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 June 30, 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
34,942,572 shares of common stock issued and outstanding as of June 30, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, June 30,
2002 2003
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,256 $ 4,659
Short Term investments 555 -
Inventory - 2,167
Other receivables 1,507 52
Prepaid expenses and other current assets 71 239
----------- ----------
Total current assets 4,389 7,117
Property and equipment, net 155 131
Patent and trademark rights, net 995 1,086
Investments in unconsolidated affiliates 408 408
Deferred acquisition costs - 1,068
Deferred financing costs - 382
Other assets 93 51
----------- ----------
Total assets $ 6,040 $ 10,243
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786 $ 1,404
Accrued expenses 678 300
----------- ----------
Total current liabilities 1,464 1,704
Long-Term Debt-net of current portion - -
Commitments and contingencies:
Minority interest in subsidiary 946 -
Redeemable Common Stock - 1,600
Stockholders' equity:
Common stock 33 36
Additional paid-in capital 107,155 111,332
Accumulated other comprehensive income 35 -
Treasury stock - at cost (4,520) (50)
Accumulated deficit (99,073) (104,379)
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Total stockholders' equity 3,630 6,939
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Total liabilities and stockholders' equity $ 6,040 $ 10,243
=========== ==========
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
June 30,
-------------------------
2002 2003
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(Unaudited) (Unaudited)
Revenues:
Sales of product, net $ - $ 60
Clinical treatment programs 134 34
--------- ---------
134 94
Costs and expenses:
Cost of Gross sold - 37
Research and development 1,246 855
General and administrative 851 838
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Total cost and expenses 2,097 1,730
Interest and other income 25 1
Interest and related expenses - (2,054)
Equity in loss of unconsolidated affiliate (18) -
Loss on investment due to impairment (678) -
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Net loss $(2,634) $(3,689)
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Basic and diluted loss per share $ (.08) $ (.11)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,086,966 33,519,275
========== ==========
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 Six months ended
June 30,
-------------------------
2002 2003
--------- ---------
(Unadited) (Unadited)
Revenues:
Sales of product, net $ - $ 79
Clinical treatment programs 184 81
License fee income 563 -
--------- ---------
747 160
Costs and expenses:
Production/Cost of Gross sold - 155
Research and development 2,538 1,728
General and administrative 1,680 1,505
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Total cost and expenses 4,218 3,388
Interest and other income 67 51
Interest and related expenses - (2,129)
Equity in loss of unconsolidated affiliate (40) -
Loss on investment due to impairment (678) -
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Net loss $(4,122) $(5,306)
========== =========
Basic and diluted loss per share $ (.13) $ (.16)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,079,327 32,872,905
========== ==========
See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Six months ended
June 30,
--------------------------
2002 2003
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Cash flows from operating activities:
Net loss $(4,122) $(5,306)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 47 43
Amortization of patents rights 53 70
Amortization of deferred financing costs - 2,030
Equity in loss of unconsolidated affiliates 40 -
Loss on investment due to impairment 678
Changes in assets and liabilities:
Inventory - (400)
Other receivable 66 1,455
Prepaid expenses and other current assets 114 (168)
Accounts payable (281) 452
Accrued expenses (100) (443)
Other assets 2 42
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Net cash used in operations (3,503) (2,225)
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Cash flows from investing activities:
Purchase of property and equipment - (19)
Additions to patent rights (54) (161)
Maturity of short term investments 5,310 520
Purchase of short term investments (2,542) -
Deferred acquisition costs - (160)
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Net cash provided by investing activities 2,714 180
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Cash flows from financing activities:
Proceeds from issuance of common stock 6 -
Proceeds from exercise of warrants 59 -
Proceeds from issuance of preferred
Stock of subsidiary 946 -
Proceeds from long-term borrowings - 5,426
Payments on long-term borrowings - (440)
Deferred financing costs - (455)
Purchase of treasury stock (31) (83)
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Net cash provided by financing activities 980 4,448
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Net increase in cash and cash equivalents 191 2,403
Cash and cash equivalents at beginning of period 3,107 2,256
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Cash and cash equivalents at end of period $3,298 $4,659
======== =========
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
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 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:
June 30,
-----------------
2002 2003
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Risk-free interest rate 5.23% 5.23%
Expected dividend yield - -
Expected lives 2.5 years 2.5 years
Expected volatility 63.17% 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 and six months ended June 30, 2002 and 2003
would have been as follows:
Three Months Ended Six Months Ended
------------------------------------
June 30, June 30,
----------------- --------------
2002 2003 2002 2003
------ ------ -------- -------
(In Thousands) (In Thousands)
Net (loss) as reported $(2,634) $(3,689) $(4,122) $(5,306)
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 $(271) (137) (542) (274)
Proforma net loss $(2,905) $(3,826) $(4,664) $(5,580)
Basic and diluted loss
per share
As reported $(.08) $(.11) $(.13) $(.16)
Proforma $(.09) $(.11) $(.15) $(.17)
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: INVENTORIES The Company uses the lower of first-in, first-out ("FIFO")
cost or market method of accounting for inventory.
Inventories consist of the following:
June 30, 2003
-------------
Raw materials-Work in Process $1,993,346
Finished goods 173,684
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$2,167,030
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Note 5: 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
$563,000) 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 $563,000.
During the perods ending December 31, 2002 and June 30, 2003. The Company did
not receive any grant monies from local, state and or Federal Agencies.
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues from the sale of product are recognized when the product is shipped, as
title is transferred to the customer. The Company has no other obligation
associated with its products once shipment has occurred.
Note 6: 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 $563,000) 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 have
registered these shares for public sale by Provesan SA. As a result of the
exchange, minority interest in our subsidiary was transfered 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 7: 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.
In May 2003, FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity". This Statement establishes standards for how an
issuer classifies and measures in statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is with its scope
as a liability (or assets in some circumstances) because that financial
instrument embodies an obligation. This statement shall be effective for finical
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of a nonpublic
entity. We do not expect this Interpretation to have an material effect on the
consolidated financial statements.
Note 8: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.
On March 11, 2003, we acquired from Interferon Sciences, Inc.'s ("ISI")
inventory of ALFERON N Injection, a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacture, use, marketing and sale of this product. As
consideration, we issued 487,028 shares of our common stock and agreed to pay
ISI 6% of the net sales of the product. Pursuant to our agreements with ISI, we
have agreed to register the foregoing shares for public sale.
Except for 62,500 of the shares issued to ISI, we have guaranteed the market
value of the shares retained by ISI as of March 11, 2005, the termination date,
to be $1.59 per share. ISI is permitted to periodically sell certain amounts of
its shares. If, within 30 days after the termination date, holders of the
guaranteed shares request that we honor the guarantee, we will be obligated to
reacquire the holders' remaining guaranteed shares and pay the holders $1.59 per
share for a total of $675,000. Accordingly, certain shares issued in connection
with this transaction are and will be recorded outside of stockholders' equity.
On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery. For these assets, we agreed to issue
to ISI an additional 487,028 shares and to issue 314,465 shares and 267,296
shares, respectively to The American National Red Cross and GP Strategies, two
creditors of ISI, to continue to pay royalties of 6% on net sales of Alferon N.
other consideration, e.g., paying off a third creditor, paying a tax
liability.
On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we have
agreed to register the foregoing shares for public sale. The acquisition of the
real estate and machinery is contingent on our receiving appropriate
governmental and shareholder approval. The value of these guaranteed shares
totaled $925,000 and are redeemable under certain conditions, acordingly they
are reflected as redeemable common stock and deffered acquisition costs on the
accompanying financial statements as of June 30, 2003.
We have guaranteed the market value of all but 62,500 of these shares on terms
substantially similar to those for the initial acquisition of the ISI assets.
The termination date for these guarantees is 18 months after the date of
issuance of the guaranteed shares to GP Strategies, 24 months after the date of
issuance of the additional 487,028 guaranteed shares to ISI and 12 months after
the date of issuance of the guaranteed shares to the American National Red
Cross.
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
Fair Value of liabilities
Assumed (1,081,041)
---------------
Fair Value of Common Shares
Issued $ 759,720
===============
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.
Six Months ended June 30,
-----------------------------
2002 2003
------ ------
(in thousands except for share data)
Net revenues $ 1,707 $ 402
Operating 6,956 6,254
----- ------
Net loss $ (5,249) (5,852)
===== ======
Basic and
diluted loss
per share $ (.16) $ (.18)
------ ------
Weighted average
Shares
Outstanding 32,566,327 33,058,557
---------- ----------
In giving effect to the additional shares that would be issued as a result of
the second agreement with ISI the weighted average shares outstanding during the
six months ending June 30, 2002 and 2003 would have been 33,053,327 and
33,545,557 resulting in a proforma loss per share as adjusted of $(.16) and
$(.17) for said periods respectively.
Note 9: 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 expiring on March 12, 2008 to two investors in a private
placement for an aggregate 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
was been held back to be released to us if, and only if, we acquire ISI's
facility with in a set timeframe. In June 2003 each of the investors
collectively funded the $1,550,000 of the proceeds. Each investor waived the
requirement to perfect a security interest in the building to be acquired. In
addition, each of the investors waived the requirment that the company acquire
the assets of ISI pursuant to the terms of the second ISI Asset Purchase
Agreement. 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 proceeding 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 milestones.
The Warrants received by these investors are exercisable at any time through
March 12, 2008 to purchase 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. All of these warrants were exercised in June 2003.
We entered into a registration rights agreement with the investors in connection
with the issuance of the March 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 will
register these shares.
On July 10, 2003, We issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 and an aggregate of 507,102
Warrants due July 2008 to the same investors who purchased the Debentures due
January 2005 in a private placement for aggregate anticipated gross proceeds of
$4,650,000. Pursuant to the terms of the July Debentures, $1,550,000 of the
proceeds from the sale of the July 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. The Debentures mature on July 31, 2005 and bear interest at 6% per
annum, payable quarterly in cash or, subject to satisfaction of certain
conditions, common stock. Any shares of common stock issued to the investors as
payment of interest shall be valued at 95% of the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date. The
investors accepted the same collateral as was pledged in the March 12, 2003
transaction.
The Debentures are convertible at the option of the investors at any time
through July 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $2.14 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 warrants received by the investors are exercisable at any time through July
31, 2008 to purchase an aggregate of 507,102 shares of common stock at a price
of $2.46 per share. On July 10, 2004, the exercise price of these July 2008
Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
11, 2003 and July 9, 2004 (but in no event less than $1.72 per share). The
exercise price (and the reset price) under the July 2008 warrants also is
subject to similar adjustments for anti-dilution protection.
We entered into a registration rights agreement with the investors in connection
with the issuance of these Debentures and the July 2008 Warrants. If the
registration statement is not filed within the time period required by the
agreement, not declared effective within the time period required by the
agreement or, after it is declared effective and subject to certain exceptions,
sales of all shares required to be registered thereon cannot be made pursuant
thereto, then we will be required to pay the investors their pro rata share of $
3,635 for each day any of the above conditions exist with respect to this
registration statement.
On June 25, 2003, in connection with the March 12, 2003 $5,426,000 6%
convertible debentures offering, we issued an additional warrant to each of the
Debenture holders to acquire at any time through June 25, 2008 an aggregate of
500,000 shares of common stock at a price of $2.40 per share. On June 25, 2004,
the exercise price of these June 2008 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 June 26, 2003 and June 24, 2004 (but in no event
less than $1.68 per share.) The exercise price (and the reset price) is also
subject to adjustments for anti-dilution protection.
In conjunction with both the March and July 2003 6% convertible debenture
placements we paid Placement agent an investment banking fee equal to 7% of the
investments made by the two Debenture holders. A portion of this fee was paid
with the issuance of 30,000 shares of our common stock. Placement agent also
received 425,000 warrants to purchase common stock, of which 112,500 are
exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per share and
200,000 are exercisable at $2.50 per share. The $1.74 warrants expire on July
10, 2008 and the other warrants expire on March 12, 2008. By agreement with
the placement agent, we will register all shares and warrants for public sale.
As of August 7, 2003, the investor have converted $3,277,500 of the March 12,
2003 Debenture into 2,244,916 shares of common stock. The investors also
exercised the 743,288 warrants issued on March 12, 2003, which produced gross
proceeds of $1,248,724 in operating funds.
The March 12, 2003 issuance of $5,426,000 of 6% Convertible Debentures and
related embedded conversion features and warrant issuances, were accounted for
in accordance with EITF 98-5: Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion and with
EITF No. 00-27: Application of issue No. 98-5 to Certain convertible 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 approximately $5.4 million
which in effect reduced the carrying value of our debt to zero. These costs are
deferred and charge to interest expense over the life of the debentures. As of
June 30, 2003 the amount of debt discount amortized to interest expense totaled
approximately $2.0 million.
Recorded debt discounts include 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.
In connection with the debenture agreements, the Company has outstanding letters
of credit of $1 million as additional collateral. Included in the 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 June 30, 2003, the Company has $133,333 in restricted cash
under other letter of credit agreements required by our insurance carrier. 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 July 31,
2003, only approximately 104,000 shares of our authorized shares of Common Stock
were not issued or reserved for issuance. This does not include 3,006,650 shares
that had been reserved for issuance pursuant to warrants and options owned by
Dr. Carter and 200,000 shares that had been reserved for issuance pursuant to
warrants owned by the placement agent. Dr. Carter and the placement agent have
agreed that they will not exercise their warrants or options unless and until
our stockholders approve an increase in our authorized shares of common stock.
One of the proposals for the annual meeting of our stockholders to be held in
September 2003 is an amendment to our certificate of incorporation to increase
the authorized shares of common stock from 50,000,000 to 100,000,000 (the
"Proposal"). We cannot assure you that the Proposal will be approved. 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.
In addition, for Dr. Carter's waiver of his right to exercise certain options
and warrants prior to approval of the Proposal and for the possible diminution
in value of these Options that could result in the event that the Proposal is
not approved, we have agreed to compensate Dr. Carter. Although the specific
method of determining such potential loss has not been determined, it is
anticipated that, in the event that the Proposal is not approved, a committee of
our independent directors, with the assistance of an independent valuation firm,
will determine the monetary value of his warrants and options. The committee
will then give Dr. Carter the choice of turning in his warrants and options for
an amount equal to this determined value (the "Value Payment") or to continue to
hold his warrants and options. If Dr. Carter elects to continue to hold these
securities, the Committee, again with the assistance of the independent
valuation firm, will determine a formula pursuant to which Dr. Carter would
receive cash ("Stock Appreciation Payments") rather than shares of common stock
should he exercise any of the warrants or options prior to the time, if ever,
adequate authorized but unissued and unreserved shares become available for
issuance upon exercise of his warrants and options. In addition, if the Proposal
does not pass, we have agreed to pledge some of our intellectual property as
collateral for the Value Payment or the Stock Appreciation Payments. The
specific intellectual property to be used as collateral, the valuation of such
collateral and the method of sale or license of such intellectual property in
the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
Certain statements in this document constitute "forwarding-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange Act of 1995
(collectively, the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
All statements other than statements of historical fact, included in this report
regarding our financial position, business strategy and plans or objectives for
future operations are forward-looking statements. Without limiting the broader
description of forward-looking statements above, we specifically note that
statements regarding potential drugs, their potential therapeutic effect, the
possibility of obtaining regulatory approval, our ability to manufacture and
sell any products, market acceptance or our ability to earn a profit from sales
or licenses of any drugs or our ability to discover new drugs in the future are
all forward-looking in nature.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors, including but not limited to, the risk factors
discussed below, which may cause the actual results, performance or achievements
of Hemispherx and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in this report. We do
not undertake and specifically decline any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Overview
In the course of almost three decades, we have established a strong foundation
of laboratory, pre-clinical data with respect to the development of nucleic
acids to enhance the natural antiviral defense system of the human body and the
development of therapeutic products for the treatment of chronic diseases. Our
strategy is to obtain the required regulatory approvals which will allow the
progressive introduction of Ampligen(R) (our proprietary drug) for treating
Myalgic Encephalomyelitis/Chronic Fatique 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 emerging multi-drug resistant HIV, and for the induction of
cell mediated immunity in HIV patients that are under control using potentially
toxic drug cocktails.
Our proprietary drug technology utilizes specifically configured ribonucleic
acid ("RNA") and is protected by more than 350 patents worldwide, with over 60
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 compositions of matter patents
pertain to other new RNA compounds, which have a similar mechanism of action.
We have obtained from Interferon Sciences, Inc. ("ISI") all of its raw
materials, work-in-progress and finished product ALFERON N Injection, together
with a limited license to sell ALFERON N Injection, a natural alpha interferon
that has been approved for commercial sale for the intralesional treatment of
refractory or recurring external condylomata acuminata ("genital warts") in
patients 18 years of age or older, in the United States. We are under contract
to purchase from ISI the balance of ISI's rights to its product as well as ISI's
production facility. We intend to market the ALFERON N Injection in the United
States through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection in multiple sclerosis and other chronic viral diseases.
We were incorporated in Maryland in 1966 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 were 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
consisting of BioPro Corp., BioAgen Corp., and Core BioTech Corp., all of which
are incorporated in Delaware. Our foreign subsidiaries include Hemispherx
Biopharma, Inc. Europe N.V./S.A. established in Belgium in 1998 and Hemispherx
Biopharma, Inc. Europe S.A. ("Hemispherx, 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 form those projected in the
forward-looking statements made in this report. Among the key factors that have
a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and
our other related products is subject to a number of significant risks.
Ampligen(R) may be found to be ineffective or to have adverse side effects, fail
to receive necessary regulatory clearances, be difficult to manufacture on a
commercial scale, be uneconomical to market or be precluded from
commercialization by proprietary right of third parties. Our products are in
various stages of clinical and pre-clinical development and, require further
clinical studies and appropriate regulatory approval processes before any such
products can be marketed. We do not know when, 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(R) is approved for
marketing for the intralesional treatment of refractory or recurring external
genital warts in patients 18 years of age or older, to date it has not been
approved for other indications. We face many of the risks discussed above, with
regard to developing this product for use to treat other ailments such as
multiple sclerosis and cancer.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.
All of our drugs and associated technologies other than ALFERON N
Injection(R) are investigational and must receive prior regulatory approval by
appropriate regulatory authorities for general use and are currently legally
available only through clinical trials with specified disorders. At present,
ALFERON N Injection(R) is only approved for the intralesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. Use of ALFERON N Injection(R) for other indications will require
regulatory approval. In this regard, Interferon Sciences, Inc., the Company from
which we obtained our rights to ALFERON N Injection(R), conducted clinical
trials related to use of ALFERON N Injection(R) for treatment of HIV and
Hepatitis C. In both instances, the FDA determined that additional studies were
necessary in order to fully evaluate the efficacy of ALFERON N Injection(R) in
the treatment of HIV and Hepatitis C diseases. We have no obligation or 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 June
30, 2003 our accumulated deficit was approximately $104,000,000. 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 on our current projections, we may need $2.0 million in additional
financing to fund operations and debt service over the next twelve months
subsequent to June 30, 2003. Our projections assume that our debenture holders
do not continue to convert the remaining Debt into common stock and that we will
need cash to repay the debt as scheduled. If the debenture holders continue to
periodically convert the debt into our common stock, we may not need additional
funds. Also, sales of Alferon N(R) could exceed our conservative projection and
reduce the need for additional financing during this period. Between March and
July 2003, we received approximately $8.3 Million in net proceeds from the sale
of the Debentures and the exercise of warrants issued in conjunction with the
Debentures due January 2005. The foregoing amount includes initial gross
proceeds of $3.1 Million received from the sale of the July Debentures and July
2008 Warrants. 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 $1.55 Million. As of July 31, 2003, we had approximately $6.3
Million in cash and short term investments. These funds plus the anticipated
infusion of approximately $1.55 million in remaining net proceeds from the
Debenture placement.
In the long term, 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(R) and our
financial condition will be adversely affected.
In March, 2003 we executed two agreements with 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
July 10, 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. The same condition
was in the debentures issued in March 2003; however, the holders waived this
condition. Consummation of the second agreement requires, among other things,
approval by ISI's stockholders and certain environmental approvals with regard
to the sale of the facility. As of the date hereof, ISI is preparing the proxy
statement for a special meeting of its stockholders at which approval of the
second acquisition will be sought. Our failure to complete the acquisition
within the 90 day period will 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. In addition,
although we have not yet completed the acquisition, we issued an aggregate of
581,761 shares to GP Strategies and the American National Red Cross, two
creditors of ISI, as partial consideration for the acquisition and we may be
required to repurchase some or all of these shares in the future at $1.59 per
share (see the risk factor "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, 18 or 24 months
after the dates of issuance of the guaranteed shares, our financial condition
could be adversely affected" below). If we do not complete the acquisition, we
will look to ISI to pay us the value of the shares that we issued to these two
creditors. No assurance can be given that we will be able to so recoup the value
of these shares.
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. If our stockholders do not approve an increase in the number of our
authorized shares of common stock, our financial condition most likely would be
adversely affected.
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 July 31, 2003, only approximately 104,000 shares of our authorized shares
of Common Stock were not issued or reserved for issuance. This does not include
3,006,650 shares that had been reserved for issuance pursuant to warrants and
options owned by Dr. Carter and 200,000 shares that had been reserved for
issuance pursuant to warrants owned by the placement agent Dr. Carter and the
placement agent have agreed that they will not exercise their warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. One of the proposals for the annual meeting of our
stockholders to be held in September 2003 is an amendment to our certificate of
incorporation to increase the authorized shares of common stock from 50,000,000
to 100,000,000 (the "Proposal"). We cannot assure you that the Proposal will be
approved. 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.
In addition, for Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the Proposal and for the possible
diminution in value of these Options that could result in the event that the
Proposal is not approved, we have agreed to compensate Dr. Carter. Although the
specific method of determining such potential loss has not been determined, it
is anticipated that, in the event that the Proposal is not approved, a committee
of our independent directors, with the assistance of an independent valuation
firm, will determine the monetary value of his warrants and options. The
committee will then give Dr. Carter the choice of turning in his warrants and
options for an amount equal to this determined value (the "Value Payment") or to
continue to hold his warrants and options. If Dr. Carter elects to continue to
hold these securities, the Committee, again with the assistance of the
independent valuation firm, will determine a formula pursuant to which Dr.
Carter would receive cash ("Stock Appreciation Payments") rather than shares of
common stock should he exercise any of the warrants or options prior to the
time, if ever, adequate authorized but unissued and unreserved shares become
available for issuance upon exercise of his warrants and options. In addition,
if the Proposal does not pass, we have agreed to pledge some of our intellectual
property as collateral for the Value Payment or the Stock Appreciation Payments.
The specific intellectual property to be used as collateral, the valuation of
such collateral and the method of sale or license of such intellectual property
in the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm.
For all of the above reasons, if our stockholders do not approve an
increase in the number of our authorized shares of common stock, our financial
condition most likely would be adversely affected.
We have guaranteed the value of a number of shares issued and to be issued as a
result of our asset acquisition agreements with Interferon Sciences. If our
share price is not above $1.59 per share 12, 18 or 24 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
consummation of the second ISI asset acquisition, we plan to issue an additional
487,028 shares to Interferon Science in contemplation of consummating the second
Interferon Sciences acquisition. In May 2003 we issued an aggregate of 581,761
shares to two of ISI's creditors. We anticipate, but cannot assure, that we will
close the second ISI asset acquisition sometime between September and October
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 24 months after the date of issuance and
delivery of the guaranteed shares to ISI, 18 months after the date of issuance
of the guaranteed shares to 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 August 15, 2003 was $1.96 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 24, 18 and 12 month
periods prior to the relevant termination date.
If we are 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(R), 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(R),
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, 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(R), 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(R). The costs and availability of products and materials we
need for the commercial production of ALFERON N Injection(R) and other products
which we may commercially produce are subject to fluctuation depending on a
variety of factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will lead to a successful transition to
commercial, large-scale production.
Small changes in methods of manufacturing may affect the chemical
structure of Ampligen(R) and other RNA drugs, as well as their safety and
efficacy. Changes in methods of manufacture, including commercial scale-up may
affect the chemical structure of Ampligen(R) and, can, among other things,
require new clinical studies and affect orphan drug status, particularly, market
exclusivity rights, if any, under the Orphan Drug Act. The transition from
limited production of pre-clinical and clinical research quantities to
production of commercial quantities of our products will involve distinct
management and technical challenges and will require additional management and
technical personnel and capital to the extent such manufacturing is not handled
by third parties. There can be no assurance that our manufacturing will be
successful or that any given product will be determined to be safe and
effective, capable of being manufactured economically in commercial quantities
or successfully marketed.
We have limited manufacturing experience and capacity.
Ampligen(R) 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(R) is manufactured in Interferon Science's facility and ALFERON N
Injection(R) 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
in the United States. The dominant competitors with drugs to treat HIV diseases
include Gilead Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo
Smithkline and Schering-Plough Corp. ("Schering"). 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(R) currently competes with Schering's injectable recombinant
alpha interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection(R) also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection(R). If and when we obtain additional approvals of uses of this
product, we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, three recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection(R) for the treatment of new indications, we will
be able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection(R). Currently, our wholesale price on a per
unit basis of ALFERON N Injection(R) is 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(R)
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, slow or irregular heart rate,
decreases in platelets and white blood cell counts, anemia, dizziness,
confusion, elevation of kidney function tests, occasional temporary hair loss
and various flu-like symptoms, including fever, chills, fatigue, muscular aches,
joint pains, headaches, nausea and vomiting. These flu-like side effects
typically subside within several months. One or more of the potential side
effects might deter usage of Ampligen(R) in certain clinical situations and
therefore, could adversely effect potential revenues and physician/patient
acceptability of our product.
ALFERON N Injection(R). At present, ALFERON N Injection(R) is only
approved for the intralesional (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(R), patients did not
experience serious side effects; however, there can be no assurance that
unexpected or unacceptable side effects will not be found in the future for this
use or other potential uses of ALFERON N Injection(R) which could threaten or
limit such product's usefulness.
We may be subject to product liability claims from the use of Ampligen(R) or
other of our products which could negatively affect our future operations.
We face an inherent business risk of exposure to product liability
claims in the event that the use of Ampligen(R) or other of our products results
in adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively 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 June 30, 2003, the price of our common
stock has ranged from $1.33 to $3.35. 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,
primarily those planned to be registered and those in a prior registration
statements, are sold in the public market.
As of July 31, 2003, approximately 1,098,780 shares of our common
stock, constituted "restricted securities" as defined in Rule 144 under the
Securities Act of 1933. All of these shares are to be registered for resale
under the Securities Act pursuant to agreements between us and the holders of
these shares. In addition, we have registered or will register shortly 8,079,150
shares issuable upon (i) conversion of 135% of the Debentures due July 2008 and
100% of the remaining principal balance on the Debentures due January 2005; (ii)
as payment of interest on both sets of Debentures (including 135% of the
interest due on the Debentures); (iii) exercise of 135% of the July 2008
Warrants and the June 2008 Warrants; and (iv) exercise of certain other
warrants. Registration of the shares permits the sale of the shares in the open
market or in privately negotiated transactions without compliance with the
requirements of Rule 144. To the extent the exercise price of the warrants is
less than the market price of the common stock, the holders of the warrants are
likely to exercise them and sell the underlying shares of common stock and to
the extent that the conversion price and exercise price of these securities are
adjusted pursuant to anti-dilution protection, the securities could be
exercisable or convertible for even more shares of common stock. Moreover, we
anticipate that we may issue 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 addition, 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. Special Note Regarding Forward-Looking
Statements.
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.
In May 2003, FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity". This Statement establishes standards for how an
issuer classifies and measures in statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is with its scope
as a liability (or an assets in some circumstances) because that financial
instrument embodies an obligation. This statement shall be effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
shall be effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatorily redeemable financial instruments of a
nonpublic entity. We do not expect Interpretation to have a material effect on
the consolidated financial statements.
RESULTS OF OPERATIONS
Three months ended June 30, 2003 versus Three months ended June
30, 2002
Our net losses were approximately $3,689,000 or $.11 per share in the three
months ended June 30, 2003 compared to losses of approximately $2,634,000 or
$.08 per share for the same period in 2002. Our losses in 2003 include costs of
approximately $233,000 relating to our newly acquired assets and operations
pertaining to Alferon N Injection(R) ("ALFERON N") and $1,906,000 in non-cash
interest charges related to our 6% convertible debenture dated March 12, 2003.
Our losses of $2,634,000 in 2002 include $718,000 in non-cash charges for losses
related to investments in other companies. Our operating losses, which exclude
interest, other income and losses on investments, were $1,636,000 in 2003
compared to $1,963,000 in 2002. This reduction of $327,000 in operating losses
in 2003 consists of several factors.
Compared to the same period in 2002, our revenues in 2003 were down by $40,000.
This shortfall is due to ME/CFS cost recovery revenues being down $100,000. Some
of this revenues shortfall was offset by $60,000 in ALFERON N net sales. The
shortfall in ME/CFS cost recovery revenues will continue downward as we near
completion of the ME/CFS clinical trials. pending completion of these trials and
the obtaining FDA approval to market Ampligen(R), we are focused on marketing
and selling ALFERON N which we expect to produce greater revenue gains.
Revenues were $94,000 in the first three months of 2003 compared to revenues of
$134,000 in the first three months of 2002. Revenues in 2003 include $34,000 in
ME/CFS Cost Recovery Income and $60,000 in net sales of ALFERON N. 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 June 30, 2003 by approximately
$367,000 compared to the same three months in 2002. Total cost and expenses in
2003 were $1,730.000 versus $2,097.000 in 2002. In 2003, our costs include
$233,000 for ALFERON N related operating costs, $855,000 for Ampligen(R)
research and development costs and $642,000 for general and administrative
expenses.
Research and Development costs of $855,000 in the three months ended June 30,
2003 compared to research and development costs of $1,246,000 in the same three
months of 2002. These costs primarily reflect the direct costs associated with
our effort to develop 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 $391,000 lower in 2003 due to reduced costs
associated with the development of Ampligen(R) to treat ME/CFS patients. In the
three months ended June 30, 2002, our ME/CFS Phase III clinical trial was in
full force therefore increasing our manufacturing and clinical support expenses
during that period. In 2003, the Amp 516 trial is nearing completion with far
fewer patients enrolled.
General and Administrative ("G&A") expenses were approximately $838,000 during
the three months ended June 30, 2003. Excluding the expenses related to our new
Alferon division totaling $196,000 our G&A expenses were $642,000 compared to
$851,000 in expenses for the same period in 2002. This reduction basically
consists in $147,000 in lower legal expenses and $62,000 in lower Public
Relations expense.
Six months ended June 30, 2003 versus Six Months ended June 30, 2002
During the six months period ended June the 30, 2003, we have 1) acquired
certain assets and patent rights to ALFERON N 2) privately placed 6% Convertible
Debentures with an aggregate maturity value of $5,426,000 (gross proceeds of
$4,650,000) and 3) continued our efforts to develop Ampligen(R) for the
treatment of patients affiliated with ME/CFS and HIV.
In the six months period ended June 30, 2003, we recorded $5,306,000 or $.16 per
share in net losses. In the same period in 2002, we had net losses of $4,122,000
or $.13 per share. The losses in 2003 includes $1,956,000 in non-cash interest
charges relating to our 6% Convertible Debenture issued on March 12, 2003. These
non-cash interest charges account for 38% of our six months to date net losses.
In addition, our six months to date losses include $342,000 in expenses relating
to our new Alferon division. After adjusting our 2003 year-to-date losses for
these two factors, our losses were $2,952,000 in 2003 compared to $4,122,000 in
2002 or a reduction in the amount of $1,170,000.
Revenues were $160,000 in the first six months of 2003 compared to revenues of
$747,000 in the first six months of 2002. Revenues in 2002 included $545,000 of
license fee income which was not repeated during this period in 2003. Revenues
in 2003 include $81,000 in ME/CFS Cost Recovery Income and $79,000 in net sales
of ALFERON N.
Overall costs and expenses were lower in the six months ended June 30, 2003 by
approximately $830,000 compared to the first six months of 2002. Total costs and
expenses in 2003 were $3,388,000 versus $4,218,000 in 2002. In 2003, our costs
consisted of $409,000 for ALFERON N related expenses, $1,728,000 for Ampligen(R)
research and development costs and $1,505,000 for general and administrative
expenses.
Production costs were $155,000 in the first six months of 2003. These costs
reflect approximately $48,000 for the cost of sales of ALFERON N during the
period of April 1, 2003 through June 30, 2003. In addition, we recorded $107,000
of production costs at the New Brunswick facility. We ramped up the facility in
April, 2003 and started production on three lots of work in process inventory.
Research and Development costs of $1,728,000 in the six months ended June 30,
2003 compared to research and development costs of $2,538,000 in the first six
months of 2002. These costs primarily reflect the direct costs associated with
our effort to develop 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 direct costs are $703,000 lower in 2003 due to reduced
costs associated with the development of Ampligen(R) to treat ME/CFS patients.
In the first six months of 2002, our ME/CFS Phase III clinical trial was in full
force and effect therefore increasing our manufacturing and clinical support
expenses during that period.
Over 230 patients have participated and/or participating in our ME/CFS Phase III
clinical trial. Approximately 16 patients are still in the clinical process. We
expect to complete the randomized placebo controlled phase of this study by the
first quarter of 2004. 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. In July 2003, Dr. Blick, a principal
investigator in our HIV studies, presented updated results on our Amp 720 HIV
study at the 2nd IAS CONFERENCE ON HIV PATHOGENESIS AND TREATMENT in Paris
France. In this study using Strategic Treatment Interruption (STI), patients'
antiviral HAART regimens are interrupted and Ampligen(R) is substituted as
mono-immunotherapy. Ampligen(R) is an experimental immunotherapeutic designed to
display both antiviral an immune enhancing characteristics. Prolonged use of
Highly Active Antiretroviral Therapy (HAART) has been associated with long-term,
potentially fatal, toxicities. The clinical study AMP 720 is designed to address
these issues by evaluating the administration of the Company's lead experimental
agent, Ampligen(R), a double stranded RNA drug acting potentially both as an
immunomodulator and antiviral. Patients, who have completed at least 9 months of
Ampligen(R) therapy, were able to stay off HAART for a total STI duration with a
mean time of 29.0 weeks whereas the control group, which was also taken off
HAART, but not given Ampligen(R), had earlier HIV rebound with a mean duration
of 18.7 weeks. Thus, on average, Ampligen(R) therapy spared the patients
excessive exposure to HAART, with its inherent toxicities, for more than 11
weeks. As 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,
i.e.: patient drop out rate, recruitment of clinical investigators, etc. The
length of the study and costs related to our clinical trials cannot be
determined at this time as such will be materially influenced by (a) the number
of clinical investigators needed to recruit and treat the required number of
patients, (b) the rate of accrual of patients and (c) the retention of patients
in the studies and their adherence to the study protocol requirements. Under
optimal conditions, the cost of completing the studies could be approximately
$2.0 to $3.0 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, which will determine when completion of the
ongoing Phase IIb is appropriate and whether a Phase III trial be conducted or
not. In case that a Phase III study is required; the FDA might require a patient
population exceeding the current one which will influence the cost and time of
the trial. Accordingly, the number of "unknowns" is sufficiently great to be
unable to predict when, or whether, the Company may obtain revenues from its HIV
treatment indications.
Since acquiring the right to manufacture and marketing of Alferon N in March,
2003 we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
approximately 53,000 vials (doses) at various stages of the manufacturing
process. On August 8, 2003 we released the first lot of which product to Abbott
Laboratories for packaging and expect to realize some 21,000 vials of ALFERON N
by the middle of September, 2003. Preliminary work has started on completing the
second lot of approximately 17,000 vials. Our production and quality control
personnel in the New Brunswick facility are involved in the extensive process of
manufacturing and validation required by the FDA. Plans are underway for
completing the trial lot of some 16,000 vials now in very early stages of
production.
Our marketing and sales plan for ALFERON N consists of engaging sales force
contract organizations and supporting their sales efforts with marketing
support. This marketing support would consist of building awareness of ALFERON N
with physicians as a successful and effective treatment of refactory of
recurring external general warts in patients of age 18 or older and to assist
primary prescriber in expanding their practice.
On August 18, 2003, we entered into a sales and marketing agreement with
Engitech, LLC. to distribute ALFERON N on a nationwide basis. Engitech, Inc. is
to develop and implement marketing plans including extensive scientific and
educational programs for use in marketing ALFERON N. This firm has provided
professional services to the pharmaceutical and Biotech industry since 1987 and
has experience in launching new products and/or developing sales for exiting
products.
General and Administrative expenses ("G&A") were $1,505,000 in 2003, which
includes $154,000 of expenses relating to our new Alferon Division. Excluding
the Alferon expenses, our G&A costs were $1,351,000 compared to $1,680,000 of
expenses in 2002. This Decrease of $329,000 is primarily due to Lower Legal
Expenses and lower Public Relation costs. In the six months ended June 30, 2002
we incurred significant legal costs associated with the Asensio lawsuit and
trial. See "Legal Proceeding" for more details.
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 an aggregate 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 was been held back to be released
to us if, and only if, we acquire ISI's facility with in a set timeframe. In
June 2003 each of the investors collectively funded the $1,550,000 of the
proceeds. Each investor waived the requirement to perfect a security interest in
the building to be acquired. In addition, each of the investors waived the
requirement that the Company acquire the assets of ISI pursuant to the terms of
the second ISI Asset Purchase Agreement. 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 milestones.
The Warrants received by these investors are exercisable at any time through
March 12, 2008 to purchase 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. All of these warrants were exercised in June 2003.
We entered into a registration rights agreement with the investors in connection
with the issuance of the March 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 will
register these shares.
On July 10, 2003, we issued to the same investors, who purchased the March ,
2003 Debentures due January 2005 a second Debenture with an aggregate of
$5,426,000 in principal amount of 6% Senior Convertible Debentures due July 31,
2005, and an aggregate of 507,102 Warrants to investors in a private placement
for aggregate anticipated gross proceeds of $4,650,000. (4.4 million net)
Pursuant to the terms of the July Debentures, $1,550,000 of the proceeds from
the sale of the July 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.
The Debentures mature on July 31, 2005 and bear interest at 6% per annum,
payable quarterly in cash or, subject to satisfaction of certain conditions,
common stock. Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five consecutive business days ending on the third business day
immediately preceding the applicable interest payment date.
The Debentures are convertible at the option of the investors at any time
through July 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $2.14 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 Warrants received by these investors are exercisable at any time through
July 31, 2008 to purchase an aggregate of 507,102 shares of common stock at a
price of $2.46 per share. On July 10, 2004, the exercise price of these July
2008 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between July
11, 2003 and July 9, 2004 (but in no event less than $1.722 per share). The
exercise price (and the reset price) under the July 2008 warrants also is
subject to similar adjustments for anti-dilution protection.
We entered into a registration rights agreement with the investors in connection
with the issuance of the Debentures and the July 2008 Warrants. The registration
rights agreement requires that we register on behalf of the Debenture holders
the securities related to these transactions. If the registration statement is
not filed within the time period required by the agreement, not declared
effective within the time period required by the agreement or, after it is
declared effective and subject to certain exceptions, sales of all shares
required to be registered thereon cannot be made pursuant thereto, then we will
be required to pay the investors their pro rata share of $ 3,635 for each day
any of the above conditions exist with respect to this registration statement.
On June 25, 2003, we issued to each of the Debenture holders a warrant to
acquire at any time through June 25, 2008 an aggregate of 500,000 shares of
common stock at a price of $2.40 per share. On June 25, 2004, the exercise price
of these June 2008 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 June 26, 2003 and June 24, 2004 (but in no event less than $1.68 per
share.) The exercise price (and the reset price) under the June 2008 Warrants
also is subject to adjustments for anti-dilution protection similar to those in
the July 2008 Warrants. Pursuant to our agreement with the Debenture holders, we
plan to register the shares issuable upon exercise of these June 2008 Warrants
for public sale.
In conjunction with the July 2003 private Debenture offering and the March 2003
private debenture offering on substantially the same terms to the same
investors, we paid Cardinal Securities, LLC an investment banking fee equal to
7% of the investments made by the two Debenture holders. A portion of this fee
was paid with the issuance of 30,000 shares of our common stock. Cardinal also
received 425,000 warrants to purchase common stock, of which 112,500 are
exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per share and
200,000 are exercisable at $2.50 per share. The $1.74 warrants expire on July
10, 2008 and the other warrants expire on March 12, 2008. By agreement with
Cardinal, we have agreed to register 255,000 shares, with the shares issuable
upon exercise of the 200,000 warrants to be registered at some future date.
As of August 7, 2003 the investors holding our March 12, 2003 6% Senior
Convertible Debentures has converted principal in the amount of $3,277,500 into
2,244,916 shares of our common stock. Also the investors exercised 743,288
warrants which produced operating funds of $1,248,724.
The March 12, 2003 issuance of $5,426,000 of 6% Convertible Debentures and
related embedded conversion features and warrant issuances, were accounted for
in accordance with EITF 98-5: Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion and with
EITF No. 00-27: Application of issue No. 98-5 to Certain convertible 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 $5.4 million which in effect
reduced the carrying value of our debt to zero. These costs are deferred and
charge to interest expense over the life of the debentures. Recorded Debt
discounts include an Original Issue Discount (OID) of $776,000 as additional
cost of the offering. These costs are also deferred and expensed as interest
over the life of the debentures. As of June 30, 2003 the amount of debt
discounts amortized into interest expenses totaled approximately $2.0 million.
In connection with the debenture agreements, the Company has outstanding letters
of credit of $1 million as additional collateral.
Pursuant to the terms of the Debentures issued in July 2003, $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 property and facility. The
Debentures mature on January 31, 2005 and bear interest at 6% per annum, payable
quartile 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
condition 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 balance upon achieving certain revenue milestone.
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 July 31,
2003, only approximately 104,000 shares of our authorized shares of Common Stock
were not issued or reserved for issuance. This does not include 3,006,650 shares
that had been reserved for issuance pursuant to warrants and options owned by
Dr. Carter and 200,000 shares that had been reserved for issuance pursuant to
warrants owned by the placement agent. Dr. Carter and the placement agent have
agreed that they will not exercise their warrants or options unless and until
our stockholders approve an increase in our authorized shares of common stock.
One of the proposals for the annual meeting of our stockholders to be held in
September 2003 is an amendment to our certificate of incorporation to increase
the authorized shares of common stock from 50,000,000 to 100,000,000 (the
"Proposal"). We cannot assure you that the Proposal will be approved. 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.
In addition, for Dr. Carter's waiver of his right to exercise certain options
and warrants prior to approval of the Proposal and for the possible diminution
in value of these Options that could result in the event that the Proposal is
not approved, we have agreed to compensate Dr. Carter. Although the specific
method of determining such potential loss has not been determined, it is
anticipated that, in the event that the Proposal is not approved, a committee of
our independent directors, with the assistance of an independent valuation firm,
will determine the monetary value of his warrants and options. The committee
will then give Dr. Carter the choice of turning in his warrants and options for
an amount equal to this determined value (the "Value Payment") or to continue to
hold his warrants and options. If Dr. Carter elects to continue to hold these
securities, the Committee, again with the assistance of the independent
valuation firm, will determine a formula pursuant to which Dr. Carter would
receive cash ("Stock Appreciation Payments") rather than shares of common stock
should he exercise any of the warrants or options prior to the time, if ever,
adequate authorized but unissued and unreserved shares become available for
issuance upon exercise of his warrants and options. In addition, if the Proposal
does not pass, we have agreed to pledge some of our intellectual property as
collateral for the Value Payment or the Stock Appreciation Payments. The
specific intellectual property to be used as collateral, the valuation of such
collateral and the method of sale or license of such intellectual property in
the event that sale of the collateral is required, would be determined by the
committee, with the assistance of the independent valuation firm.
On March 11, 2003, we entered two agreements with Interferon Sciences, Inc.
("ISI") Pursuant to the first agreement, we acquired ISI's inventory of ALFERON
N Injection, a pharmaceutical product used for the treatment of certain types of
genital warts, and a limited license for the production, manufacture, use,
marketing and sale of this product. As partial consideration, we issued 487,028
shares of our common stock and agreed to pay royalties of 6% on net sales. ISI
Pursuant to our agreements with ISI. These shares are to be registered for
public sale.
Except for 62,500 of the shares issued to ISI, we have guaranteed the market
value of shares to be $1.59 per share for a total of $675,000 as of March 11,
2005, the termination date, to the extent ISI retaing any or all of these shares
as of the termination date. These guaranteed shares are redeemable in nature and
recorded as such on the accompanying financial statements as of June 30, 2003.
ISI is permitted to periodically sell certain amounts of its shares. If, within
30 days after the termination date, holders of the guaranteed shares request
that we honor the guarantee, we will be obligated to reacquire the holders'
remaining guarantee shares and pay the holders $1.59 per share. Please see "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, 18 or 24 months after the dates of issuance of
the guarantee shares, our financial condition could be adversely affected" in
"Risk Factors" above.
Under our second agreement on March 11, 2003, we agreed to purchase from ISI all
of ISI's rights to the product and other assets related to the product and other
assets related to the product including, but not limited to, real estate and
machinery. For these assets, we agreed to issue to ISI an additional 487,028
shares and to issue 314,465 shares and 267,296 shares, respectively to The
American National Red Cross and GP Strategies Corporation, two creditors of ISI.
We agreed to continue to pay royalties of 6% on net sales of Alferon N. other
consideration, e.g., paying off a third creditor, paying a tax liability...
We have guaranteed the market value of all but 62,500 of these shares on terms
substantially similar to those for the initial acquisition of the ISI assets.
The value of the guaranteed shares issued to ISI totaled $675,000 and are
redeemable under certain conditions, acordingly they are reflected as such on
the accompanying financial statements as of June 30, 2003. The termination date
for these guarantees is 18 months after the date of issuance of the guaranteed
shares to GP Strategies, 24 months after the date of issuance of the additional
487,028 guaranteed shares to ISI and 12 months after the date of issuance of the
guaranteed shares to the American National Red Cross.
On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we are
in the process of registering these sales for Public sale. The value of these
guaranteed shares on date of issuance was $925,000 and are redeemable nature,
accordingly are recorded as redeemable common stock and deferred acquisition
cost on the accompanying financial statements as of June 30, 2003.
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 June 30, 2003, we had approximately $4,659,000 in cash and cash
equivalents term investments and $52,000 in accounts receivable. We believe that
these funds plus an additional net amount of approximately $4.5 million from the
July 10, 2003 Debentures, the projected net cash flow from the acquisition of
the ALFERON N business and additional financing of $2.0 million. will be
sufficient to meet our operating requirement during the next 12 months. The need
for additional financing assumes that the debenture holders do not continue to
convert debt into common stock and that need we will cash to repay the debt as
scheduled. If the debenture holders continue to convert debt, we may not need
additional funds. Also, sales of Alferon could be greater than expected which
reduce our need for additional financing during the next twelve 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. Our ability to raise additional funds will be materially and
adversely affected if we are unable to increase our authorized shares at the
upcoming September 2003 Annual Meeting of Stockholders (see the risk factor "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. If our stockholders do not approve an increase in the number of our
authorized shares of common stock, our financial condition most likely would be
adversely affected.")
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Excluding obligations to pay us for various licensing related fees, we had
approximately $4,659,000 in cash, cash equivalents and short term investments at
June 30, 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.
We have not entered into, and do not expect to enter into, financial
instruments for trading or hedging purposes.
The following methods and assumptions were used to estimate the fair value of
the financial instruments:
Tradeaccounts receivable and payables and accrued expenses. The fair value of
these receivables and payables equal their carrying value because of their
short maturities.
Convertible Debentures. Interest rates that are currently available to us for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value for debt issues for which no market quotes are
available. The carrying amount of these debt facilities is believed to be a
reasonable estimate of fair value. The fair market value of our short and
long-term debt is not contingent upon interest rates.
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 the rules
of the Securities and Exchange Commission. 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, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of 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 in August and September, 1998. In 1999, Asensio filed an
answer and counterclaim alleging that in response to Asensio's strong sell
recommendation and other press releases, we made defamatory statements about
Asensio. We denied the material allegations of the counterclaim. In July 2000,
following dismissal in federal court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and a trial commenced on
January 30, 2002. A jury verdict disallowed the claims against the defendants
for defamation and disparagement and the court granted us a directed verdict on
the counterclaim. On July 2, 2002 the Court entered an order granting us a new
trial against Asensio for defamation and disparagement. Thereafter, Asensio
appealed the granting of a new trial. 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 Belgian
subsidiary, and one of our clinical trial investigators alleging that she was
harmed in the Belgium ME/CFS clinical trial as a result of negligence and breach
of warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.
In 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
During the quarter ended June 30, 2003 and subsequent thereto, the Company
issued debentures and warrants in private transactions pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of 1933. For
information on these issuances, see "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations; Liquidity And Capital Resources."
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5: Other Information
None
ITEM 6: Exhibits and Reports on Form 8K
(a) Exhibits
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Executive Officer
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 from the Company's
Chief Financial Officer
(b)Reports on Form 8-K
Form 8-K filed on June 27, 2003 Form 8-K filed on July 14, 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: August 18, 2003 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: August 18, 2003 Robert E. Peterson
Chief Financial Officer
EXHIBIT 31.1
CERTIFICATION PURSUANT OT RULE 13A-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 Rule 13a-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: August 18, 2003
/s/_William A. Carter
-----------------------
William A. Carter
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT OT RULE 13A-14 OF
THE SECURITIES AND EXCHANGE ACT OF 1934
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 Rule 13a-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: August 18, 2003
/s/Robert E. Peterson
-----------------------
Robert E. Peterson
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
William A. Carter, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Willaim A. carter
---------------------
William A. Carter
Chief Executive Officer
August 18, 2003
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended June 30, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Robert E. Peterson, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Robert E. Peterson
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Robert E. Peterson
Chief Financial Officer
August 18, 2003