Debenture 3,083 2,750
July 2004 Debenture 2,000 2,000
------- -------
Total 7,155 6,822
Less Discounts (3,602) (2,607)
------- -------
Balance 3,553 4,215
Less Current Portion of long-term debt
(net of discounts of $3,239 and $2,454
respectively) (3,248) (4,034)
------- ------
Total long-term debt $ 305 $ 181
======= ======
On July 10, 2003, the Company issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due July 31, 2005 (the "July 2003
Debentures") and an aggregate of 507,102 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March Debentures, in a private placement
for aggregate proceeds of $4,650,000. Pursuant to the terms of the July 2003
Debentures, $1,550,000 of the proceeds from the sale of the July 2003 Debentures
were to have been held back and released to the Company if, and only if, the
Company acquired ISI's facility with in a set timeframe. These funds were
released to the Company in October 2003 although the Company had not acquired
ISI's facility at that time. The July 2003 Debentures mature on July 31, 2005
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date.
The July 2003 Debentures are convertible at the option of the investors at any
time through July 31, 2005 into shares of the Company's common stock. The
conversion price under the July 2003 Debentures was fixed at $2.14 per share;
however, as part of the subsequent debenture placement closed on October 29,
2003 (see below), the conversion price under the July 2003 Debentures was
lowered to $1.89 per share. The conversion price is subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect. In addition, in the event that the Company does not pay the
redemption price at maturity, the Debenture holders, at their option, may
convert the balance due at the lower of (a) the conversion price then in effect
and (b) 95% of the lowest closing sale price of our common stock during the
three trading days ending on and including the conversion date.
The July 2008 Warrants received by the investors, as amended, were an aggregate
of 507,102 shares of common stock at a price of $2.46 per share. The amended
Warrants resulted in an additional debt discount of approximately $335,000 in
2004. These Warrants were exercised in July 2004 which produced gross proceeds
in the amount of $1,247,470.
On June 25, 2003, the Company issued to each of the March 12, 2003 Debenture
holders warrants to acquire at any time through June 25, 2008 an aggregate of
1,000,000 shares of common stock at a price of $2.40 per share (the "June 2008
Warrants"). These warrants were issued as incentive for the debenture holders to
exercise prior warrant issuances. This issuance resulted in an additional debt
discount to the March debentures of $2,640,000. Pursuant to the Company's
agreement with the Debenture holders, the Company has registered the shares
issuable upon exercise of these June 2008 Warrants for public sale. These
warrants were exercised in May 2004 and the Company received gross proceeds of
$2,400,000.
As of December 31, 2004, the investors had converted the total $5,426,000
principal of the July Debentures into 2,870,900 shares of common stock.
On October 29, 2003, the Company issued an aggregate of $4,142,357 in principal
amount of 6% Senior Convertible Debentures due October 31, 2005 (the "October
2003 Debentures") and an aggregate of 410,134 Warrants (the "October 2008
Warrants") in a private placement for aggregate gross proceeds of $3,550,000.
Pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the October 2003 Debentures were held back and were to be
released to the Company if, and only if, the Company acquired ISI's facility
within 90 days of January 26, 2004 and provide a mortgage on the facility as
further security for the October 2003 Debentures. In March 2004, the Company
acquired the facility and the Company subsequently provided the mortgage of the
facility to the Debenture holders. The October 2003 Debentures mature on October
31, 2005 and bear interest at 6% per annum, payable quarterly in cash or,
subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date.
Upon completing the sale of the October 2003 Debentures, the Company received
$3,275,000 in net proceeds consisting of $1,725,000 from the October 2003
Debentures and $1,550,000 that had been withheld from the July 2003 Debentures.
As noted above, pursuant to the terms of the October 2003 Debentures, $1,550,000
of the proceeds from the sale of the October 2003 Debentures had been held back.
However, these proceeds were released to the Company in April 2004. As required
by the Debentures, the Company has provided a mortgage on the ISI facility as
further security for the Debentures.
The October 2003 Debentures are convertible at the option of the investors at
any time through October 31, 2005 into shares of our common stock. The
conversion price under the October 2003 Debentures is fixed at $2.02 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that the Company
does not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors were to acquire
an aggregate of 410,134 shares of common stock at a price of $2.32 per share.
The amended Warrants resulted in a reduction in debt discount of approximately
$53,000 in 2004. These Warrants were exercised in July 2004 which produced gross
proceeds in the amount of $951,510.
As of March 31, 2005, the investors had converted $2,071,178 principal amount of
the Debenture into 1,025,336 shares of Common Stock.
On January 26, 2004, the Company issued an aggregate of $4,000,000 in principal
amount of 6% Senior Convertible Debentures due January 31, 2006 (the "January
2004 Debentures"), an aggregate of 790,514 warrants (the "July 2009 Warrants")
and 158,103 shares of common stock, and Additional Investment Rights (to
purchase up to an additional $2,000,000 principal amount of January 2004
Debentures commencing in six months) in a private placement for aggregate net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Commencing July 26, 2004, the Company is required to
start repaying the then outstanding principal amount under the January 2004
Debentures in monthly installments amortized over 18 months in cash or, at our
option, in shares of common stock. After one installment payment of $111,111 in
our common stock, one debenture holder exercised its right to waive further
installment payments on their note. Any shares of common stock issued to the
investors as installment payments shall be valued at 95% of the average closing
price of the common stock during the 10-day trading period commencing on and
including the eleventh trading day immediately preceding the date that the
installment is due.
The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of the Company's common stock. The
conversion price under the January 2004 Debentures was fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect. In addition, in the event that the Company
does not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date. Upon
completion of the August 2004 Private Placement, the conversion price was
lowered to $2.08 per share. As of March 31, 2005, the remaining principal on
these debentures was $2,749,740. The investors converted $139,150 principal
amount of the January 2004 Debenture into 55,000 shares of common stock. In
addition, installment payments of $1,111,110 were made to the Company's
investors amounting to 574,971 shares of the Company's common stock.
There are two classes of July 2009 Warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2004, the exercise price of
these July 2009 Class A and Class B Warrants were reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005.
The exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise prices as reset or adjusted for anti-dilution, will in
no event be less than $2.58 per share. Upon completion of the August 2004
Private Placement, the exercise price was lowered to $2.58 per share.
The Company also issued to the investors Additional Investment Rights pursuant
to which the investors have the right to acquire up to an additional $2,000,000
principal amount of January 2004 Debentures (the July 2004 Debentures") from us.
The July 2004 Debentures are identical to the January 2004 Debentures except
that the conversion price is $2.58. The investors exercised the Additional
Investment Rights on July 13, 2004 and the Company received net proceeds of
$1,860,000. Upon completion of the August 2004 Private Placement (see below),
the conversion price was lowered to $2.08 per share. As of March 31, 2005, the
Debenture holders had not converted any portion of this debenture.
On May 14, 2004, in consideration for the Debenture holders' exercise of all of
the June 2008 Warrants, the Company issued to the holders warrants (the "May
2009 Warrants") to purchase an aggregate of 1,300,000 shares of the Company's
common stock. As a result the warrants were valued at $2,355,000 which was
recorded as additional debt discounts. The Company issued 1,000,000 shares of
common stock and received gross proceeds of $2,400,000 from the exercise of the
June 2008 Warrants.
The May 2009 Warrants are to acquire at any time commencing on November 14, 2004
through April 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $4.50 per share. On May 14, 2005, the exercise price of these May 2009
Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004. Upon completion of the
August 2004 Private Placement (see below), the exercise price was lowered to
$4.008 per share.
The Company entered into Registration Rights Agreements with the investors in
connection with the issuance of (i) the Debentures; (ii) the June 2008, July
2008, October 2008, July 2009, and May 2009 Warrants (collectively, the
"Warrants"); and (iii) the shares issued in January 2004. Pursuant to the
Registration Rights Agreements the Company has registered on behalf of the
investors the shares issued to them in January 2004 and 135% of the shares
issuable upon conversion of the Debentures and upon exercise of all of the
Warrants. If, subject to certain exceptions, sales of all shares so registered
cannot be made pursuant to the registration statements, then the Company will be
required to pay to the investors their pro rata share of $.00067 times the
outstanding principal amount of the relevant Debentures for each day the above
condition exists.
As discussed below, Section 713 of the American Stock Exchange ("AMEX") Company
Guide provides that the Company must obtain stockholder approval before
issuance, at a price per share below market value, of common stock, or
securities convertible into common stock, equal to 20% or more of our
outstanding common stock (the "Exchange Cap"). The Debentures (including the
July 2004 Debentures) and Warrants have provisions that require us to pay cash
in lieu of issuing shares upon conversion of the Debentures or exercise of the
Warrants if the Company is prevented from issuing such shares because of the
Exchange Cap. In May 2004, the Debenture holders agreed to amend the provisions
of these Debentures and Warrants to limit the maximum amount of funds that the
holders could receive in lieu of shares upon conversion of the Debentures and/or
exercise of the Warrants in the event that the Exchange Cap was reached to
119.9% of the conversion price of the relevant Debentures and 19.9% of the
relevant Warrant exercise price. See below for the accounting effect on this
matter.
As of March 31, 2005, the investors have converted $13,062,328 principal amount
of debt from the Debentures issued in March, July and October 2003 and January
2004 into 7,667,674 shares of our common stock. $1,111,110 of principal was
repaid with the issuance of 574,971 shares of stock. The March and July
Debentures have been fully converted. The remaining principal balance on the
outstanding Debentures is convertible into shares of our stock at the option of
the investors at any time, through the maturity date. In addition, the Company
has paid $1,300,000 into the debenture cash collateral account as required by
the terms of the October 2003 Debentures. The amounts paid through March 31,
2005 have been accounted for as advances receivable and are reflected as such on
the accompanying balance sheet as of March 31, 2005. The cash collateral account
provides partial security for repayment of the outstanding Debentures in the
event of default.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January, May and July 2004, the Company paid Cardinal
Securities, LLC an investment banking fee equal to 7% of the investments made by
the two Debenture holders and issued to Cardinal the following warrants to
purchase common stock: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500
exercisable at $2.42 per share; and (iii) 100,000 exercisable at $3.04 per
share. The $2.57 warrants expire on July 10, 2008, the $2.42 warrants expire on
October 29, 2008 and the $3.04 warrants expire on January 5, 2009. With regard
to the exercise of the June 2008 Warrants and issuance of the May 2009 Warrants,
Cardinal received an investment banking fee of 7%, half in cash and half in
shares. With regard to the exercise of the Additional Investment Rights, the
July 2008 and October 2008 Warrants and issuance of the July 2009 Warrants,
Cardinal received an investment banking fee of 7%, 146,980 in cash and 22,703 in
shares as well as 50,000 warrants exercisable at $4.07 expiring on July 12,
2009. By agreement with Cardinal, the Company has registered all of the
foregoing shares and shares issuable upon exercise of the above mentioned
warrants for public sale and the Company has agreed to register the balance. As
a result of all of the transactions discussed above, the Company recorded
$1,430,000 as additional debt discounts.
Section 713 of the AMEX Company Guide provides that the Company must obtain
stockholder approval before issuance, at a price per share below market value,
of common stock, or securities convertible into common stock, equal to 20% or
more of our outstanding common stock (the "Exchange Cap"). Taken separately, the
July 2003, October 2003 and January 2004 Debenture transactions do not trigger
Section 713. However, the AMEX took the position that the three transactions
should be aggregated and, as such, stockholder approval was required for the
issuance of common stock for a portion of the potential exercise of the warrants
and conversion of the Debentures in connection with the January 2004 Debentures.
The amount of potential shares that the Company could exceed the Exchange Cap
amounted to approximately 1,299,000. In accordance with EITF 00-19, Accounting
For Derivative Financial Instruments Indexed to and Potentially Settled in a
Company's Own Stock, the Company recorded on January 26, 2004, a redemption
obligation of approximately $1,244,000. This liability represented the fair
market value of the warrants and beneficial conversion feature related to the
1,299,000 shares.
In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. The Company recorded an additional redemption obligation and
finance charge of $947,000 as a result of this revaluation. Upon stockholder
approval, our redemption obligation was recorded as additional paid in capital
as of the date approval was received.
The requisite stockholder approval was obtained at our Annual Meeting of
Stockholders on June 23, 2004. In accordance with EITF 00-19, the Company
revalued this redemption obligation associated with the beneficial conversion
feature and warrants as of June 23, 2004. The Company recorded a reduction in
the value of the redemption obligation and financing charge of $260,000 as a
result of this revaluation. In addition, upon receiving the requisite
stockholder approval, this redemption obligation was reclassified as additional
paid in capital as of the date the approval was received or June 23, 2004.
On July 13, 2004, the Debenture holders exercised all of the July 2003 and
October 2003 Warrants and the Additional Investment Rights amounting to
approximately $4,198,980 in gross proceeds to the Company. The Company issued to
these holders warrants (the "June 2009 Warrants") to purchase an aggregate of
1,300,000 shares of common stock. The issuance of these warrants resulted in an
additional debt discount to the note of $1,320,000 as explained below and a
financing charge of $2,351,000.
The June 2009 Warrants are to acquire at any time commencing on January 13, 2005
through June 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $3.75 per share. On July 13, 2005, the exercise price of these June
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
14, 2004 and July 12, 2005. The exercise price (and the reset price) under the
June 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $3.33 per share. Upon completion of the August 2004 Private Placement (see
below), the exercise price was lowered to $3.33 per share. This transaction was
subject to a non-cash financing charge of $1,320,000 to be amortized over the
remaining life of the October 2003 Debentures. The Company agreed to register
the shares issuable upon exercise of the June 2009 Warrants pursuant to
substantially the same terms as the registration rights agreements between the
Company and the holders. Pursuant to this obligation, the Company has registered
the shares.
On August 5, 2004, the Company closed a private placement with select
institutional investors of approximately 3,617,300 shares of its Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
it received a fee and warrants to purchase Common Stock. The Company raised
approximately $6,984,000 net proceeds from this private offering.
The Warrant issued to each purchaser is exercisable for up to 30% of the number
of shares of Common Stock purchased by such Purchaser, at an exercise price
equal to $2.86 per share. Each Warrant has a term of five years and is fully
exercisable from the date of issuance.
Pursuant to the Registration Rights Agreement, made and entered into as of
August 5, 2004 (the "Rights Agreement"), the Company has registered the resales
of the shares issued to the Purchasers and shares issuable upon the exercise of
the Warrants.
Closing of the August 2004 Private Placement triggered the anti-dilution
provisions of the January 2004 Debentures and the July 2004 Debentures and the
July 2009 Warrants and the June 2009 Warrants. The conversion price adjustment
for the Debentures noted above resulted in an adjustment of $1,320,000 in the
third quarter 2004 to the Debenture discount and additional paid-in-capital. Any
adjustment to the Debenture discount will be amortized over the remaining life
of the Debentures. The exercise price adjustment for the above warrants resulted
in a non-cash financing adjustment in the third quarter 2004 upon revaluing the
warrants at the new anti-dilution pricing using the Black-Scholes Method.
The March, July, October and January 2004 issuances of 6% Senior Convertible
Debentures in the principal amounts of $5,426,000, $4,142,357 and $4,000,000 and
$2,000,000 respectively and related embedded conversion features and warrants
issuances were accounted for in accordance with EITF 98-5: Accounting for
convertible securities with beneficial conversion features or contingency
adjustable conversion and with EITF No. 00-27: Application of issue No. 98-5 to
Certain convertible instruments. The Company determined the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method. The Company recorded debt discounts of approximately
$17.4 million which, in effect, reduced the carrying value of the debt to $3.6
million.
Pursuant to the terms and conditions of all of the outstanding Debentures, the
Company has pledged all of the Company's assets, other than the Company's
intellectual property, as collateral, and the Company is subject to comply with
certain financial covenants. As of March 31, 2005, the Company was in compliance
with debt covenants contained within its debenture agreements.
In connection with the Debenture agreements, the Company has outstanding letters
of credit of $1 million as additional collateral.
Note 8: EXECUTIVE COMPENSATION
In order to facilitate the Company's need to obtain financing and prior to our
stockholders approving an amendment to our corporate charter to increase the
number of authorized shares, Dr. Carter agreed to waive his right to exercise
certain warrants and options unless and until our stockholders approved an
increase in our authorized shares of Common Stock.
In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies.
In the quarter ended March 31, 2004, Dr. Carter was awarded an additional bonus
of $99,481 by the Compensation Committee. In addition, The Company recorded a
non-cash stock compensation charge of $1,769,000 during the first quarter 2004
resulting from warrants issued to Dr. Carter in 2003 that vested upon the
execution of the second ISI asset closing on March 17, 2004. This was determined
by subtracting the exercise price from the stock closing price on March 17, 2004
and multiplying the result by the number of warrants.
Note 9 - EQUITY INCENTIVE PLAN
The Equity Incentive Plan authorizes the grant of non-qualified and incentive
stock options, stock appreciation rights, restricted stock and other stock
awards. The Equity Incentive Plan provides for awards to be made to such
officers, other key employees, non-employee directors, consultants and advisors
of the Company and its subsidiaries as the board of directors may select. A
maximum of 8,000,000 shares of common stock is reserved for potential issuance.
Unless sooner terminated, the Equity Incentive Plan will continue in effect for
a period of 10 years from its effective date. As of March 31, 2005, the Company
has granted 633,080 options to directors, officers and employees pursuant to the
terms of this plan.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
Certain statements in this document constitute "forwarding-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1995 (collectively, the
"Reform Act"). Certain, but not necessarily 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. All statements other than
statements of historical fact, included in this report regarding our financial
position, business strategy and plans or objectives for future operations are
forward-looking statements. Without limiting the broader description of
forward-looking statements above, we specifically note that statements regarding
potential drugs, their potential therapeutic effect, the possibility of
obtaining regulatory approval, our ability to manufacture and sell any products,
market acceptance or our ability to earn a profit from sales or licenses of any
drugs or our ability to discover new drugs in the future are all forward-looking
in nature.
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 and its subsidiaries 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 report. We do
not undertake and specifically decline 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 biopharmaceutical company engaged in the clinical development,
manufacture, marketing and distribution of new drug entities based on natural
immune system enhancing technologies for the treatment of viral and immune based
chronic disorders. We were founded in the early 1970s, as a contract researcher
for the National Institutes of Health. After almost 30 years, we have
established a strong foundation of laboratory, pre-clinical, and clinical data
with respect to the development of nucleic acids to enhance the natural
antiviral defense system of the human body and to aid the development of
therapeutic products for the treatment of chronic diseases. We own a FDA
approved GMP manufacturing facility in New Jersey, and our corporate offices in
Philadelphia, PA.
Our flagship products include Ampligen and Alferon. Ampligen is an experimental
drug undergoing clinical trials for the treatment of: Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS), HIV, and HIV/Hepatitis C
co-infection. In August 2004, we completed a Phase III clinical trial treating
over 230 ME/CFS patients with Ampligen and are in the process of preparing a new
drug application to be filed with the FDA. Alferon N Injection is the registered
trademark for our injectable formulation of Natural Alpha Interferon, which is
approved by the U.S. Food and Drug Administration ("FDA") for the treatment of
genital warts. Alferon N is also in clinical development for treating Hepatitis
C ("HEP-C"), Multiple Sclerosis, Human Immunodeficiency Virus (HIV), West Nile
Virus ("WNV") and Severe Acute Respiratory Syndrome (SARS).
We have over 150 patents worldwide with 14 additional patents pending comprising
our core intellectual property, a fully commercialized product (Alferon), and a
GMP (good manufacturing practice) certified manufacturing facility.
In March 2004, we completed the step by step acquisition from Interferon
Sciences, Inc. ("ISI") of ISI's commercial assets, Alferon N inventory, a
worldwide license for the production, manufacture, use, marketing and sale of
Alferon N. As well as, a 43,000 square foot manufacturing facility in New Jersey
and the acquisition of all intellectual property related to Alferon. Alferon N
is a natural alpha interferon that has been approved by the FDA for commercial
sale for the intra-lesional treatment of refractory or recurring external
genital warts in patients 18 years of age or older. The acquisition was
completed in Spring 2004 with the acquisition of all world wide commercial
rights, the FDA approval.
We outsource certain components of our research and development, manufacturing,
marketing and distribution while maintaining control over the entire process
through our quality assurance group and our clinical monitoring group.
Since the completion of our AMP 516 ME/CFS Phase III clinical trial for use of
Ampligen(R) in the treatment of ME/CFS we have received inquiries from and,
under confidentiality agreements, are having dialogue with other companies
regarding marketing opportunities. No proposals or agreements have resulted from
the dialogue, nor can we be assured that any proposals or agreements will result
from these inquiries.
RISK FACTORS
The following cautionary statements identify important factors that could cause
our actual result 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:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and
our other related products is subject to a number of significant risks.
Ampligen(R) 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 right 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, if ever, Ampligen(R) or our other
products will be generally available for commercial sale for any indication.
Generally, only a small percentage of potential therapeutic products are
eventually approved by the U.S. Food and Drug Administration ("FDA") for
commercial sale.
ALFERON N Injection(R). Although ALFERON N Injection(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments such as multiple sclerosis and cancer.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.
All of our drugs and associated technologies other than ALFERON N
Injection(R) 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. At present,
ALFERON N Injection(R) is only approved for the intralesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. Use of ALFERON N Injection(R) for other indications will require
regulatory approval. In this regard, Interferon Sciences, Inc. ("ISI"), the
company from which we obtained our rights to ALFERON N Injection(R), conducted
clinical trials related to use of ALFERON N Injection(R) for treatment of HIV
and Hepatitis C. In both instances, the FDA determined that additional studies
were necessary in order to fully evaluate the efficacy of ALFERON N Injection(R)
in the treatment of HIV and Hepatitis C diseases. We have no obligation or
immediate plans to conduct these additional studies at this time.
Our products, including Ampligen(R), are subject to extensive
regulation by numerous governmental authorities in the U.S. and other countries,
including, but not limited to, the FDA in the U.S., the Health Protection Branch
("HPB") of Canada, and the European Medical Evaluation Agency ("EMEA") in
Europe. Obtaining regulatory approvals is a rigorous and lengthy process and
requires the expenditure of substantial resources. In order to obtain final
regulatory approval of a new drug, we must demonstrate to the satisfaction of
the regulatory agency that the product is safe and effective for its intended
uses and that we are capable of manufacturing the product to the applicable
regulatory standards. We require regulatory approval in order to market
Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) 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(R) or one of our other products does
not receive regulatory approval in the U.S. or elsewhere, our operations most
likely will be materially adversely affected.
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 we
pursued our clinical trial effort and expanded our efforts in Europe. As of
March 31, 2005 our accumulated deficit was approximately $141,000,000. 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
be profitable.
We may require additional financing which may not be available.
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. As of March 31, 2005, we had approximately $14,407,000 in
cash and cash equivalents and short-term investments. These funds should be
sufficient to meet our operating cash requirements including debt service for
the near term. However, we may need to raise 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 including the
commercializing of Ampligen(R) products. There can be no assurances that we will
raise adequate funds from these or other sources, which may have a material
adverse effect on our ability to develop our products. Also, we have the ability
to curtail discretionary spending, including some research and development
activities, if required to conserve cash.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. We obtained all rights to
ALFERON N Injection(R), and we plan to preserve and acquire enforceable patents
covering its use for existing and potentially new diseases. Our success depends,
in large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and expertise. 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 have been issued certain patents including those
on the use of Ampligen(R) and Ampligen(R) in combination with certain other
drugs for the treatment of HIV. We also have been issued patents on the use of
Ampligen(R) 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(R) in patients with Chronic Fatigue Syndrome.
We have not yet been issued any patents in the United States for the use of
Ampligen(R) as a sole treatment for any of the cancers, which we have sought to
target. With regard to ALFERON N Injection(R), we have acquired from ISI its
patents for natural alpha interferon produced from human peripheral blood
leukocytes and its production process. We cannot assure that our competitors
will not seek and obtain patents regarding the use of similar products in
combination with various other agents, for a particular target indication prior
to our doing such. If we cannot protect our patents covering the use of our
products for a particular disease, or obtain additional patents, we may not be
able to successfully market our products.
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 new 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 and we may not have the financial resources
necessary to enforce the patent rights that we hold. 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 develop or market our products or to obtain or maintain
any competitive position that 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 be able to obtain necessary licenses if
we cannot enforce patent rights we may hold. In addition, the failure of third
parties from whom we currently license certain proprietary information or from
whom we may be required to obtain such licenses in the future, to adequately
enforce their rights to such proprietary information, could adversely affect the
value of such licenses to us.
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.
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.
If our distributors do not market our products successfully, we may not generate
significant revenues or become profitable.
We have limited marketing and sales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, 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 Accredo offers the potential to provide some
marketing and distribution capacity in the United States while agreements with
Bioclones (Proprietary), Ltd, Biovail Corporation and Laboratorios Del Dr.
Esteve S.A. may provide a sales force in South America, Africa, United Kingdom,
Australia and New Zealand, Canada, Spain and Portugal. On December 27, 2004, we
initiated a lawsuit in Federal Court identifying a conspiratorial group seeking
to illegally manipulate our stock for purposes of bringing about the hostile
takeover of Hemispherx. This conspiratorial group includes Bioclones and the
potential legal action may adversely effect our agreement with Bioclones and the
potential for marketing and distribution capacity in South America, Africa,
United Kingdom, Australia and New Zealand.
We cannot assure that our domestic or 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.
There are no long-term agreements with suppliers of required materials. If we
are unable to obtain the required raw materials, we may be required to scale
back our operations or stop manufacturing ALFERON N Injection and/or
Ampligen(R).
A number of essential materials are used in the production of ALFERON N
Injection(R), including human white blood cells. We do not have long-term
agreements for the supply of any of such materials. There can be no assurance we
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all.
At present, we do not have any agreements with third parties for the
supply of any polymers for use in manufacturing Ampligen. We are consolidating
relevant manufacturing operations into our New Brunswick, New Jersey facility
for the production of Ampligen raw materials. This consolidation and transfer of
manufacturing operations has been implemented as an inspection of the Ribotech
facility in South Africa, our previous supplier of Ampligen(R) raw materials,
indicated that it did not, at present, meet the necessary GMP standards for a
fully certified commercial process. The transfer of Ampligen(R) raw materials
manufacture to our own facilities, while having obvious advantages with respect
to regulatory compliance (other parts of the 43,000 sq. ft. wholly owned
facility are already in compliance for Alferon N manufacture), may delay certain
steps in the commercialization process, specifically a targeted NDA filing.
If we are unable to obtain the required raw materials, we may be
required to scale back our operations or stop manufacturing. The costs and
availability of products and materials we need for the production of Ampligen(R)
and the commercial production of ALFERON N Injection(R) and other products which
we may commercially produce are subject to fluctuation depending on a variety of
factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
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(R) and other 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(R) 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 manufacturing 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.
We have limited manufacturing experience and capacity.
Ampligen(R) has been only produced in limited quantities for use in our
clinical trials and we are dependent upon certain third party suppliers for key
components of our products and for substantially all of the production process.
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
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 current Good Manufacturing Practices ("cGMP") regulations. There
can be no assurance that such facilities can be used, built, or acquired on
commercially acceptable terms, or that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
In connection with settling various manufacturing infractions
previously noted by the FDA, Schering-Plough ("Schering") entered into a
"Consent Decree" with the FDA whereby, among other things, it agreed to
discontinue various contract (third party) manufacturing activities at various
facilities including its San Juan, Puerto Rico, plant. Ampligen(R) (which was
not involved in any of the cited infractions) was produced at this Puerto Rico
plant from year 2000-2004. Operating under instructions from the Consent Decree,
Schering has advised us that it would no longer manufacture Ampligen(R) in this
facility beyond 2004 and would assist us in an orderly transfer of said
activities to other non Schering facilities. Accordingly, we have entered into a
Confidentiality Agreement with Mayne Pharma Pty, Ltd ("Mayne") to lead to
reinitiation and expansion of its Ampligen(R) manufacturing program. We are
currently in discussions with Mayne to provide us with proposals on
manufacturing Ampligen(R) at their facility. Mayne (formerly known as Faulding
Pharma) has already successfully manufactured Ampligen(R) several times for
ongoing clinical trials, and maintains a fully GMP compliant facility.
Simultaneously, we expect to qualify at least one other GMP facility to maintain
a minimum of two independent production sites. If we are unable to engage Mayne
and/or additional manufacturers in a timely manner, our plans to file an NDA for
Ampligen(R) and, eventually, to market and sell Ampligen(R) will be delayed.
The purified drug concentrate utilized in the formulation of ALFERON N
Injection(R) is manufactured in our New Brunswick, New Jersey facility and
ALFERON N Injection(R) was formulated and packaged at a production facility
formerly owned and operated by Abbott Laboratories located in Kansas. Abbott
Labs has sold the facility to Hospira and we are currently in discussions with
two other production facilities for this work. We currently have 12,000 vials at
Hospira in purified drug concentrate form. We are negotiating with Hospira to
complete the labeling and packaging of this lot. If Hospira is unable to
complete this production, or if we are unable to secure a new facility within a
reasonable period of time to formulate and package ALFERON N Injection(R) at an
acceptable cost, our ability to sell ALFERON N Injection(R) and to generate
profits therefrom will be adversely affected.
We may not be profitable unless we can produce Ampligen(R) or other products in
commercial quantities at costs acceptable to us.
We have never produced Ampligen(R) or any other products in large
commercial quantities. 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(R) or enter into third party
agreements for its manufacture at costs acceptable to us, our operations will be
significantly affected. Also, each production lot of Alferon N Injection(R) is
subject to FDA review and approval prior to releasing the lots to be sold. This
review and approval process could take considerable time, which would delay our
having product in inventory to sell. Alferon N Injection(R) presently has a
shelf life of 18 months after having been bottled. Studies were completed in
2004 to possibly extend the shelf life to 24 months. We filed our annual report
with the FDA in December 2004 informing them of the extension of shelf-life for
Alferon N Injection(R). We filed the request with the FDA in May 2005 requesting
approval to relabel the first 2,000 vials with an extended shelf-life of 24
months. We anticipate a response from the FDA by the end of June 2005.
Rapid technological change may render our products obsolete or non-competitive.
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.
Our products may be subject to substantial competition.
Ampligen(R). Competitors may be developing technologies that are, or in
the future may be, the basis for competitive products. Some of these potential
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 may 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, HPB or other regulatory product approvals more rapidly than us.
There are no drugs approved for commercial sale with respect to treating ME/CFS
in the United States. The dominant competitors with drugs to treat HIV diseases
include Gilead Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo
Smithkline, Merck and Schering-Plough Corp. These potential competitors are
among the largest pharmaceutical companies in the world, are well known to the
public and the medical community, and have substantially greater financial
resources, product development, and manufacturing and marketing capabilities
than we have. Although we believe our principal advantage is the unique
mechanism of action of Ampligen(R) on the immune system, we cannot assure that
we will be able to compete.
ALFERON N Injection(R). Many potential competitors are among the
largest pharmaceutical companies in the world, are well known to the public and
the medical community, and have substantially greater financial resources,
product development, and manufacturing and marketing capabilities than we have.
ALFERON N Injection(R) currently competes with Schering's injectable recombinant
alpha interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection(R) also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection(R). If and when we obtain additional approvals of uses of this
product, we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, three recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection(R) for the treatment of new indications, we will
be able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection(R). Currently, our wholesale price on a per
unit basis of ALFERON N Injection(R) is higher than that of the competitive
recombinant alpha and beta interferon products.
General. Other companies may succeed in developing products earlier
than we do, obtaining approvals for such products from the FDA more rapidly than
we do, or developing products that are more effective than those we may develop.
While we will attempt to expand our technological capabilities in order to
remain competitive, there can be no assurance that research and development by
others or other medical advances will not render our technology or products
obsolete or non-competitive or result in treatments or cures superior to any
therapy we develop.
Possible side effects from the use of Ampligen(R) or ALFERON N Injection(R)
could adversely affect potential revenues and physician/patient acceptability of
our product.
Ampligen(R). We believe that Ampligen(R) 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 a
rapid heart beat, a tightness of the chest, urticaria (swelling of the skin),
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, asthma, low blood pressure,
photophobia, rash, transient visual disturbances, slow or irregular heart rate,
decreases 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. One or more of the potential side
effects might deter usage of Ampligen(R) in certain clinical situations and
therefore, could adversely affect potential revenues and physician/patient
acceptability of our product.
ALFERON N Injection(R). At present, ALFERON N Injection(R) is only
approved for the intralesional (within the lesion) treatment of refractory or
recurring external genital warts in adults. In clinical trials conducted for the
treatment of genital warts with ALFERON N Injection(R), patients did not
experience serious side effects; however, there can be no assurance that
unexpected or unacceptable side effects will not be found in the future for this
use or other potential uses of ALFERON N Injection(R) which could threaten or
limit such product's usefulness.
We may be subject to product liability claims from the use of Ampligen(R) 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(R) 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 affected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against Ampligen and/or Alferon N Injection product liability
claims. A successful product liability claim against us in excess of Ampligen's
$1,000,000 in insurance coverage; $3,000,000 in aggregate, or in excess of
Alferon's $5,000,000 in insurance coverage; $5,000,000 in aggregate; or for
which coverage is not provided could have a negative effect on our business and
financial condition.
The loss of Dr. William A. 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(R), and his knowledge of our overall
activities, including patents and clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. We have secured key man life insurance in the amount of $2,000,000 on
the life of Dr. Carter and we have an employment agreement with Dr. Carter that,
as amended, runs until May 8, 2008. However, Dr. Carter has the right to
terminate his employment upon not less than 30 days prior written notice. 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 for our products.
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.
There are risks of liabilities associated with handling and disposing of
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. We do not maintain
insurance coverage against such liabilities.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock has been and is likely to be
volatile. In addition to general economic, political and market conditions, the
price and trading volume of our stock could fluctuate widely in response to many
factors, including:
o announcements of the results of clinical trials by us or our competitors;
o adverse reactions to products;
o governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
o changes in U.S. or foreign regulatory policy during the period of product
development;
o developments in patent or other proprietary rights, including any
third party challenges of our intellectual property rights;
o announcements of technological innovations by us or our competitors;
o announcements of new products or new contracts by us or our competitors;
o actual or anticipated variations in our operating results due to the level
of development expenses and other factors; o changes in financial estimates
by securities analysts and whether our earnings meet or exceed the
estimates;
o conditions and trends in the pharmaceutical and other
industries; new accounting standards; and
o the occurrence of any of the risks described in these "Risk Factors."
Our common stock is listed for quotation on the American Stock
Exchange. For the 12-month period ended March 31, 2005, the price of our common
stock has ranged from $1.50 to $5.40 per share. We expect the price of our
common stock to remain volatile. The average daily trading volume of our common
stock varies significantly. Our relatively low average volume and low average
number of transactions per day may affect the ability of our stockholders to
sell their shares in the public market at prevailing prices and a more active
market may never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares are
sold in the public market.
As of April 25, 2005, approximately 544,572 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. 179,323 of these shares have been registered pursuant to agreements
between us and the holders of these shares. In addition, we have registered
9,352,765 shares issuable (i) upon conversion of approximately 135% of the
January 2004 Debentures, the October 2003 Debentures, the July 2003 Debentures
and the July 2004 Debentures; (ii) as payment of 135% of the interest on all of
the Debentures; (iii) upon exercise of 135% of the July 2009 Warrants issued in
conjunction with the January 2004 Debentures, the May 2009 Warrants and the June
2009 Warrants; and (iv) upon exercise of certain other warrants. Registration of
the shares permits the sale of the shares in the open market or in privately
negotiated transactions without compliance with the requirements of Rule 144. To
the extent the exercise price of the warrants is less than the market price of
the common stock, the holders of the warrants are likely to exercise them and
sell the underlying shares of common stock and to the extent that the conversion
price and exercise price of these securities are adjusted pursuant to
anti-dilution protection, the securities could be exercisable or convertible for
even more shares of common stock. We also may issue shares to be used to meet
our capital requirements or use shares to compensate employees, consultants
and/or directors. We are unable to estimate the amount, timing or nature of
future sales of outstanding common stock. Sales of substantial amounts of our
common stock in the public market could cause the market price for our common
stock to decrease. Furthermore, a decline in the price of our common stock would
likely impede our ability to raise capital through the issuance of additional
shares of common stock or other equity securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may
make it more difficult for someone to acquire control of us or for our
stockholders to remove existing management, and might discourage a third party
from offering to acquire us, even if a change in control or in management would
be beneficial to our stockholders. For example, our Certificate of Incorporation
allows us to issue shares of preferred stock without any vote or further action
by our stockholders. Our Board of Directors has the authority to fix and
determine the relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without further
stockholder approval. As a result, our Board of Directors could authorize the
issuance of a series of preferred stock that would grant to holders the
preferred right to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium, prior to the
redemption of our common stock. In this regard, in November 2002, we adopted a
stockholder rights plan and, under the Plan, our Board of Directors declared a
dividend distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on November 29, 2002. Each Right
initially entitles holders to buy one unit of preferred stock for $30.00. The
Rights generally are not transferable apart from the common stock and will not
be exercisable unless and until a person or group acquires or commences a tender
or exchange offer to acquire, beneficial ownership of 15% or more of our common
stock. However, for Dr. Carter, our chief executive officer, who already
beneficially owns 10.9% of our common stock, the Plan's threshold will be 20%,
instead of 15%. The Rights will expire on November 19, 2012, and may be redeemed
prior thereto at $.01 per Right under certain circumstances.
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 or 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. Our research in 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(R) 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.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (revised 2004) (FASB
123R), Shared-Based Payment. FASB 123R will require the Corporation to expense
share-based payments, including employee stock options, based on their fair
value. The Corporation is required to adopt the provisions of FASB 123R
effective as of the beginning of its next fiscal year that begins after June 15,
2005. FASB 123R provides alternative methods of adoption, which include
prospective application and a modified retroactive application. The Corporation
is currently evaluating the financial impact, including the available
alternative of adoption of FASB 123R.
Disclosure About Off-Balance Sheet Arrangements
Prior to our annual meeting of stockholders in September 2003, we had a
limited number of shares of Common Stock authorized but not issued or reserved
for issuance upon conversion or exercise of outstanding convertible and
exercisable securities such as debentures, options and warrants. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
we have agreed to compensate Dr. Carter. See Note 8 in the accompanying
financial statements for more information concerning this transaction.
In connection with the Debenture agreements, we have outstanding letters of
credit of $1,000,000 as additional collateral.
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Notes
to the Consolidated Financial Statements. The significant accounting policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:
Revenue
Revenues for non-refundable license fees are recognized under the
Performance Method-Expected Revenue. This method considers the total amount of
expected revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.
Upon receipt, the upfront non-refundable payment is deferred. The
non-refundable upfront payments plus non-refundable payments arising from the
achievement of defined milestones are recognized as revenue over the performance
period based on the lesser of (a) percentage of completion or (b) non-refundable
cash earned (including the upfront payment).
This method requires the computation of a ratio of cost incurred to
date to total expected costs and then apply that ratio to total expected
revenue. The amount of revenue recognized is limited to the total non-refundable
cash received to date.
Revenue from the sale of Ampligen(R) under cost recovery clinical
treatment protocols approved by the FDA is recognized when the treatment is
provided to the patient.
Revenues from the sale of product are recognized when the product is
shipped, as title is transferred to the customer. We have no other obligation
associated with our products once shipment has occurred.
Patents and Trademarks
Patents and trademarks are stated at cost (primarily legal fees) and
are amortized using the straight-line method over the estimated useful life of
17 years. We review our patents and trademark rights periodically to determine
whether they have continuing value. Such review includes an analysis of the
patent and trademark's ultimate revenue and profitability potential on an
undiscounted cash basis to support the realizability of our respective
capitalized cost. In addition, management's review addresses whether each patent
continues to fit into our strategic business plans.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risks
consist of cash equivalents and accounts receivable.
Our policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being credit worthy, or in short-term money markets, which are
exposed to minimal interest rate and credit risks. At times, we have bank
deposits and overnight repurchase agreements that exceed federally insured
limits.
Concentration of credit risk, with respect to receivables, is limited
through our credit evaluation process. We do not require collateral on our
receivables. Our receivables consist principally of amounts due from wholesale
drug companies as of March 31, 2005.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 versus Three months ended March 31, 2004
Net loss
Our net loss of $3,055,000 for the three months ended March 31, 2005 was
down $4,987,000 or 62% compared to the same period in 2004. 90% of this
reduction or $4,531,000 was due to 1) lower costs associated with non-cash
financing charges related to convertible debentures and 2) lower non-cash stock
compensation expenses. Production/cost of goods sold costs were down $503,000
primarily due to expenditures in the first quarter of 2004 associated with the
ramping up of the New Brunswick facility for further production of Alferon N
Injection(R). Net losses per share were $(.07) for current period versus $(.20)
in the same period 2004.
Revenues
Revenues for the three months ended March 31, 2005 were $258,000 as
compared to revenues of $308,000 for the same period in 2004. Ampligen sold
under the cost recovery clinical program was down $20,000 (41%) and Alferon N
Injection sales were down $30,000 (12%). Ampligen sold under the cost recovery
clinical program is a product of physicians and ME/CFS patients applying to the
Company to enroll in the program. After screening the patient's enrollment
records, the Company ships Ampligen to the physician. A typical six month
treatment therapy costs the patient about $7,200 for Ampligen. This program has
been in effect for many years and is offered as a treatment option to patients
severely affected by ME/CFS. As the name "cost recovery" implies, we have no
gain or profit on these sales. The benefits to us include 1) physicians and
patient's becoming familiar with Ampligen and 2) collection of clinical data
relating to the patient's treatment and results.
Alferon N sales are anticipated to increase as we are in the process of
establishing an internal marketing and sales infrastructure to support the sales
of Alferon N Injection in the United States, including marketing and sales
support professionals based at our headquarters in Philadelphia, Pennsylvania.
We have hired and trained our two regional sales managers and have hired an
additional sales manager in April 2005. We will continue to aggressively hire
and train more sales representatives in the expertise in this field. We are
targeting sales representatives with an average of 6-8 years of experience. Our
sales force will introduce Alferon and promote Alferon to OB GYN's,
dermatologists, and infectious disease physicians and particularly STD Clinics,
who are involved in the treatment of patients with refractory or recurring
external genital warts, as well as physicians about the growing problem and the
risks of HPV. In addition to marketing and sales personnel, we have hired The
Schwartz Group, a telemarketing group. The Schwartz Group is a marketing partner
organization that works exclusively with companies selling products or services
to Physicians, Hospitals, and Retail Pharmacies. They perform telemarketing
campaigns that are designed to assist their clients and expand their reach and
market share. We expect to use their leads to assist our sales force in making
sales calls.
We also intend to expand our marketing/sales programs on an
international basis with our primary focus on Europe. This program is being
designed to engage European pharmaceutical distributors to market and distribute
Alferon N.
Human papillomavirus (HPV) is one of the most common causes of sexually
transmitted infection in the world. Experts estimate that there are more cases
of genital HPV infection than of any other sexually transmitted disease (STD) in
the United States. The Centers for Disease Control and the National Institute of
Health, report that approximately 20 million people are presently infected with
HPV. At least one half of sexually active men and women acquire genital HPV
infection at some point in their lives. By age 50, at least 80 percent of women
will have gotten a genital HPV infection. Roughly 6.2 million Americans get a
new genital HPV infection each year. The potential market for drugs treating HPV
is extremely large.
Production costs/cost of goods sold
Production costs for the three months ended March 31, 2004 were
$490,000. These costs represented expenditures associated with preparing the New
Brunswick facility for further production of Alferon N Injection(R) in the first
quarter 2004. There were no production costs for Alferon N Injection in the
current quarter as we concentrated on the completion of the consolidation of all
manufacturing and research and development activities within our own Good
Manufacturing Practice (GMP) Facility in New Brunswick for Ampligen. This
consolidation will improve efficiency and compliance procedures and bring the
facility in line with worldwide drug manufacturing standards.
Cost of goods sold for the three months ended March 31, 2005 and 2004
were $98,000 and $111,000, respectively. Since acquiring the right to
manufacture and market Alferon N on March 11, 2003, we have focused on
converting the work-in-progress inventory into finished goods. This
work-in-progress inventory included three production lots totaling the
equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. Approximately 34,000 vials have been produced. In August
2004, we released most of the second lot of product to Hospira (formerly Abbott
Laboratories) for bottling and realized approximately 12,000 vials of Alferon N.
Some 3,000 of the remaining vials within this lot were held back to be utilized
in the development of a more compatible vial size for manufacturing of Alferon N
Injection. We have had preliminary discussions with Hospira to complete the
labeling and packaging of our approximately 12,000 vials of Alferon N
Injection(R) at their site. If Hospira will not complete the labeling and
packaging or if we are unable to secure a new facility to formulate and package
Alferon N Injection(R) at an acceptable cost, our ability to sell Alferon N
Injection(R) and to generate profits therefrom will be adversely affected.
We plan on initiating the process of converting the third lot of
approximately 13,000 vials from work-in-progress to finished goods inventory in
the second half of 2005. Approximately 2,000 vials were abstracted from the
third lot for research and development purposes during the 4th quarter 2004. Our
production and quality control personnel in our New Brunswick, NJ facility are
involved in the extensive process of manufacturing and validation required by
the FDA. We are currently in discussions with two production facilities to
formulate, bottle, package and label Alferon N Injection(R) on a going forward
basis.
We completed the consolidation of our Rockville Quality Assurance Lab
and equipment into our New Brunswick facility. This consolidation of facilities
will produce savings in facility and manpower costs.
Research and Development costs
Overall research and development direct costs for the three months
ended March 31, 2005 and 2004 were $1,268,000 and $964,000, respectively. These
costs in 2005 reflect the direct costs associated with our effort to develop our
lead product, Ampligen(R), as a therapy in treating chronic diseases and cancers
as well as on-going clinical trials involving patients with HIV. In addition,
these costs reflect direct costs incurred relating to the development of Alferon
LDO (low dose oral). We have over approximately 161,000 doses on hand of Alferon
LDO which have been prepared for use in clinical trials treating patients
affected with the SARS or other potentially emerging infectious diseases, such
as, avian flu.
In the three months ended March 31, 2005 we have increased our clinical
staff by employing additional medical doctors, a PhD and several other highly
trained individuals to focus on the preparation of our Ampligen NDA filing. We
are being meticulous in the preparation of the NDA. Our clinical monitors and
research assistants are in the process of visiting the multiple clinical study
sites around the country and are collecting data generated at each of these
sites. All data must be reviewed and checked to clarify any inconsistencies or
inaccuracies that turn up. Due to the human factor, these types of problems
occur in all clinical trials. These gaps and inconsistencies in data must be
resolved with the respective clinical investigators, while maintaining a clear
record of events which allows the FDA to conduct a meaningful audit of these
records.
We believe that our recently completed AMP 516 ME/CFS Phase III
clinical trial for use of Ampligen(R) in the treatment of ME/CFS is the most
comprehensive study ever conducted in ME/CFS. This Phase III clinical trial,
which was conducted over a six year period, involved an enrollment of more than
230 severely debilitated CFS patients and was conducted at twelve medical
centers throughout the United States. The study is serving as the basis for us
to file a new drug application with the FDA. As discussed above, we have hired
additional personnel and in the process of preparing the NDA. The FDA review
process could take 18-24 months and result in one of the following events; 1)
approval to market Ampligen(R) for use in treating ME/CFS patients, 2) require
more research, development, and clinical work, 3) approval to market as well as
conduct more testing, or 4) reject our application. Given these variables, we
are unable to project when material net cash inflows are expected to commence
from the sale of Ampligen(R).
We had originally targeted a late 2004 filing date for this new drug
application for Ampligen(R). In order to respond to recent changes in the
regulatory environment that place a greater emphasis on the safety and efficacy
of all new experimental drug candidates, we are now incorporating a larger
sample of data from our previous trials. The NDA filing will now include data
accumulated from 40,000 administrations of the studied drug to approximately 700
CFS patients.
At the 18th International Conference on Antiviral Research on April 10,
2005, we presented new peer-reviewed data entitled "Correlation of Increased
Oxygen Consumption with Enhanced Treadmill Performance in Patients with Chronic
Fatigue Syndrome (CFS) as a Function of Ampligen(R)". According to recent
reports by the Centers for Disease Control and Prevention (CDC), ME/CFS, a
disease that affects between 400,000 and 800,000 Americans, is more serious than
multiple sclerosis with respect to medical severity and overall economic impact
on society. This was reported in the ME/CFS Advisory Committee Report dated
January 5, 2005. Specifically, ME/CFS imparts a clinically significant, profound
deficit in oxygen utilization to patients, which impairs their ability to
perform a range of ambulatory functions necessary to maintain quality of life.
Similar oxygen consumption deficits have been observed in other chronic diseases
such as congestive heart failure/angina ("CHF") and chronic pulmonary conditions
such as pulmonary arterial hypertension ("PAH") both of which now have a range
of readily available, commercially approved, therapeutics for disease
intervention.
The experimental Ampligen(R) treatment in ME/CFS improved exercise
duration up to two times more than approved (or approvable) drugs for their
respective chronic disease indications. Ampligen(R) increased the percentage
improvement in endurance (as determined by an "intent to treat" analysis) more
than 15% over the placebo group. In the ME/CFS study, maximal oxygen consumption
(VO2max) increased ten fold with Ampligen vs. Placebo. There was a high
correlation between improvement in exercise duration and increase in VO2 max (p
is less than 0.0001). VO2max is a measure of oxygen consumption at maximum
exertion.
By comparison, analysis of seven recent clinical studies, which
resulted in commercial approvals (or "approvable" letters) for various drugs
used in these other allied disease categories (both CHF and PAH), showed much
lower magnitudes of physical performance improvements due to therapeutic
interventions. For example, in CHF: Fosinopril (6.7% improvement), Captopril
(6.2%), Ranolazine (6.5%) and Ranolazine (5.7%); in PAM, Tracleer (10.6%
improvement), Remodulin (8.0%), and Remodulin (4.1%). All therapeutic
measurements in these seven other studies were determined by exercise treadmill
testing (or extent of walking), similar or identical to the therapeutic endpoint
used in the CFS study.
With respect to Ampligen(R) in the ME/CFS pivotal study, no significant
differences (p>0.05) were observed between the two groups (drug vs. placebo) for
treatment dropouts, the incidence of serious adverse events, or missed treatment
doses. With respect to relative safety of the experimental therapeutic, there
were also no significant differences in week forty blood chemistry, hematology,
or thyroid function parameters. These results are consistent with two prior open
label trials and a phase II, double-blind, placebo controlled, multi-center
clinical trial of Ampligen(R).
Ampligen is also currently in two Phase IIb studies for the treatment
of HIV to overcome multi-drug resistance, virus mutation and toxicity associated
with current HAART therapies. One study, the AMP-719, is a Salvage Therapy,
conducted in the U.S. and evaluating the potential synergistic efficacy of
Ampligen in multi-drug resistant HIV patients for immune enhancement. The second
study, the AMP-720, is a clinical trial designed to evaluate the effect of
Ampligen under Strategic Treatment Intervention and is also conducted in the
U.S. Enrollment in the AMP 719 study is presently on hold as we focus our
efforts on ramping up the AMP 720 study.
We have recruited and hired additional clinical research associates to
assist in the recruitment of clinical investigators and HIV patients to
participate in the AMP 720 HIV clinical trial. The AMP 516 ME/CFS is completed
and we are devoting more resources toward the AMP 720 HIV clinical trial.
The Amp 720 HIV study is a treatment using a Strategic Treatment
Interruption (STI). The patients' antiviral HAART regimens are interrupted and
Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an experimental
immunotherapeutic designed to display both antiviral and immune enhancing
characteristics. Prolonged use of Highly Active Antiretroviral Therapy (HAART)
has been associated with long-term, potentially fatal, toxicities. The clinical
study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As of April 28, 2005 we have five
clinical investigators on board treating five HIV patients. 41 HIV patients have
already participated in this 64 week study. It is difficult to estimate the
duration or projected costs of this clinical trial due to the many variables
involved, i.e.: patient drop out rate, recruitment of clinical investigators,
etc. The length of the study and costs related to our clinical trials cannot be
determined at this time as such will be materially influenced by (a) the number
of clinical investigators needed to recruit and treat the required number of
patients, (b) the rate of accrual of patients and (c) the retention of patients
in the studies and their adherence to the study protocol requirements. Under
optimal conditions, the cost of completing the studies could be approximately
$2.5 to $3.0 million if the target of 120 patients is achieved. The rate of
enrollment depends on patient availability and on other products being in
clinical trials for the treatment of HIV, as there is competition for the same
patient population. At present, more than 18 FDA approved drugs for HIV
treatment may compete for available patients. The length, and subsequently the
expense of these studies, will also be determined by an analysis of the interim
data, which will determine when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial will be conducted or not. In case a
Phase III study is required; the FDA might require a patient population
exceeding the current one which will influence the cost and time of the trial.
Accordingly, the number of "unknowns" is sufficiently great to be unable to
predict when, or whether, we may obtain revenues from our HIV treatment
indications.
A clinical study has been approved by the Clinical Research Ethics
Committee of the Kowloon West Cluster at the Princess Margaret Hospital in Hong
Kong to evaluate the use of Alferon(R) LDO (Low Dose Oral Interferon Alfa-N3,
Human Leukocyte Derived) in normal volunteers and/or asymptomatic subjects with
exposure to a person known to have Severe Acute Respiratory Syndrome (SARS).
The trial methodology may have implications for treating other emerging
viruses such as avian influenza (bird flu). Present production methods for
vaccines involve the use of millions of chicken eggs and would be slow to
respond to an outbreak according to a recently convened World Health
Organization (WHO) expert panel in November 2004. Health officials are also
concerned that bird flu could mutate to cause the next pandemic and render
present vaccines under development ineffective. We have prepared more than
300,000 doses of Alferon LDO for appropriate clinical programs.
In September 2004, we commenced a clinical trial using Alferon N
Injection to treat patients infected with the West Nile Virus. The infectious
Disease section of New York Queens Hospital and the Weill Medical College of
Cornell University will be conducting this double-blinded, placebo controlled
trial. During 2004, over 2,000 human cases of West Nile Virus have been reported
in 40 states.
In order to obtain Ampligen(R) raw materials on a more regular
production basis, we implemented consolidation and transfer of relevant
manufacturing operations into our New Brunswick, New Jersey facility during the
first quarter 2005. This consolidation and transfer of manufacturing operations
has been implemented as a recent inspection of the Ribotech facility in South
Africa, our previous supplier of Ampligen(R) raw materials, indicated that it
did not, at present, meet the necessary standards for a fully certified
commercial process. The transfer of Ampligen(R) raw materials manufacture to our
own facilities has obvious advantages with respect to overall control of the
manufacturing procedure of Ampligen's raw materials, keeping costs down and
controlling regulatory compliance issues (other parts of the 35,725 sq. ft.
wholly owned facility are FDA approved for Alferon N manufacture). This may
delay certain steps in the commercialization process, specifically a targeted
NDA filing.
In connection with settling various manufacturing infractions
previously noted by the FDA, Schering-Plough ("Schering") entered into a
"Consent Decree" with the FDA whereby, among other things, it agreed to
discontinue various contract (third party) manufacturing activities at various
facilities including its San Juan, Puerto Rico, plant. Ampligen(R) (which was
not involved in any of the cited infractions) was produced at this Puerto Rico
plant from year 2000-2004. Operating under instructions from the Consent Decree,
Schering has recently advised us that it would no longer manufacture Ampligen(R)
in this facility at the end of the applicable term (which is 4th quarter 2004)
and would assist us in an orderly transfer of said activities to other non
Schering facilities. Accordingly, we have entered into a Confidentiality
Agreement with Mayne Pharma Pty, Ltd ("Mayne") to lead to reinitiation and
expansion of its Ampligen(R) manufacturing program. We are currently in
discussions with Mayne to provide us with proposals on manufacturing Ampligen(R)
at their facility. Mayne (formerly known as Faulding Pharma) has already
successfully manufactured Ampligen(R) several times for ongoing clinical trials,
and maintains a fully GMP compliant facility. Simultaneously, we expect to
qualify at least one other GMP facility to maintain a minimum of two independent
production sites. If we are unable to engage Mayne and/or additional
manufacturers in a timely manner, our plans to file an NDA for Ampligen(R) and,
eventually, to market and sell Ampligen(R) will be delayed.
General and Administrative Expenses
General and Administrative ("G&A") expenses for the three months ended
March 31, 2005 and 2004 were approximately $982,000 and $2,844,000,
respectively. The decrease in G&A expenses of $1,862,000 during this period is
primarily due to a non-cash stock compensation charge of $1,769,000 resulting
from the issuance of 1,450,000 warrants to purchase common stock at $2.20 per
share to Dr. Carter in 2003 that vested in the first quarter 2004. The warrants
vested upon the second ISI asset closing which occurred on March 17, 2004.
Please see "Item 11. Executive Compensation." contained within our Form 10K
filed with the Securities and Exchange Commission on March 16, 2005, for more
details on how Dr. Carter was compensated. In addition, investment banking fees
relating to assistance in financial matters and public relations fees also
contributed to the decrease in G&A expenses from period-to-period.
Interest and Other Income
Interest and other income for the three months ended March 31, 2005 and
2004 totaled $230,000 and $11,000, respectively. The increase in interest and
other income during the current quarter can primarily be attributed to the
maturing of marketable securities during the 2005 period. All funds in excess of
our immediate need are invested in short-term high quality securities.
Interest Expense and Financing Costs
Non-cash financing costs were $1,089,000 for the three months ended
March 31, 2005 versus $3,851,000 for the same three months a year ago. Non-cash
financing costs consist of the amortization of debenture closing costs, the
amortization of Original Issue Discounts and the amortization of costs
associated with beneficial conversion features of our debentures and the fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated Statements of Operations under the caption "Financing Costs."
These charges are amortized over the life of the debentures. The aggregate total
of these charges have been reduced since the first quarter of 2004 due to
amortization charges, as well as, charges related to the conversion of the
debentures. Also, in connection with the redemption obligation recorded in
conjunction with the January 2004 Debenture, we recorded additional financing
costs of approximately $947,000 in the first quarter 2004. Please see Note 7 in
the consolidated financial statements contained herein for more details on these
transactions.
Liquidity And Capital Resources
Cash used in operating activities for the three months ended March 31,
2005 was $2,052,000. There was no cash provided by financing activities for the
three months ended March 31, 2005. As of March 31, 2005, we had approximately
$14,407,000 million in cash and short-term investments. These funds should be
sufficient to meet our operating cash requirements including debt service for
the near term. However, we may need to raise 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 including the
commercializing of Ampligen(R) products. There can be no assurances that we will
raise adequate funds from these or other sources, which may have a material
adverse effect on our ability to develop our products. Also, we have the ability
to curtail discretionary spending, including some research and development
activities, if required to conserve cash.
Please see Note 7 - "Debenture Financing" in the consolidated financial
statements contained herein for more details on our acquisition of assets and
debenture and stock financings.
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 our clinical trials for which cost recovery
from participants has been approved.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
We had approximately $14,407,000 in cash and cash equivalents and
short-term investments at March 31, 2005. 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 interest bearing financial instruments. We
employ established conservative policies and procedures to manage any risks with
respect to investment exposure.
We have not entered into, and do not expect to enter into, financial
instruments for trading or hedging purposes.
Item 4: Controls and Procedures
Our Chairman of the Board (serving as the principal executive officer)
and the Chief Financial Officer performed an evaluation of our disclosure
controls and procedures, which have been designed to permit us to effectively
identify and timely disclose important information. They concluded that the
controls and procedures were effective as of March 31, 2005 to ensure that
material information was accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. During the
quarter ended March 31, 2005, we have made no change in our internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On September 30, 1998, we filed a multi-count complaint against Manuel
P. Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of Asensio's false and defamatory
statements. The complaint further alleged that Asensio defamed and disparaged us
in furtherance of a manipulative, deceptive and unlawful short-selling scheme in
August and September, 1998. In 1999, Asensio filed an answer and counterclaim
alleging that in response to Asensio's strong sell recommendation and other
press releases, we made defamatory statements about Asensio. We denied the
material allegations of the counterclaim. In July 2000, following dismissal in
federal court for lack of subject matter jurisdiction, we transferred the action
to the Pennsylvania State Court. In March 2001, the defendants responded to the
complaints as amended and a trial commenced on January 30, 2002. A jury verdict
disallowed the claims against the defendants for defamation and disparagement
and the court granted us a directed verdict on the counterclaim. On July 2, 2002
the Court entered an order granting us a new trial against Asensio for
defamation and disparagement. Thereafter, Asensio appealed the granting of a new
trial to the Superior Court of Pennsylvania. The Superior Court of Pennsylvania
has denied Asensio's appeal. Asensio has now petitioned the Supreme Court of
Pennsylvania for allowance of an appeal. We have opposed Asensio's petition for
allowance of appeal and the matter is now pending before the Supreme Court of
Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and
her husband filed a claim in the Superior Court of New Jersey, Middlesex County,
against us, one of our clinical trial investigators and others alleging that she
was harmed in the ME/CFS clinical trial as a result of negligence and breach of
warranties. On June 25, 2004 all claims against us were dismissed with
prejudice. The former ME/CFS clinical trial patient and her husband have now
appealed the dismissal of their claims to the New Jersey Superior Court,
Apellate Division, where the matter is now pending.
In June 2002, a former ME/CFS clinical trial patient in
Belgium filed a claim in Belgium, against Hemispherx Biopharma Europe, NV/SA,
our
Belgian subsidiary, and one of our clinical trial investigators alleging that
she was harmed in the Belgium ME/CFS clinical trial as a result of negligence
and breach of warranties. We believe the claim is without merit and we are
defending the claim against us through our product liability insurance carrier.
In June 2004, One Penn Associates, L.P. filed a claim in the
Philadelphia Municipal Court for the Commonwealth of Pennsylvania seeking
$44,242.68 for alleged unpaid rent and charges related to our offices in One
Penn Center in Philadelphia. We believe this claim is without merit and are
defending same pursuant to the terms of our lease as we were damaged and
deprived of the use of a portion of the offices due to water from the landlord's
faulty sprinkler system.
In December, 2004 we filed a multicount complaint in federal court
(Southern District of Florida) against a conspiratorial group seeking to
illegally manipulate our stock for purposes of bringing about a hostile takeover
of Hemispherx. The lawsuit alleges that the conspiratorial group commenced with
a plan to seize control of our cash and proprietary assets by an illegal
campaign to drive down our stock price and publish disparaging reports on our
management and current fiduciaries. The lawsuit seeks monetary damages from each
member of the conspiratorial group as well as injunctions preventing further
recurrences of their misconduct. The conspiratorial group includes Bioclones, a
privately held South African Biopharmaceutical company that collaborated with
us, and Johannesburg Consolidated Investments, a South African corporation,
Cyril Donninger, R. B. Kebble, H. C. Buitendag, Bart Goemaere, and John Doe(s).
On January 10, 2005, we initiated a multicount lawsuit in the United
States District Court for the Eastern District of Pennsylvania seeking
injunctive relief and damages against a conspiratorial group, many of whom are
foreign nationals or companies located outside the United States alleging that
the conspiratorial group has engaged in secret meetings, market manipulations,
fraudulent misrepresentations, utilization of foreign accounts and foreign
secrecy laws all in furtherance of an illegal scheme to take over Hemispherx and
enrich themselves at the expense of Hemispherx's public shareholders. On
February 18, 2005 we filed an amended complaint in the same lawsuit joining
Redlabs, USA, Inc. as a defendant with the existing defendants R.E.D.
Laboratories, N.V./S.A., Bart Goemaere, Jan Goemaere, Dr. Kenny De Meirleir,
Kenneth Schepmans, Johan Goossens, Lieven Vansacker and John Does.
ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds
During the quarter ended March 31, 2005, we issued 1) an aggregate of
19,737 shares to our Directors as part of their quarterly compensation, 2) 2,195
shares to Business Asia Corporation for services performed and 3) 46,667 shares
to Cardinal Securities reflecting 50% of fees earned on the August, 2004
financing.
All of the foregoing transactions were conducted pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933.
We did not repurchase any of our securities during the quarter ended
March 31, 2005.
ITEM 3: Defaults upon Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
ITEM 5: Other Information
None.
ITEM 6: Exhibits
(a) Exhibits
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer
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
---------------------------
William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Robert E. Peterson
Chief Financial Officer
Date: May 10, 2005
EXHIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, William A. Carter, Chief Executive Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: May 10, 2005
/s/ William A. Carter
------------------------
William A. Carter
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Robert Peterson, Chief Financial Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the Registrant's auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: May 10, 2005
/s/ Robert E. Peterson
-------------------------
Robert Peterson
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William A. Carter, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 10, 2005
/s/ William A. Carter
--------------------------
William A. Carter
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended March 31, 2005 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert E. Peterson, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 10, 2005
/s/ Robert E. Peterson
--------------------
Robert E. Peterson
Chief Financial Officer