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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2003
Commission File Number: 0-27072
HEMISPHERx BIOPHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 988-0080
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
32,978,252 shares of common stock issued and outstanding as of March 31, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
2002 2003
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,256 $ 3,409
Short Term investments 555 -
Inventory - 1,829
Other receivables 1,507 1,519
Prepaid expenses and other current assets 71 142
----------- ----------
Total current assets 4,389 6,899
Property and equipment, net 155 133
Patent and trademark rights, net 995 978
Investments in unconsolidated affiliates 408 408
Deferred financing costs 260
Other assets 93 51
----------- ----------
Total assets $ 6,040 $ 8,729
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786 $ 1,588
Accrued expenses 678 668
Current portion of long-term debt - 570
----------- ----------
Total current liabilities 1,464 2,826
Long-Term Debt-net of current portion - 638
Commitments and contingencies:
Minority interest in subsidiary (Note 5) 946 -
Redeemable Common Stock - 662
Stockholders' equity:
Common stock 33 33
Additional paid-in capital 107,155 108,977
Accumulated other comprehensive income 35 -
Treasury stock - at cost (4,520) (3,716)
Accumulated deficit (99,073) (100,691)
----------- ----------
Total stockholders' equity 3,630 4,603
----------- ----------
Total liabilities and stockholders' equity $ 6,040 $ 8,729
=========== ==========
See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three months ended
March 31,
-------------------------
(Unaudited)
2002 2003
--------- ---------
Revenues:
Sales of product $ - $ 19
Clinical treatment programs 68 47
License fee income 545 -
--------- ---------
613 66
Costs and expenses:
Production 118
Research and development 1,292 873
General and administrative 829 667
---------- ---------
Total cost and expenses 2,121 1,658
Interest and other income 42 50
Interest and related expenses - (75)
Equity in loss of unconsolidated affiliate (22) -
---------- ---------
Net loss $(1,488) $(1,617)
========== =========
Basic and diluted loss per share $ (.05) $ (.05)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,072,092 32,393,754
========== ==========
See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Three months ended
March 31,
--------------------------
2002 2003
-------- ---------
Cash flows from operating activities:
Net loss $(1,488) $(1,617)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 24 22
Amortization of patents rights 29 36
Amortization of deferred financing costs - 57
Equity in loss of unconsolidated affiliates 22 -
Changes in assets and liabilities:
Accounts receivable (9) (12)
License fee receivable (545) -
Prepaid expenses and other current assets (389) (72)
Accounts payable 213 189
Accrued expenses (108) (336)
Other assets - 41
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Net cash used in operations (2,251) (1,692)
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Cash flows from investing activities:
Additions to patent rights (29) (18)
Maturity of short term investments 5,293 520
Purchase of short term investments (2,711) -
--------- ---------
Net cash provided by investing activities 2,553 502
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Cash flows from financing activities:
Proceeds from issuance of common stock 5 -
Proceeds from exercise of warrants 59 -
Proceeds from long-term borrowings - 3,100
Payments on long-term borrowings - (440)
Deferred financing costs - (268)
Purchase of treasury stock - (49)
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Net cash provided by financing activities 64 2,343
-------- ---------
Net increase in cash and cash equivalents 366 1,153
Cash and cash equivalents at beginning of period 3,107 2,256
-------- ---------
Cash and cash equivalents at end of period $3,473 $3,409
======== =========
See accompanying notes to condensed 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
year 2002 consolidated financial statements included in amendment no. 1 to our
annual report on Form 10-K for the year ended December 31, 2002, as filed with
the SEC on May 20, 2003.
NOTE 2: STOCK COMPENSATION
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 proforma 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, 2003
--------------
Risk-free interest rate 5.23%
Expected dividend yield -
Expected lives 2.5 years
Expected volatility 63.17%
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, 2003 would have been as
follows:
Three Months Ended
March 31, 2003
--------------
(In Thousands)
----------------
Net (loss) as reported $ (1,617)
Add: Stock based employee compensation expense
Included in reported net loss, net of
Related tax effects -
Deduct: Total stock based employee compensation determined
under fair value method for all awards, net
of related tax effects (137)
-----
Proforma net loss $ (1,754)
=======
Basic and diluted loss per share
As reported $ (.05)
Proforma $ (.05)
Note 3: INVESTMENTS
Investments in unconsolidated affiliates
Investments include an initial equity investment of $290,625 in Chronix
Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for
chronic diseases. This initial investment was made in May 31, 2000 by the
issuance of 50,000 shares of Hemispherx Biopharma, Inc. common stock from the
treasury. On October 12, 2000, the Company issued an additional 50,000 shares of
Hemispherx Biopharma, Inc. common stock and on March 7, 2001 the Company issued
12,000 more shares of Hemispherx Biopharma, Inc. 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. This
impairment reduces our carrying value to reflect a permanent decline in
Chronix's market value based on their current investment offerings.
Note 4: REVENUE AND LICENSING FEE INCOME
On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R)in Spain,
Portugal and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue
Syndrome ("ME/CFS"). Esteve paid the initial and non refundable fee of 625,000
Euros (approximately $545,000) to Hemispherx S.A. on April 24, 2002.
The terms of the agreement granting the licensee marketing rights for
Ampligen(R) for the treatment of myalgic/chronic fatigue syndrome ("ME/CFS") in
Spain, Portugal and Andorra require the Company to provide the licensee with
technical, scientific and commercial information. The Company fulfilled the
requirements during the first quarter of 2002. The agreement terms required no
additional performance on the part of the Company.
The agreement also requires the licensee to pay of 1,000,000 Euros after FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 after
issuance in Spain of final marketing approval authorization for Ampligen(R) for
the treatment of ME/CFS.
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.
The percentage of expenses incurred to date to total expected expenses in
connection with the research and development project, exceed the percentage of
license fees received compared to total license fees to be earned per the
agreement. Therefore the amount of revenue recognized by the Company was limited
to the total non-refundable cash received to date of approximately $545,000,
inclusive of foreign exchange effects.
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 5: MINORITY SHAREHOLDER INTEREST
On March 20, 2002 our European Subsidiary Hemispherx, S.A. entered into a Sales
and Distribution agreement Esteve. Pursuant to the terms of the Agreement,
Esteve was granted the exclusive right to market Ampligen(R) in Spain Portugal
and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue Syndrome
("ME/CFS"). In addition to other terms and other projected payments, Esteve paid
an initial and non refundable fee of 625,000 Euros (approximately $545,000) to
Hemispherx S.A. on April 24, 2002 as the first part of a series of milestone
based payments.
During March 2002, Hemispherx, S.A. was authorized to issue up to 22,000,000
Euros of seven percent (7%) convertible preferred securities. Such securities
will be guaranteed by the parent company and will be converted into a specified
number of shares of Hemispherx S.A. pursuant to the securities agreement.
Conversion is to occur on the earlier of an initial public offering of
Hemispherx S.A. on a European stock exchange or September 30, 2003.
Esteve purchased 1,000,000 Euros of Hemispherx, S.A.'s convertible preferred
equity certificates on May 23, 2002. During 2002, the terms and conditions of
these securities were changed so that these preferred equity certificates would
be converted into the common stock of the Company in the event that a European
IPO is not completed by September 30, 2003. The conversion rate is to be 300
shares of the Company's common shares for each 1,000 Euro convertible preferred
certificate. As a result the Company recorded approximately $946,000 as minority
interest in subsidiary on its balance sheet.
On December 18, 2002, we proposed that Esteve convert its convertible preferred
equity certificates into Company common stock pursuant to the terms of the
agreement and all unpaid dividends at the market price on that conversion date.
On January 9, 2003, Esteve accepted our proposal.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan SA,
an affiliate of Esteve, in exchange for the 1,000,000 Euros of convertible
preferred equity certificates issued to Esteve and any unpaid dividends. We are
in the process of registering these shares for public sale. As a result of the
exchange, minority and subsidiary was transfer to stockholders' equity on such
date.
The contingent conversion price was more than the then market value of the
parent company's or subsidiaries' common stock at each of the respective
measurement dates. As a result and in accordance with Emerging Issues Task Force
(EITF) No. 00-27 "Application of Issue No. 98-5 (Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios) to Certain Convertible Instruments", the Company did not
ascribe any value to any contingent conversion feature.
Note 6: RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No.
4,44 and 64, Amendment of FASB statement No. 13, and Technical Corrections"
("SFAS 145"). FASB No. 4 required that gains and losses from extinguishment of
debt that were included in the determination of net income be aggregated and, if
material, be classified as an extraordinary item, net of related income tax.
Effective January 1, 2003, pursuant to SFAS 145, the treatment of debt is to be
included in "Other Income" in the Financial Statements. Currently the Company
believes that the adoption of SFAS 145 will not have an impact on it's financial
position and results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities". ("Interpretation No. 46"), which clarifies the application
of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Interpretation No. 46 is applicable immediately for
variable interest entities created after January 31, 2003. For variable interest
entities created prior to January 31, 2003, the provision of Interpretation No.
46 are applicable no later than July 1, 2003. We do not expect this
Interpretation to have an effect on the consolidated financial statements.
Note 7: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.
On March 11, 2003, we executed two agreements with Interferon Sciences, Inc.
(ISI) to purchase certain of its assets.
In the first agreement with ISI, the Company acquired ISI's inventory of ALFERON
N Injection(R), and a limited license for the production, manufacture, use,
marketing and sale of this product. For these assets, the Company:
(i) issued 487,028 shares of its common stock; and
(ii) agreed to pay ISI 6 % of the net sales of the Product.
The Company also is required to pay ISI a service fee and pay certain of ISI's
obligations related to the product.
In the second agreement with ISI, ISI has agreed to sell to the Company all of
ISI's 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
will:
(i) issue an additional 487,028 shares of its common stock; and
(ii) continue to pay ISI 6 % of the net sales of the product.
In addition, the Company will be required to satisfy three obligations of ISI.
The Company will satisfy two of these obligations, pursuant to forbearance
agreements with The American National Red Cross and GP Strategies Corporation,
two of ISI's creditors, by issuing an aggregate of 581,761 shares of common
stock to these creditors. The third obligation is approximately $521,000 and is
secured by a lien on the property.
Second agreement with ISI is contingent on the Company receiving appropriate
governmental approval for the real estate transaction.
Pursuant to the agreements with ISI and its creditors, the Company is in the
process of registering the foregoing shares issued to ISI in a registartion
statement on form S-3, and has agreed to register the additional shares to be
issued to ISI and its creditors for public sale. Except for 62,500 of the shares
issued to ISI, the Company has guaranteed the market value of the shares
retained by ISI as of September 11, 2005, the termination date, to be $1.59 per
share. Except for 62,500 of the shares to be issued to ISI, the Company has
guaranteed the market value of the shares retained by ISI from the second ISI
asset purchase and the shares to be issued to the creditors to be $1.59 per
share as of a specified date. The specified date ("termination date") is 18
months after the issuance of the additional shares to ISI and the issuance of
the shares to GP Strategies and 12 months after the issuance of the shares to
American National Red Cross. ISI and the creditors are permitted to periodically
sell certain amounts of their shares. If, within 30 days after the respective
termination dates, holders of the guaranteed shares request that the Company
honor the guarantee, the Company will be obligated to reacquire the holders'
remaining guaranteed shares and pay the holders $1.59 per share. Accordingly
certain shares issued in connection with the agreements are and will be recorded
outside of stockholders' equity.
We will account for these transactions as a Business Combination under Statement
of Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.
As a result of the first agreement, the following table summarize the estimated
fair values of the assets and liabilities assumed at the acquisition date.
At March 11, 2003
-----------------
Inventory $ 1,840,762.00
Fair Value of liabilities
Assumed (1,081,041.72)
---------------
Fair Value of Common Shares
Issued $ 759,720.00
===============
The above table is subject to further adjustment upon final determination of
estimated fair values as well as the additional accounting for the effects of
the second agreement as described above.
The following table represents the unaudited proforma results of operations as
though the acquisition, described in the first agreement, of certain net assets
of ISI occurred on January 1, 2002.
Three Months ended March 31,
-----------------------------
2002 2003
----- ------
(in thousands except for share data)
Net revenues $ 1,397 $ 308
Operating 3,761 2,471
----- ------
Net loss $ (2,364) (2,163)
===== ======
Basic and
diluted loss
per share $ (0.07) $(0.07)
----- ------
Weighted average
Shares
Outstanding 32,559,092 32,767,121
---------- ----------
In giving effect to the shares that would be issued as a result of the second
agreement with ISI the weighted average shares outstanding during the three
months ending March 31, 2002 and 2003 would have been 33,046,092 and 33,254,121
resulting in a proforma loss per share as adjusted of $(.07) and $(.07) for said
periods respectively.
Note 8: CONVERTIBLE DEBENTURES
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe (see the discussion below). The Debentures mature on
January 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. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestone.
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 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.
The investors also received Warrants to acquire at any time through March 12,
2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the 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 March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
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 instrument,
the Company determined the fair values to be ascribed to detachable warrants
issued with the convertible debentures utilizing the Black-Scholes method.
These pronouncements also provide for fair values of contingent conversion
features of convertible debt securities to be determined when the contingent
conversion price of is less than the market value of the underlying parent
company or subsidiary common stock at the measurement date.
As a result the Company recorded debt discount of $1.5 million. These costs are
deferred and charge to interest expense over the life of the debentures.
In addition, the Company, in connection with the issuance of Debentures,
recorded an Original Issue Discount (OID) of approximately $554,000 as
additional cost of the offering. These costs are also deferred and expensed as
interest over the life of the debentur
We entered into a registration rights agreement with the investors in connection
with the issuance of the Debentures and the Warrants. The registration rights
agreement requires that we register the shares of common stock issuable upon
conversion of the Debentures, as interest shares under the Debenture and upon
exercise of the Warrants. In accordance with this agreement, we filed a
registration statement on form S-3 with the Securities and Exchange Commission.
The Debentures mature on March 12, 2005 and bear interest at 6% per annum,
payable quarterly in cash or common stock. Any shares of common stock issued to
the investors as payment shall be valued at 95% of the average closing price of
the common stock during common stock during the five consecutive business days
ending on the third business day immediately preceding the applicable interest
payment date.
In connection with the debenture agreement, the Company has outstanding letters
of credit of $1 million as additional collateral. Included in $1 million
outstanding letters of credit, is a $250,000 letter of credit acquired by
William A. Carter, CEO, on behalf of the Company.
In addition, as of April 30, 2003, the Company has $750,000 in restricted cash
under the letter of credit agreements.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Report on Form 10-Q ("Form 10-Q"), constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and the Private Securities Litigation Reform Act of 1995
(collectively, the "Reform Act"). Certain, but not 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.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, including but not limited to, the risk factors discussed
below, which may cause the actual results, performance or achievements of
Hemispherx Biopharma, Inc.and its subsidiaries (collectively, the "Company", "we
or "us") to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements and other
factors referenced in this Form 10Q. The Company does not undertake and
specifically declines any obligation to publicly release the results of any
revisions which may be made to any forward-looking statement to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Overview
We have established a strong foundation of laboratory, pre-clinical and clinical
data with respect to the development of nucleic acid to enhance the natural
antiviral defense system of the human body and the development of the
therapeutic products for the treatment of chronic disease. Our strategy is to
obtain the required regulatory approval which will allow the progressive
introduction of Ampligen(R) (our proprietary drug) for treating Myalgic
encephalomyelitis Chronic Syndrome ("ME/CFS"), HIV, hepatitis C ("HCV") and
hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. Ampligen(R) is
currently in phase III clinical trials in the U.S. for use in treatment of
ME/CFS and is in Phase IIb Clinical trials in the U.S. for the treatment of
newly emerged multi-drug resistant HIV, and for the induction of Cell mediated
immunity in HIV patients that are under control using potentially toxic drug
cocktail.
Our proprietary drug technology utilizes specifically configured ribonucleic
acid ("RNA") and is protected by more than 350 patents worldwide. With over 80
additional patent applications pending to provide further proprietary protection
in various international markets. Certain patents apply to the use of
Ampligen(R) alone and certain patents apply to the use of Ampligen(R) in
combination with certain other drugs. Some composition of matter patents pertain
to other new medication, which have a similar mechanism of action.
In March, 2003, the Company acquired from Interferon Sciences, Inc. ("ISI"), all
of ISI's raw materials, work-in-progress and finished product of Alferon N
Injection, together with a limited license for the production, manufacture, use,
marketing and sale of the product. Alferon N [interferon alfa- n3 (human
derived)] is a natural alpha interferon that has been approved by the U.S. Food
and Drug Administration ("FDA") for the commercial sale for the treatment of
certain types of genital warts. We intend to market this product in the United
States through sales facilitated via third party marketing agreements. In the
future, we expect to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis. This acquisition not withstanding, our primary
focus remains the development to Ampligen(R) for treating ME/CFS and HIV
diseases.
We are incorporated in Maryland in 1996 under the name HEM research, Inc., and
originally served as a supplier of research support products. Our business was
redirected in the early 1980's to the development of nucleic acid pharmaceutical
technology and the commercialization of RNA drugs. We are reincorporated in
Delaware and changed our name to Hem Pharmaceutical Corp. in 1991 and to
Hemispherx Biopharma, Inc. in June 1995. We have three domestic subsidiaries
BioPRo Copr., BioAegean Corp., and Core Biotech Corp., all of which are
incorporated in Delaware. Our foreign subsidiaries include Hemispherx Biopharma
Europe N.V./S.A. established in Belgium in 1998 an Hemispherx Biopharma Europe
S.A. incorporated in Luxembourg in 2002.
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 Form 10-K/A. 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, or 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 is approved for
marketing for the treatment of genital warts, to date it has not been approved
for other applications. 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 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 is only approved for the treatment of genital warts. Use of
ALFERON N Injection for other applications will require regulatory approval. In
this regard, Interferon Sciences, Inc., the Company from which we obtained our
rights to ALFERON N Injection, conducted clinical trials related to use of
ALFERON N Injection 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 plans to conduct these additional studies at
this time. Our principal development efforts are currently focused on
Ampligen(R), which has not been approved for commercial use. 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 will be
materially adversely effected.
We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profit from 1985
through 1987. Since 1987, we have incurred substantial operating losses, as we
pursued our clinical trial effort and expanded our efforts in Europe. As of
March 31, 2003 our accumulated deficit was approximately $101,000,000. 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
profitability.
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. Based upon our current operating plan, we anticipate that we
will need approximately $5,400,000 over the next 12 months, inclusive of
revenues and financing, to sustain our operations. In March 2003, we received
$2,873,000 in initial net proceeds from the sale of the Debentures and Warrants
and, pursuant to the terms of the Debentures, if and when we close on the second
Interferon Sciences asset acquisition, we will receive additional net proceeds
of $1,550,000. We anticipate receipt of revenues and proceeds from the sales of
Ampligen(R) under the Cost Recovery Clinical Programs and, possibly, funds from
the exercise of outstanding non-public warrants. We also anticipate significant
revenues from our recently acquired commercial product, Alferon N. As of May 1,
2003, we had approximately $3.6 Million in cash and short term investments. We
believe that these funds plus 1) the anticipated infusion of approximately $1.55
million in remaining net proceeds from the Debenture placement and 2) the
projected net cash flow from the sale of ALFERON N should be sufficient to meet
our operating requirement for the next 12 months. 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 and begin commercializing Ampligen(R) products. There can be
no assurances that we will raise adequate funds from these or other sources,
which may have a material effect on our ability to develop our products. In
addition, if we do not timely complete the second ISI asset acquisition, our
financial condition could be materially and adversely affected (see the next
risk factor). If we do not complete the second Interferon Sciences asset
acquisition, our ability to generate revenues from the sale of ALFERON N
Injection and our financial condition will be adversely affected.
In March, 2003 we executed two agreements with Interferon Sciences, Inc.
("ISI") to purchase certain assets of ISI. In the first agreement we acquired
ISI's inventory of ALFERON N Injection(R) and a limited license for the
production, manufacture, use, marketing and sale of this product. Our ability to
generate sustained revenues from sales of this product is dependent, among other
things, on our completing the terms of the second agreement to acquire the
balance of ISI's rights to its product as well as ISI's production facility used
to formulate and purify the drug concentrate of ALFERON N Injection(R). In
addition, pursuant to the terms of the Debentures, we are required to acquire
ISI's facility within 90 days from March 12, 2003 and, unless and until we
acquire the facility, $1,550,000 of the proceeds from the sale of the Debentures
has been held back. Consummation of the second agreement requires, among other
things, approval by ISI's shareholders and certain environmental approvals with
regard to the sale of the facility. As of the date hereof, there is the
possibility that either or both approvals may not be obtained within the
required 90 day period. Our failure to complete the acquisition within the 90
day period would be a technical default of the terms of the Debentures and,
absent consent from the Debenture holders for additional time, most likely would
result in our having to redeem the securities. If we do not receive the
additional Debenture funds as planned and, especially if we are required to
redeem the Debentures, our financial condition would be materially and adversely
affected and we would probably have to reduce or possibly curtail operational
spending including some critical clinical effort.
The limited number of unissued and unreserved authorized shares of Common Stock
severely restricts our ability to raise funds through the sale of our
securities.
We have 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.
As of May 1, 2003, only approximately 809,000 shares of our authorized shares of
Common Stock will not be issued or reserved for issuance. Unless and until we
are able to increase the number of authorized shares of Common Stock, our
ability to raise funds through the sale of Common Stock or instruments that are
convertible into or exercisable for Common Stock will be severely restricted.
Although we intend to ask our stockholders at our next annual meeting to approve
an amendment to our Certificate of Incorporation to increase the shares of
Common Stock we are authorized to issue, we cannot assure you that we will be
able to obtain this approval.
We have guaranteed the value of a number of shares issued and to be issued as a
result of our acquisition of assets from Interferon Sciences. If our share price
is not above $1.59 per share 12 or 18 months after the dates of issuance of the
guaranteed shares, our financial condition could be adversely affected.
In March 2003 we issued 487,028 shares to Interferon Sciences and, upon
the completion of the second Interferon Sciences asset acquisition, we will
issue an additional 487,028 shares to Interferon Sciences and an aggregate of
581,761 shares to two of Interferon Sciences' creditors. We anticipate, but
cannot assure, that we will close the second Interferon Sciences asset
acquisition by mid June, 2003. We have guaranteed the value of up to 1,430,817
of these shares to be $1.59 per share or $2,275,000 in the aggregate on the
relevant termination dates. The termination dates are 18 months after the dates
of issuance of the guaranteed shares to ISI and GP Strategies, and 12 months
after the date of issuance of the guaranteed shares to the American National Red
Cross. The guarantee relates only to those shares still held by Interferon
Sciences and the two creditors on the applicable termination date. If, within 30
days after the relevant termination date, holders of the guaranteed shares
request that we honor the guarantees, we will reacquire the holders' remaining
guaranteed shares and pay the holders $1.59 per share. By way of example,
assuming that all 1,430,817 shares are still held on the relevant termination
dates, we would be obligated to pay to Interferon Sciences and these two
creditors an aggregate of $2,275,000. The reported last sale price for our
common stock on the American Stock Exchange on May 16, 2003 was $2.84 per share.
If, during the 31 days commencing on the relevant termination dates, the market
price of our stock is not above $1.59 per share, we most likely would be
requested and obligated to pay the guaranteed amount on the guaranteed shares
outstanding on the relevant termination dates. We believe that the number of
guaranteed shares still outstanding on the relevant termination dates will be a
factor of the market price and sales volume of our common stock during the 18
month period prior to the relevant termination date.
If the holders of the guaranteed shares do not sell a significant
amount of their guaranteed shares prior to the relevant termination dates and
the price of our common stock during the 31 day period commencing on the
relevant termination dates is not above $1.59 per share, we most likely will be
required to repurchase a significant number of guaranteed shares and our
financial condition could be materially and adversely affected.
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. If and when we obtain all
rights to ALFERON N Injection, we will need to preserve and acquire enforceable
patents covering its use for a particular disease too. 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, Interferon Sciences, Inc. has a
patent for Natural Alpha Interferon produced from human peripheral blood
leukocytes and its production process and has additional patent applications
pending. We will acquire this patent and related patent applications if and when
we close on the second Interferon Sciences asset acquisition We cannot assure
you that any of these applications will be approved or that our competitors will
not seek and obtain patents regarding the use of our products in combination
with various other agents, for a particular target indication prior to us. If we
cannot protect our patents covering the use of our products for a particular
disease, or obtain additional pending 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 the we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
There can be no assurance that we will 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 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 product successfully, we may not
generate significant revenues or become profitable.
We have limited marketing and sales capability. We need to enter into
marketing agreements and third party distribution agreements for our products in
order to generate significant revenues and become profitable. To the extent that
we enter into co-marketing or other licensing arrangements, any revenues
received by us will be dependent on the efforts of third parties, and there is
no assurance that these efforts will be successful. Our agreement with Gentiva
Health Services offers the potential to provide significant marketing and
distribution capacity in the United States while licensing and marketing
agreements with certain foreign firms should provide an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand, Canada,
Austria, Spain and Portugal.
We cannot assure that our domestic or our foreign marketing partners
will be able to successfully distribute our products, or that we will be able to
establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The failure to continue these arrangements or to
achieve other such arrangements on satisfactory terms could have a materially
adverse effect on us.
No Guaranteed Source Of Required Materials.
A number of essential materials are used in the production of ALFERON N
Injection, including human white blood cells, and we have a limited number of
sources from which to obtain such materials. 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. 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. The costs and availability of products and materials we
need for the commercial production of ALFERON N Injection 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) is currently produced only 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.
The purified drug concentrate utilized in the formulation of ALFERON N Injection
is manufactured in Interferon Science's facility and ALFERON N Injection is
formulated and packaged at a production facility operated by Abbott. if and when
we close on the second Interferon Sciences asset acquisition, we will acquire
this facility. We still will be dependent upon Abbott Laboratories and/or
another third party for product formulation and packaging.
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. Ampligen(R) is currently produced for use in clinical
trials. 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.
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
and we have no knowledge of any ME/CFS drugs being developed by others. The
dominant competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs and Schering-Plough Corp.
("Shering"). 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 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 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 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. 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, two 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 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. Currently, Interferon Sciences' wholesale
price on a per unit basis of ALFERON N Injection is substantially 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 could
adversely effect 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, irregular heart rate,
decreased visual activity in platelets and white blood cell counts, anemia,
dizziness, confusion, elevation of kidney function tests, occasional temporary
hair loss and various flu-like symptoms, including fever, chills, fatigue,
muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side
effects typically subside within several months. One or more of the potential
side effects might deter usage of Ampligen(R) in certain clinical situations and
therefore, could adversely effect potential revenues and physician/patient
acceptability of our product.
ALFERON N Injection(R). At present, ALFERON N Injection is only sold
for the intralesional (with in 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, 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 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 effected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against product liability claims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.
The loss of Dr. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A.
Carter because of his position as a pioneer in the field of nucleic acid drugs,
his being the co-inventor of Ampligen(R), and his knowledge of our overall
activities, including patents, clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. While we have an employment agreement with Dr. Carter, and have secured
key man life insurance in the amount of $2 million on the life of Dr. Carter,
the loss of Dr. Carter or other personnel, or the failure to recruit additional
personnel as needed could have a materially adverse effect on our ability to
achieve our objectives.
Uncertainty of health care reimbursement 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; o 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 December 31, 2002, the price of our
common stock has ranged from $0.74 to $4.95. We expect the price of our common
stock to remain volatile. The average daily trading volume in 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 May 1, 2003, approximately 834,445 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. In addition, we are registering 5,967,820 shares issuable upon the
conversion of 135% of the Debentures and as payment of interest thereon. All of
these shares are being registered in the form S-3 registration statement
discussed above pursuant to agreements between us and the purchasers in our
recent private placements, requiring us to register their shares for resale
under the Securities Act. This permits the sale of registered shares of common
stock in the open market or in privately negotiated transactions without
compliance with the requirements of Rule 144. In addition, as of May 1, 2003, we
had options and warrants outstanding for the purchase of an aggregate of
approximately 9,710,035 shares of our common stock, which includes 135% of the
shares issuable upon exercise of the Warrants. To the extent the exercise price
of the options and warrants is less than the market price of the common stock,
the holders of the options and 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. Moreover, we anticipate that we will be issuing and
registering for public resale 1,068,789 shares if and when we acquire additional
assets from Interferon Sciences, Inc. and, possibly, additional shares to raise
funding or 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
shareholder 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 William A. Carter, M.D., our chief executive officer, who
already beneficial owns 11.4% of the 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 April 2002, the FASB issued SFAS No. 145, "Rescission of FASB statements No.
4,44 and 64, Amendment of FASB statement No. 13, and Technical Corrections"
("SFAS 145"). FASB No. 4 required that gains and losses from extinguishment of
debt that were included in the determination of net income be aggregated and, if
material, be classified as an extraordinary item, net of related income tax.
Effective January 1, 2003, pursuant to SFAS 145, the treatment of debt is to be
included in "Other Income" in the Financial Statements. Currently the Company
believes that the adoption of SFAS 145 will not have an impact on it's financial
position and results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), which clarifies
the application of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements", to certain entities in which equity inventors
do not have the characteristic of a controlling interest or do not
have sufficient equity at risk for the entity to finance its
activities without subordinated financial support from other parties.
Interpretation No. 46 is applicable immediately for variable interest
entities created after January 31, 2003. For variable interest
entities created prior to January 31, 2003, the provision of
Interpretation No. 46 are applicable no later than July 1, 2003. We do
not expect Interpretation No. 46 to have an effect on the consolidated
financial statements.
RESULTS OF OPERATIONS
Three months ended March 31, 2003 versus Three months ended March
31, 2002
Our net losses were approximately $1,617,000 or $.05 per share in the three
months ended March 31, 2003 compared to losses of approximately $1,488,000 or
$.05 per share for the same period in 2002. Our losses in 2003 include net costs
of approximately $170,000 relating to our newly acquired assets and operations
pertaining to ALFERON N Injection(R) ("ALFERON N").
Revenues were $66,000 in the first three months of 2003 compared to revenues of
$613,000 in the first three months of 2002. Revenues in 2002 included $545,000
of license fee income which was not repeated in 2003. Revenues in 2003 include
$47,000 in ME/CFS Cost Recovery Income and $19,000 in sales of Alferon N
Injection ("Alferon") that were recorded from March 12 through March 31, 2003.
March 12, 2003 is the date that we completed and executed the first agreement to
acquire the inventory and limited marketing rights of Alferon N. Overall costs
and expenses were lower in the three months ended March 31, 2003 by
approximately $463,000 compared to the first three months of 2002. Total costs
and expenses in 2003 were $1,658,000 versus $2,121,000 in 2002. In 2003, our
costs consisted of $118,000 for Alferon N related costs, $873,000 for
Ampligen(R) research and development costs and $667,000 for general and
administrative expenses.
Production costs were $118,000 in the first three months of 2003. These costs
reflect approximately $12,000 for the cost of sales of Alferon N during the
period of March 12, 2003 through March 31, 2003. In addition, we recorded
$106,000 for excess/idle production reflecting the fixed costs of production at
the New Brunswick facility. This was due to the lack of production at the
facility during March 12, 2003 through March 31, 2003. We expect to ramp up the
facility in April, 2003 and start production on the work in process inventory.
Research and Development costs of $873,000 in the three months ended March 31,
2003 compared research and development costs of $1,292,000 in the first three
months of 2002. These costs primarily reflect the direct costs associated with
our effort to developed our lead product, Ampligen(R), as a therapy in treating
chronic diseases and cancers. At this time, this effort consists of conducting
clinical trials involving patients with ME/CFS and patients with HIV. Our
research and development costs are $419,000 lower in 2003 due to reduced costs
associated with the development of Ampligen(R) to treat ME/CFS patients. In the
first three months of 2002, our ME/CFS Phase III clinical trial was in full
force therefore increasing our manufacturing and clinical support expenses.
As of March 31, 2003 our ME/CFS Phase III clinical trial was fully enrolled
with over 230 patients participating in the study. Approximately 18 patients are
still in process. We expect to finalize this study by the fourth quarter of
2003. At that time we will complete data collection and start the data analysis
process with the expectation of filing an NDA (New Drug Application) with the
FDA by the second quarter of 2004. As with any experimental drug being tested
for use in treating human diseases, the FDA must approve the testing and
clinical protocols employed and must render their decision based on the safety
and efficacy of the drug being tested. Historically this is a long and costly
process. Our ME/CFS AMP 516 clinical study is a Phase III study, which based on
favorable results, will serve as the basis for us to file a new drug application
with the FDA. 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) required more research, development, and clinical work, 3)
approval to market as well as conduct more testing, or 4) reject our
application. Given these variable, we are unable to project when material net
cash inflows are expected to commence from the sale of Ampligen(R).
Our efforts in using Ampligen(R) to treat HIV patients currently consist of
conducting two clinical trials. As of March 31, 2003, we had 58 patients
enrolled in both studies. Its is our objective to enroll an aggregate of 230
patients in these two studies. As more patients are enrolled, the related
clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, ie: 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 $3.0 to $4.0 million. 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 by the FDA, which will decide when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial will have to be conducted or not. In
case of 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, the Company may obtain revenues from its HIV treatment
indications.
General and Administrative ("G&A") were $667,000 in 2003 compared to $829,000 in
2002. The $162,000 decrease in G&A expenses in 2003 is attributable to lower
legal expenses. In the three months ending March 3, 2002 we incurred significant
legal costs associated with the Asensio trial.
In the three months ended March 31, 2003 we incurred expenses of approximately
$75,000 in connection with our $5.4 million Debentures placed on March 11, 2003.
These Securities are Senior Convertible debentures due January 31, 2005 and pay
6% interest. As of March 31, 2003, expenses relating to there debentures
consisted of $17,000 for interest and $49,000 for amortization of deferred
financing charges.
LIQUIDITY AND CAPITAL RESOURCES
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe (see the discussion below). The Debentures mature on
January 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. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestone.
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 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.
The investors also received Warrants to acquire at any time through March 12,
2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the 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 March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
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 instrument,
both of which provide for the company to determine the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method.
These pronouncements also provide for fair values of contingent conversion
features of convertible debt securities to be determined when the contingent
conversion price is less than the market value of the underlying parent company
or subsidiary common stock at the measurement date.
As a result the Company recorded debt discount of $1.5 million. These costs are
deferred and charge to interest expense over the life of the debentures.
In addition, the Company, in connection with the issuance of Debentures,
recorded an Original Issue Discount (OID) of approximately $554,000 as
additional cost of the offering . These costs are also deferred and expensed as
interest over the life of the debentures.
We entered into a registration rights agreement with the investors in connection
with the issuance of the Debentures and the Warrants. The registration rights
agreement requires that we register the shares of common stock issuable upon
conversion of the Debentures, as interest shares under the Debenture and upon
exercise of the Warrants. In accordance with this agreement, we filed a
registration statement on form S-3 with the Securities and Exchange Commission.
The Debentures mature on March 12, 2005 and bear interest at 6% per annum,
payable quarterly in cash or common stock. Any shares of common stock issued to
the investors as payment shall be valued at 95% of the average closing price of
the common stock during common stock during the five consecutive business days
ending on the third business day immediately preceding the applicable interest
payment date.
In connection with the debenture agreement, the Company has outstanding letters
of credit of $1 million as additional collateral. Included in $1 million
outstanding letters of credit, is a $250,000 letter of credit acquired by
William A. Carter, on behalf of the Company.
In addition, as of April 30, 2003, the Company has $750,000 in restricted cash
under letter of credit agreements in relation to issuance of debentures.
On March 11, 2003, we executed two agreements with Interferon Sciences, Inc.
(ISI) to purchase certain of its assets.
In the first agreement with ISI, the Company acquired ISI's inventory of ALFERON
N Injection(R), and a limited license for the production, manufacture, use,
marketing and sale of this product. For these assets, the Company:
(iii) issued 487,028 shares of its common stock; and
(iv) agreed to pay ISI 6 % of the net sales of the Product.
The Company also is required to pay ISI a service fee and pay certain of ISI's
obligations related to the product.
In the second agreement with ISI, ISI has agreed to sell to the Company all of
ISI's 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
will:
(iii) issue an additional 487,028 shares of its common stock; and (iv) continue
to pay ISI 6 % of the net sales of the product.
In addition, the Company will be required to satisfy three obligations of ISI.
The Company will satisfy two of these obligations, pursuant to forbearance
agreements with The American National Red Cross and GP Strategies Corporation,
two of ISI's creditors, by issuing an aggregate of 581,761 shares of common
stock to these creditors. The third obligation is approximately $521,000 and is
secured by a lien on the property.
The second agreement with ISI is contingent on the Company receiving appropriate
governmental approval for the real estate transaction.
Pursuant to the agreements with ISI and its creditors, the Company is in the
process of registering the foregoing shares issued to ISI in a registartion
statement on form S-3, and has agreed to register the additional shares to be
issued to ISI and its creditors for public sale. Except for 62,500 of the shares
issued to ISI, the Company has guaranteed the market value of the shares
retained by ISI as of September 11, 2005, the termination date, to be $1.59 per
share. Except for 62,500 of the shares to be issued to ISI, the Company has
guaranteed the market value of the shares retained by ISI from the second ISI
asset purchase and the shares to be issued to the creditors to be $1.59 per
share as of a specified date. The specified date ("termination date") is 18
months after the issuance of the additional shares to ISI and the issuance of
the shares to GP Strategies and 12 months after the issuance of the shares to
American National Red Cross. ISI and the creditors are permitted to periodically
sell certain amounts of their shares. If, within 30 days after the respective
termination dates, holders of the guaranteed shares request that the Company
honor the guarantee, the Company will be obligated to reacquire the holders'
remaining guaranteed shares and pay the holders $1.59 per share. Accordingly,
certain shares issued in connection with these agreements are and will be
recorded outside of stockholds' equity.
We will account for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
As of March 31, 2003, we had approximately $3,409,000 in cash and short term
investments and $1,519,000 in accounts receivable, including amounts
representing an insurance settlement received subsequent to March 31, 2003. We
believe that these funds plus an additional net amount of $1,550,000 of
debenture funds to be received upon completion of the ISI real estate
transaction and the projected net cash flow from the acquisition of the ALFERON
N business will be sufficient to meet our operating requirement during the next
12 months. Also, we have the ability to curtail discretionary spending,
including some research and development activities, if required to conserve
cash. If we do not timely complete the second ISI asset acquisition, our
financial condition could be materially and adversely affected (see the risk
factor "If we do not complete the second Interferon Sciences asset acquisition,
our ability to generate revenues from the sale of ALFERON N Injection and our
financial condition will be adversely affected").
Because of our long-term capital requirements, we may seek to access the public
equity market whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. 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
Excluding obligations to pay us for various licensing related fees, we had
approximately $3,409,000 in cash, cash equivalents and short term investments at
March 31, 2003. 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. The Company employs established
conservative policies and procedures to manage any risks with respect to
investment exposure.
Item 4: Controls and Procedures
Our management, including the Chairman of the Board (serving as the principal
executive officer) and the Chief Financial Officer, have conducted an evaluation
of the effectiveness of disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based on that evaluation, the Chairman of the Board and the
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date the
Chairman of the Board and Chief Financial Officer completed their evaluation.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
On September 30, in 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc.("Asensio"). The action included claims of
defamation, disparagement, tortious interference with existing and prospective
business relations and conspiracy, arising out of the 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 between 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. This appeal is now pending in the Superior
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. We
believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a claim in
Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgium 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 July 2002, we filed suit in the United States District Court for the Eastern
District of Pennsylvania against Federal Insurance Company ("Federal") seeking
(1) a judicial order declaring our rights and the obligations of Federal under
the insurance policy Federal sold to us (2) monetary for breach of contract
resulting from Federal's refusal to fully defend us in connection with the
Asensio litigation (3) monetary damage to compensate us for Federal's breach of
its fiduciary duty faith and dealing and (4) monetary damages, interest, costs,
and attorneys fees to compensate us for Federal's violation of the Pennsylvania
Bad Faith Statute. On March 31, 2003 we settled our outstanding claim with our
insurance company relating to reimbursement of expense in connection with our
Asensio law suits. The net settlement amount of approximately $1,050,000 is
recorded as a reduction in General and Administrative expenses in our statement
of operations for the year ended December 31, 2002.
In March 2003, the law firm of Schnader, Harrison, Segal & Lewis, LLP filed a
complaint in the Court of Common Pleas of Philadelphia County against us for
alleged legal fees in the sum of $65,051. We believe the claim is without merit
and we are defending the claim.
ITEM 2: Changes in Securities and Use of Proceeds
None
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
We have received and responded to an informal inquiry from the
Securities and Exchange Commission regarding our acquisition of certain
Interferon Sciences, Inc. ("ISI") assets and in particular the value of the
Alferon N(R) inventory we purchased from ISI. When announcing the agreements
with ISI we valued the Alferon N(R) inventory based upon the wholesale prices
received by ISI from its customers, whereas, for accounting purposes, the
inventory will be valued in accordance with Statement of Financial Accounting
Standards No. 141 which utilizes a number of factors, including the price paid,
in establishing value.
ITEM 6: Exhibits and Reports on Form 8K
(a)Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)Reports on Form 8-K
Form 8-K filed on March 13, 2003
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
/S/ William A. Carter
---------------------------
Date: May 19, 2003 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: May 19, 2003 Robert E. Peterson
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATIONS PURSUANT OT RULE 13A-14 AND 15D-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and cash
flow of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a) Designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation , to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls: and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weakness.
Date: May 19, 2003
/s/ William A. Carter
-----------------------
William A. Carter
Chief Executive Officer
EXHIBIT 99.2
I, Robert E. 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 quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and cash
flow of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have;
a. Designed such disclosure controls and procedures 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 quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation , to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls: and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weakness.
Date: May 19, 2003
/s/Robert E. Peterson
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Robert E. Peterson
Chief Financial Officer