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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 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
- ------------------------------ -------------------
(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
37,688,903 shares of common stock issued and outstanding as of October 30, 2003.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, September 30,
2002 2003
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,256 $ 5,061
Short term investments 555 -
Inventory - 2,545
Accounts and other
receivables 1,507 141
Prepaid expenses and other current assets 71 309
----------- ----------
Total current assets 4,389 8,056
Property and equipment, net 155 112
Patent and trademark rights, net 995 1,076
Investments in unconsolidated affiliates 408 408
Deferred acquisition costs - 1,068
Deferred financing costs - 270
Advance receivable - 951
Other assets 93 51
----------- ----------
Total assets $ 6,040 $ 11,992
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786 $ 857
Accrued expenses 678 857
Current portion of long-term debt - 349
----------- ----------
Total current liabilities 1,464 2,063
Long-Term Debt-net of current portion - 969
Commitments and contingencies:
Minority interest in subsidiary 946 -
Redeemable Common Stock - 1,600
Stockholders' equity:
Common stock 33 38
Additional paid-in capital 107,155 117,145
Accumulated other comprehensive income 35 -
Treasury stock - at cost (4,520) (21)
Accumulated deficit (99,073) (109,802)
----------- ----------
Total stockholders' equity 3,630 7,360
----------- ----------
Total liabilities and stockholders' equity $ 6,040 $ 11,992
=========== ==========
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
September 30,
-------------------------
2002 2003
--------- ---------
(Unaudited) (Unaudited)
Revenues:
Sales of product, net $ - $ 157
Clinical treatment programs 79 37
--------- ---------
79 194
Costs and expenses:
Cost of Goods sold - 69
Research and development 1,194 846
General and administrative 767 1,045
---------- ---------
Total cost and expenses 1,961 1,960
Interest and other income 23 10
Interest and related expenses - (3,666)
Equity in loss of unconsolidated affiliate (32) -
---------- ---------
Net loss $(1,891) $(5,422)
========== =========
Basic and diluted loss per share $ (.06) $ (.15)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,093,066 36,830,633
========== ==========
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 Nine months ended
September 30,
-------------------------
2002 2003
--------- ---------
(Unaudited) (Unaudited)
Revenues:
Sales of product, net $ - $ 236
Clinical treatment programs 263 118
License fee income 563 -
--------- ---------
826 354
Costs and expenses:
Production/Cost of Goods sold - 224
Research and development 3,732 2,574
General and administrative 2,447 2,550
---------- ---------
Total cost and expenses 6,179 5,348
Interest and other income 90 61
Interest and related expenses - (5,795)
Equity in loss of unconsolidated affiliate (72) -
Loss on investment due to impairment (678) -
---------- ---------
Net loss $(6,013) $(10,728)
========== =========
Basic and diluted loss per share $ (.19) $ (.31)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,083,957 34,210,987
========== ==========
See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine months ended
September 30,
--------------------------
2002 2003
-------- ---------
Cash flows from operating activities:
Net loss $(6,013) $(10,728)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 69 62
Amortization of patents rights 81 97
Amortization of deferred financing
and debt discount costs _ 5,795
Stock option and warrant compensation
and service expense 132 -
Equity in loss of unconsolidated affiliates 72 -
Loss on investment due to impairment 678
Changes in assets and liabilities:
Inventory - (926)
Other receivable (4) 1,314
Prepaid expenses and other current assets 283 (186)
Accounts payable (190) (575)
Accrued expenses (62) 179
Advance receivavle - (673)
Other assets 27 42
------- ---------
Net cash used in operations (4,927) (5,599)
------- ---------
Cash flows from investing activities:
Purchase of property and equipment - (19)
Additions to patent rights (143) (178)
Maturity of short term investments 5,310 520
Purchase of short term investments (837) -
Deferred acquisition costs - (160)
--------- ---------
Net cash provided by investing activities 4,330 163
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 6 -
Proceeds from exercise of warrants 59 1,178
Proceeds from issuance of preferred
Stock of subsidiary 946 -
Proceeds from long-term borrowings - 7,750
Deferred financing costs - (687)
Purchase of treasury stock (50) -
-------- ---------
Net cash provided by financing activities 961 8,241
-------- ---------
Net increase in cash and cash equivalents 364 2,805
Cash and cash equivalents at beginning of period 3,107 $ 2,256
-------- ---------
Cash and cash equivalents at end of period $ 3,471 $5,061
======== =========
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 pro forma disclosures of compensation expense under the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure."
The weighted average assumptions used for the period presented are as follows:
September 30,
2002 2003
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 nine months ended September 30, 2002 and
2003 would have been as follows:
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------
2002 2003 2002 2003
---- ---- ---- ----
Net (loss) as reported $(1,891) $(5,422) $(6,013) $(10,728)
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 $(411) (271) (137) (813)
------ ----- ----- -----
Pro forma net loss $(2,162) $(5,559) $(6,826) $(11,139)
======= ======= ======= ========
Basic and diluted loss
per share
As reported $(.06) $(.15) $(.19) $(.31)
Pro forma $(.07) $(.17) $(.20) $(.33)
Note 3: INVESTMENT 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 recent 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:
September 30, 2003
Raw materials-Work in process $ 2,489,480
Finished goods 55,571
--------------
$ 2,545,051
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 periods ending December 31, 2002 and September 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 with 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 transferred 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 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. This Interpretation did not 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. To date, the adoption of this interpretation did not have an 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 registered 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 as redeemable common stock
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.
and other consideration, e.g., paying off a third creditor and paying a real
estate 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, accordingly they
are reflected as redeemable common stock and deferred acquisition costs on the
accompanying financial statements as of September 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 pro forma results of operations as
though the acquisition, described in the first agreement, of certain net assets
of ISI occurred on January 1, 2002.
Nine Months ended September 30,
-----------------------------
2002 2003
----- ------
(in thousands except for share data)
Net revenues $ 2,473 $ 596
Operating expense 10,244 11,874
----- ------
Net loss $ (7,771) (11,278)
===== ======
Basic and
diluted loss
per share $ (.24) $ (.33)
------ ------
Weighted average
Shares
Outstanding 32,570,957 34,697,987
---------- ----------
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
nine months ending September 30, 2002 and 2003 would have been 33,057,957 and
35,184,987 resulting in a pro forma loss per share as adjusted of $ (.24) and
$(.32) 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 the ("March Debentures")
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 were to have held back and 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 and 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
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 conversion rate is fixed at $1.46 per share subject to
adjustment for anti-dilution protection.
The investors also received Warrants 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.
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.
On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 (the "July debentures") and an
aggregate of 507,102 Warrants due July 2008 to the same investors who purchased
the March 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 were to have been released to us if, and only if, we acquire
ISI's facility with in a set timeframe. Although we have not acquired ISI's
facility yet, these funds were released (see discussion below). 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 was fixed at $2.14 per share: however, as part of the
subsequent debenture placement that closed on October 29, 2003 (see below), the
conversion price under the July debentures was lowered to $1.89 per share. The
conversion price is subject to adjustment for anti-dilution protection for
issuance of common stock or securities convertible or exchangeable into common
stock at a price less than the conversion price then in effect.
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 registration rights agreements with the investors in connection
with the issuance of the March debentures and warrants and the July debenture
and warrants. The registration rights agreement required that we register the
shares of common stock issuable upon conversion of the debentures, shares for
interest accrued and upon exercise of the warrants issued in March, June and
July. In accordance with the agreement, we have registered these shares for
public sale.
On October 29, 2003, we issued an aggregate of $4,142,357 in the principal
amount of 6% Senior Convertible Debentures due October 31, 2005 (the "October
Debentures") and an aggregate of 410,134 Warrants (the "October 2008 Warrants")
in a private placement for aggregate anticipated gross proceeds of $3,550,000
($3,275.000 net of expenses). Pursuant to the terms of the October Debentures,
$1,550,000 of the proceeds from the sale of the October Debentures have been
held back and will be released to us if, and only if, we acquired ISI's facility
within 90 days of October 29, 2003 and provide a mortgage on the facility as
further security for the October Debentures. The October Debentures mature on
October 31, 2005 and bear interest at 6% per annum, payable quarterly in cash
or, subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date.
Upon completing the sale of the October Debentures, we received $3,275,000 in
net proceeds consisting of $1,725,000 (net) from the October Debenture and
$1,550,000 that was withheld from the July, debentures. As noted above,
$1,550.000 of the October Debenure proceeds have been held back pending our
completing the acquisition of the ISI facility.
The October Debentures are convertible at the option of the investors at any
time through October 31, 2005 into shares of our common stock. The conversion
price under the October Debentures is fixed at $2.02 per share, subject to
adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
The October 2008 Warrants received by the investors are to acquire at any time
through October 31, 2008 an aggregate of 410,134 shares of common stock at a
price of $2.32 per share. On October 29, 2004, the exercise price of these
October 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 October 29, 2003 and October 27, 2004 (but in no event less than $1.624
per share). The exercise price (and the reset price) under the October 2008
Warrants also is subject to similar adjustments for anti-dilution protection.
As of October 28, 2003, the investors had converted $4,427,580 of debt into
3,032,589 shares of our common stock. The remaining principal balance on the
debentures is convertible into shares of our stock at the option of the
investors at any time, through the maturity date. In addition, we have paid $1.3
million ($951,000 paid through September 30, 2003) into the debenture cash
collateral account as required by the terms of the October Debentures. These
amounts have been accounted for as advances receivable and are reflected as such
on the accompanying balance sheet as of September 30,2003. The cash collateral
account provides partial security for repayment of the March, July and October,
2008 debentures in the event of default.
We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the October Debentures and the October 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the Debentures, as
interest shares under the Debentures and upon exercise of the October 2008
Warrants. If the Registration Statement containing these shares 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 to the
investors their pro rata share of $3,635 for each day any of the above
conditions exist with respect to this Registration Statement.
In conjunction with both the March and July 2003 6% convertible debenture
placements we paid the placement agent, Cardinal Capital, an investment banking
fee equal to 7% of the investments made by the 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 Cardinal Capital, we registered all shares and warrants
for public sale. In conjunction with the October 2003 private debenture
offering, we paid Cardinal an investments banking fee of $245,000 and Cardinal
will receive 87,500 five year warrants to purchase an aggregate of 87,500 shares
at an exercise price of $2.42 per share.
The March, 2008 and the July, 2008 debenture issuances of $5,426,000 and
$5,426,000, respectively, and the October 29, 2003 issuance of $4,142,357
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 discounts of approximately $9.0 million
which, in effect, reduced the carrying value of our debt to zero. These costs
are deferred and charged to interest expense over the life of the debentures. As
of September 30, 2003, the amount of debt discount amortized to interest expense
totaled approximately $5.4 million.
Recorded debt discounts on these debentures include an Original Issue Discount
("OID") of approximately $1.3 million as additional cost of the offerings. These
costs are also deferred and expensed as interest over the life of the
debentures.
Excluding the application of related accounting standards, our outstanding debt
as of September 30, 2003 totaled $4.9 million.
In connection with the debenture agreements, the Company has outstanding letters
of credit totaling $1 million as additional collateral. In addition, as of
September 30, 2003, the Company has $200,000 in restricted cash under other
letter of credit agreements required by our insurance carrier.
Note 10: AUTHORIZED SHARES:
On July 31, 2003, we had approximately 104,000 shares of our authorized shares
of Common Stock that were not issued or reserved for issuance. In order to
accommodate the shares needed for the July Debenture, Dr. Carter, our Chief
Executive Officer and Cardinal Capital, the placement agent, agreed that they
would not exercise their warrants or options unless and until our stockholders
approved an increase in our authorized shares of common stock (see note 11).
This action freed up 3,206,650 shares. One of the proposals for the annual
meeting of our stockholders that was held in September 2003 was 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 could not be assured
that the Proposal would be approved.
Our stockholders approved an amendment to our corporate charter at the Annual
Stockholder meeting held in Philadelphia, PA on September 10, 2003. This
amendment increased our authorized shares from 50,000,000 to 100,000,000. As of
September 30, 2003, we have issued and outstanding shares totaling 37,654,543
and 16,393,990 shares reserved for use upon the conversion of the debenture and
the exercise of outstanding warrants and options.
Note 11: EXECUTIVE COMPENSATION
In order to facilitate the Company's need to obtain financing and prior to our
shareholders approving an amendment to our corporate charter to merge the number
of authorized shares, Dr. Carter agreed to waive his right to exercise certain
warrants and options unless and until our shareholder approved an increase in
our authorized shares of Common Stock.
In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies.
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Special Note Regarding Forward-Looking Statements
Certain statements in this document constitute "forwarding-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1995 (collectively, the
"Reform Act"). Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward- looking terminology such as
"believes," "expects," "may," "will," "should," or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. All statements other than
statements of historical fact, included in this report regarding our financial
position, business strategy and plans or objectives for future operations are
forward-looking statements. Without limiting the broader description of
forward-looking statements above, we specifically note that statements regarding
potential drugs, their potential therapeutic effect, the possibility of
obtaining regulatory approval, our ability to manufacture and sell any products,
market acceptance or our ability to earn a profit from sales or licenses of any
drugs or our ability to discover new drugs in the future are all forward-looking
in nature.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, including but not limited to, the risk factors discussed
below, which may cause the actual results, performance or achievements of
Hemispherx and its subsidiaries to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in this report. We do
not undertake and specifically decline any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Overview
We were founded in the early 1970s as a contract researcher for the National
Institutes of Health (NIH). Dr. William A. Carter, M.D., joined us in 1976 and
ultimately became our CEO in 1988. He has focused us on exploring, understanding
and mastering the mechanism of nucleic acid technology to produce a promising
new class of drugs for treating chronic viral diseases and disorders of the
immune system. In the course of almost three decades, we have established a
strong foundation of laboratory, pre-clinical and clinical data with respect to
the development of nucleic acids to enhance the natural antiviral defense system
of the human body and the development of therapeutic products for the treatment
of chronic diseases. Our strategy is to use our proprietary drug, Ampligen(R),
to treat diseases for which adequate treatment is not available. We seek the
required regulatory approvals which will allow the progressive introduction of
Ampligen(R) for Myalgic Encephalomyelitis/Chronic Fatigue Syndrome ("ME/CFS"),
HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S., Canada, Europe and
Japan. Ampligen(R) is currently in phase III clinical trials in the U.S. for use
in treatment of ME/CFS and is in Phase IIb clinical trials in the U.S. for the
treatment of newly emerged multi-drug resistant HIV, and for the induction of
cell mediated immunity in HIV patients that are under control using potentially
toxic drug cocktails.
In March, 2003, we acquired from Interferon Sciences Inc. ("ISI"), all of ISI's
raw materials, work-in-progress and finished product of Alferon N Injection(R),
together with a limited license for the production, manufacture, use, marketing
and sale of the product. Alferon N Injection(R) [interferon alfa- n3 (human
derived)] is a natural alpha interferon that has been approved by the U.S. Food
and Drug Administration ("FDA") for commercial sale for the intralesional
treatment of refractory or recurring external genital warts in patients 18 years
of age or older. We intend to market this product in the United State through
sales facilitated via third party marketing agreements. In the future, we expect
to implement studies, beyond those conducted by ISI, for testing the potential
treatment of HIV, Hepatitis C and other indications, including multiple
sclerosis. This acquisition not withstanding, our primary focus remains the
development of Ampligen(R) for treating ME/CFS and HIV diseases.
In March, 2003, we entered into an agreement with ISI subject to certain events
that would grant us global rights to sell Alferon N Injection(R) as well as
acquire certain other assets of ISI which include but are not limited to real
estate and property, plant and equipment.
We outsource certain components of our research and development, manufacturing,
marketing and distribution, while maintaining control over the entire process
through our quality assurance group and our clinical monitoring group.
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 2002.
RISK FACTORS
The following cautionary statements identify important factors that could cause
our actual result to differ materially from those projected in the
forward-looking statements made in this 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 in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments such as multiple sclerosis and cancer.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.
All of our drugs and associated technologies other than ALFERON N Injection(R)
are investigational and must receive prior regulatory approval by appropriate
regulatory authorities for general use and are currently legally available only
through clinical trials with specified disorders. At present, ALFERON N
Injection(R) is only approved for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older. Use of
ALFERON N Injection(R) for other indications will require regulatory approval.
In this regard, Interferon Sciences, Inc. ("ISI"), the company from which we
obtained our rights to ALFERON N Injection(R), conducted clinical trials related
to use of ALFERON N Injection(R) for treatment of HIV and Hepatitis C. In both
instances, the FDA determined that additional studies were necessary in order to
fully evaluate the efficacy of ALFERON N Injection(R) in the treatment of HIV
and Hepatitis C diseases. We have no obligation or 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
September 30, 2003 our accumulated deficit was approximately $110,000,000. We
have not yet generated significant revenues from our products and may incur
substantial and increased losses in the future. We cannot assure that we will
ever achieve significant revenues from product sales or become profitable. We
require, and will continue to require, the commitment of substantial resources
to develop our products. We cannot assure that our product development efforts
will be successfully completed or that required regulatory approvals will be
obtained or that any products will be manufactured and marketed successfully, or
be profitable.
We may require additional financing which may not be available.
The development of our products will require the commitment of
substantial resources to conduct the time-consuming research, preclinical
development, and clinical trials that are necessary to bring pharmaceutical
products to market. 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 September 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 debentures into our
common stock, we may not need additional funds. Also, sales of Alferon N
Injection(R) could exceed our projection and reduce the need for additional
financing during this period. Between March and the end of October 2003, we
received approximately $10.3 million in net proceeds from the sale of all three
sets of debentures and the exercise of warrants issued in conjunction with the
Debentures due January 2005. Pursuant to the terms of the October Debentures, if
and when we close on the second ISI asset acquisition, we will receive
additional net proceeds of $1.55 million. As of September 30, 2003, we had
approximately $5.1 million in cash and short term investments. We believe that
these funds plus 1) the initial net proceeds of approximately $1.7 million from
October Debenture placement, 2) the release of the remaining $1.55 million in
net proceeds from the July Debentures, 3) the anticipated infusion of
approximately $1.55 million in remaining net proceeds from the October
Debentures and 4) the projected net cash flow from the sale of ALFERON N
Injection(R) should be sufficient to meet our operating requirement for the next
12 months. We may need to raise additional funds through additional equity or
debt financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing
Ampligen(R) products. There can be no assurances that we will raise adequate
funds from these or other sources, which may have a material effect on our
ability to develop our products. In addition, if we do not timely complete the
second ISI asset acquisition, our financial condition could be materially and
adversely affected (see the next risk factor).
If we do not complete the second Interferon Sciences, Inc. 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 Interferon Sciences, Inc. ("ISI")
to purchase certain assets of ISI. In the first agreement we acquired ISI's
inventory of ALFERON N Injection(R) and a limited license for the production,
manufacture, use, marketing and sale of this product. Our ability to generate
sustained revenues from sales of this product is dependent, among other things,
on our completing the terms of the second agreement to acquire the balance of
ISI's rights to its product as well as ISI's production facility used to
formulate and purify the drug concentrate of ALFERON N Injection(R). If we are
unable to generate sustained revenues from the sale of this product, our
financial condition could be materially and adversely affected.
In addition, pursuant to terms of the October Debentures, we are required to
acquire ISI's facility within 90 days from October 29, 2003 and, unless and
until we acquire the facility, $1,550,000 of the proceeds from the sale of the
October Debentures will be held back. The same condition was in the July
Debentures and in the debentures issued in March 2003; however, the holders
waived this condition in both debentures. 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 has filed with the Securities and Exchange Commission a preliminary
proxy statement for a special meeting of its stockholders at which approval of
the second acquisition will be sought. ISI has received written environmental
approval from the state of New Jersey.
Due to ongoing delays on the part of ISI, on September 23, 2003, we commenced an
action against ISI in Delaware seeking specific performance and declaratory and
injunctive relief related to the first and second asset acquisition agreements.
Our primary objectives are to compel ISI to complete the second asset
acquisition and to prevent ISI from terminating the second asset acquisition
agreement due to the passage of time. For more information on this action, see
"Legal Proceedings" in "Our Business" below. It is possible that that this
lawsuit could further delay the closing of the second asset acquisition.
In addition, pursuant to the agreements, we have been paying certain expenses of
ISI. Given ISI's precarious financial condition, if we stop making these
payments, ISI could declare bankruptcy. This would most likely further delay and
possibly jeopardize a closing under the second asset purchase agreement.
Our failure to complete the acquisition within the 90 day period will be a
technical default of the terms of the October Debentures and, absent consent
from the holders of these debentures for additional time, most likely would
result in our having to redeem the securities. If we do not receive the
additional funds from the October Debentures as planned and, especially if we
are required to redeem these 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.
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.
In March 2003 we issued 487,028 shares to Interferon Sciences and, upon the
consummation of the second Interferon Sciences asset acquisition, we will issue
an additional 487,028 shares to Interferon Sciences. In May 2003 we issued an
aggregate of 581,761 shares to two of Interferon Sciences' creditors. We
anticipate, but cannot assure, that we will close the second Interferon Sciences
asset acquisition sometime prior to the end of December 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, which are inclusive of
424,528 guaranteed unissued shares with respect to the second asset acquisition
agreement with ISI which, to date remains unconsummated. As of October 29, 2003,
1,312,817 of the 1,430,817 shares have not been sold. The termination dates are
24 months after the dates 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 remaining 1,312,817 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 $2,087,380. The
reported last sale price for our common stock on the American Stock Exchange on
November 14, 2003 was $2.65 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 the holders of the guaranteed shares do not sell a significant amount of
their guaranteed shares prior to the relevant termination dates and the price of
our common stock during the 31 day period commencing on the relevant termination
dates is not above $1.59 per share, we most likely will be required to
repurchase a significant number of guaranteed shares and our financial condition
could be materially and adversely affected.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. If and when we obtain all
rights to ALFERON N Injection(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 products 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 ISI's facility and ALFERON N Injection(R) is
formulated and packaged at a production facility operated by Abbott Laboratories
located in Kansas. If and when we close on the second ISI asset acquisition, we
will acquire their New Brunswick, NJ 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. Also, each production lots of Alferon N Injection(R) is subject to FDA
review and approval prior to releasing the lots to be sold. This review and
approval process could take considerable time, which would delay our having
product in inventory to sell. Alferon N Injection(R) has a shelf life of 18
months after being bottled.
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. 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 (within the lesion) treatment of refractory or recurring
external genital warts in adults. In clinical trials conducted for the treatment
of genital warts with ALFERON N Injection(R), patients did not experience
serious side effects; however, there can be no assurance that unexpected or
unacceptable side effects will not be found in the future for this use or other
potential uses of ALFERON N Injection(R) which could threaten or limit such
product's usefulness.
We may be subject to product liability claims from the use of Ampligen(R) or
other of our products which could negatively affect our future operations.
We face an inherent business risk of exposure to product liability claims in the
event that the use of Ampligen(R) or other of our products results in adverse
effects. This liability might result from claims made directly by patients,
hospitals, clinics or other consumers, or by pharmaceutical companies or others
manufacturing these products on our behalf. Our future operations may be
negatively 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. William A. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A. Carter
because of his position as a pioneer in the field of nucleic acid drugs, his
being the co-inventor of Ampligen(R), and his knowledge of our overall
activities, including patents, and clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. 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 October 31, 2003, the price of our common stock has ranged
from $.74 to $3.35. We expect the price of our common stock to remain volatile.
The average daily trading volume of our common stock varies significantly. Our
relatively low average volume and low average number of transactions per day may
affect the ability of our stockholders to sell their shares in the public market
at prevailing prices and a more active market may never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares are
sold in the public market.
As of October 30, 2003, approximately 1,098,789 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. All of these shares were registered pursuant to agreements between
us and the holders of these shares. In addition, we have registered 6,993,001
shares issuable (i) upon conversion of approximately 135% of the July Debentures
and 100% of the remaining principal balance on the Debentures due January 2005;
(ii) as payment of 135% of the interest on all of the Debentures; (iii) upon
exercise of 135% of the July 2008 Warrants and the June 2008 Warrants; and (iv)
upon exercise of certain other warrants and stock options. Registration of the
shares permits the sale of the shares in the open market or in privately
negotiated transactions without compliance with the requirements of Rule 144. To
the extent the exercise price of the warrants is less than the market price of
the common stock, the holders of the warrants are likely to exercise them and
sell the underlying shares of common stock and to the extent that the conversion
price and exercise price of these securities are adjusted pursuant to
anti-dilution protection, the securities could be exercisable or convertible for
even more shares of common stock. We will be registering 3,671,599 shares
issuable (i) upon the conversion of approximately 135% of the principal of the
October 2005 debentures as well 135% of the interest on the October 2005
debentures and 135% of the October 2005 debenture warrants. Moreover, we
anticipate that we will be issuing and registering for public resale 487,028
shares if and when we close the second ISI asset acquisition. We also may issue
shares to be used to meet our capital requirements or use shares to compensate
employees, consultants and/or directors. We are unable to estimate the amount,
timing or nature of future sales of outstanding common stock. Sales of
substantial amounts of our common stock in the public market could cause the
market price for our common stock to decrease. Furthermore, a decline in the
price of our common stock would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In this regard, in November, 2002 we adopted a 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
Dr. Carter, our chief executive officer, who already beneficially owns 12.9% of
our common stock, the Plan's threshold will be 20%, instead of 15%. The Rights
will expire on November 19, 2012, and may be redeemed prior thereto at $.01 per
Right under certain circumstances.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Our research in clinical efforts
may continue for the next several years and we may continue to incur losses due
to clinical costs incurred in the development of Ampligen(R) for commercial
application. Possible losses may fluctuate from quarter to quarter as a result
of differences in the timing of significant expenses incurred and receipt of
licensing fees and/or cost recovery treatment revenues in Europe, Canada and in
the United States.
New Accounting Pronouncements
In 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. This Interpretation No. 46 did not 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. To date, the adoption of these Interpretation did not have an
effect on the consolidated financial statements.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 versus Three months ended September
30, 2002
Our net losses of approximately $5,422,000 or $.15 per share for the three
months ended September 30, 2003 primarily consists of $2,934,000 in non-cash
interest charges related to our March, 2005 debentures and $389,000 related to
our July, 2005 debentures. Excluding these non cash charges, operating losses
were $1,766,000 compared to operating losses of $1,882,000 in 2002. The
operating losses of $1,766,000 include $328,000 related to our acquired Alferon
N Injection(R) operations.
Revenues for the three months ended September 30, 2003 were $194,000 including
$157,000 from the net sales of Alferon N Injection(R). Sales in 2002 were
$79,000 from sales of Ampligen(R) related to our cost recovery clinical program.
Sales of Ampligen(R) are expected to decline as the AMP 516 ME/CFS clinical
trial near completion. Sales of Alferon N(R) are expected to increase as we
produce more product and our marketing/sales programs get underway.
Research and Development costs of $846,000 in the three months ended September
30, 2003 compared to research and development costs of $1,194,000 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 $348,000 lower in 2003 due to reduced
costs associated with the development of Ampligen(R) to treat ME/CFS patients.
In the three months ended September 30, 2002, our ME/CFS Phase III clinical
trial was in full force therefore increasing our manufacturing and clinical
support expenses during that period. The Amp 516 trial is nearing completion
with far fewer patients enrolled.
General and Administrative ("G&A") expenses were approximately $1,045,000 during
the three months ended September 30, 2003. Excluding the expenses related to our
new Alferon division totaling $416,000 our G&A expenses were $628,000 inclusive
of a $197,000 bonus granted by the Board to Dr. Carter, compared to $767,000 in
expenses for the same period in 2002. This reduction of $139,000, basically
resulted from lower legal and public relations expenses.
Nine months ended September 30, 2003 versus Nine Months ended June 30, 2002
During the nine months period ended September the 30, 2003, we have 1) acquired
certain assets and patent rights to ALFERON N Injection(R) 2) privately placed
the March, 2008 and the July, 2008 6% convertible debentures with an aggregate
maturity value of $10,852,000 (gross proceeds of $9,300,000) and 3) continued
our efforts to develop Ampligen(R) for the treatment of patients afflicted with
ME/CFS and HIV, 4) activated the New Brunswick production facility to process
doses of Alferon N and 5) produced 21,000 doses of Alferon now in the final FDA
approval process.
In the nine months period ended September 30, 2003, we recorded $10,728,000 or
$.31 per share in net losses. In the same period in 2002, we had net losses of
$6,013,000 or $.19 per share. The losses in 2003 includes $5,795,000 in non-cash
interest charges relating to our March, 2005,and July, 2005 6% convertible
debentures. These non-cash interest charges account for 54% of our net losses in
the nine month period ended September 30, 2003. In addition, our losses during
this period include $671,000 in expenses relating to our new Alferon division.
Solely for comparison purposes, excluding our 2003 losses for these two factors,
our losses were $4,262,000 in 2003 compared to $6,013,000 in 2002 or a reduction
in the amount of $1,751,000.
Revenues were $354,000 in the first nine months of 2003 compared to revenues of
$826,000 in the first nine months of 2002. Revenues in 2002 included $563,000 of
license fee income which was not repeated during this period in 2003. Revenues
in 2003 include $118,000 in ME/CFS Cost Recovery Income and $236,000 in net
sales of ALFERON N.
Overall costs and expenses were lower in the nine months ended September 30,
2003 by approximately $836,000 compared to the first nine months of 2002. Total
costs and expenses in 2003 were $5,348,000 versus $6,179,000 in 2002. In 2003,
our costs consisted of $895,000 for ALFERON N Injection(R) related expenses,
$2,574,000 for Ampligen(R) research and development costs and $1,879,000 for
general and administrative expenses, which includes a bonus of $197,000 issued
to Dr. Carter in the quarter ending September 30, 2003 for services performed
during 2001 and 2002.
Production costs were $224,000 in the first nine months of 2003. These costs
reflect approximately $117,000 for the cost of sales of ALFERON N Injection(R)
during the period of April 1, 2003 through September 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 $2,574,000 in the nine months ended September
30, 2003 compared to research and development costs of $3,732,000 in the first
nine 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 $1,158,000 lower in 2003 due to
reduced costs associated with the development of Ampligen(R) to treat ME/CFS
patients. In the first nine 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 randomized phase of
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
the equivalent of approximately 54,000 vials (doses) at various stages of the
manufacturing process. On August 8, 2003 we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N.
Which are now in the final review process. 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 third 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 refractory 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. The agreement
stipulated that Engitech will deploy a sales force of 100 sales representatives
within one year in the U.S. domestic market and further expand the sales team up
to 250 sales representative in the second year and after that as many as it
takes to continually drive market share. Engitech, Inc. is to develop and
implement marketing plans including extensive scientific and educational
programs for use in marketing ALFERON N.
General and Administrative expenses ("G&A") were $2,550,000 during the nine
months ended September 30, 2003, which includes $671,000 of expenses relating to
our new Alferon Division. Excluding the Alferon expenses, our G&A costs were
$1,879,000 compared to $2,447,000 of expenses in 2002. This Decrease of $568,000
is primarily due to Lower Legal Expenses and lower Public Relation costs. In the
nine months ended September 30, 2002 we incurred significant legal costs
associated with the Asensio lawsuit and trial. See "Legal Proceeding" for more
details.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the nine months ended September 30, 2003
was $4,926,000. Cash provided by financial activities for nine months ended
September 30, 2003 amounted to $7,568,000 substantially from proceeds from
debentures (see below). As of September 30, 2003, we had approximately
$5,100,000 in cash and cash equivalents and short term investments and $141,000
in accounts receivable. We believe that these funds plus the net proceeds of
approximately $3.2 million from the recently placed debentures due October 31,
2005 (inclusive of the $1.55 million of proceeds held back pending the
acquisition of the ISI facility), the projected revenue from the acquisition of
the ALFERON N Injection(R) business and additional financing of $2.0 million
will be sufficient to meet our operating requirements including debt service
during the twelve months subsequent to September 30, 2003. The need for
additional financing assumes that the debenture holders do not continue to
convert debt into common stock and that we will need 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 N Injection(R) could be greater than
expected which will reduce our need for additional financing during the twelve
months subsequent to September 30, 2003. 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 sales of ALFERON N
Injection(R) and our financial condition will be adversely affected").
All clinical trial drug supplies produced and acquired in 2003 have been fully
expensed although some costs are expected to be recovered under the expanded
access cost recovery programs authorized by FDA and regulatory bodies in other
countries. Our operating cash "burn rate" should decline as the AMP 516 ME/CFS
clinical trial nears completion and the cost of European market development
activity is reduced.
On March 12, 2003, we issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 2005 (the "March Debentures") and
an aggregate of 743,288 warrants to two investors in a private placement for
aggregate gross proceeds of $4,650,000. Pursuant to the terms of the March
Debentures, $1,550,000 of the proceeds from the sale of the March Debentures
were to have been held back and will be released to us if, and only if, we
acquired ISI's facility with in a set timeframe. Although we have not acquired
ISI's facility yet, these funds were released (see the discussion below). The
March 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 March Debentures, we have pledged all of our assets,
other than our 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 March Debentures are convertible at the option of the investors at
any time through January 31, 2005 into shares of our common stock. The
conversion price under the March Debentures is fixed at $1.46 per share, subject
to adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
The investors also received Warrants to acquire at any time through
March 12, 2008 an aggregate of 743,288 shares of common stock at a price of
$1.68 per share. On March 12, 2004, the exercise price of the Warrants will
reset to the lesser of the exercise price then in effect or a price equal to the
average of the daily price of the common stock between March 13, 2003 and March
11, 2004 (but in no event less than $1.176 per share). The exercise price (and
the reset price) under the Warrants also is subject to similar adjustments for
anti-dilution protection. All of these warrants have been exercised.
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 Debentures and
upon exercise of the Warrants. In accordance with this agreement, we have
registered 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 (the "July Debentures") and an
aggregate of 507,103 Warrants (the "July 2008 Warrants") to the same investors
who purchased the March 12, 2003 Debentures, 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
were to have been held back and will be released to us if, and only if, we
acquired ISI's facility with in a set timeframe. Although we have not acquired
ISI's facility yet, these funds were released (see the discussion below). The
July Debentures mature on July 31, 2005 and bear interest at 6% per annum,
payable quarterly in cash or, subject to satisfaction of certain conditions,
common stock. Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five consecutive business days ending on the third business day
immediately preceding the applicable interest payment date.
The July 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 July Debentures was fixed at $2.14 per share; however, as part of new
debenture placement closed on October 29, 2003 (see below), the conversion price
under the July Debentures was lowered to $1.89 per share. The conversion price
is subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect.
The July 2008 Warrants received by the investors are to acquire at any time
through July 31, 2008 an aggregate of 507,103 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 July Debentures and the July 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the Debentures, as
interest shares under the Debentures and upon exercise of the July 2008
Warrants. These shares have been registered for public sale.
On June 25, 2003, we issued to each of the March 12, 2003 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 have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale.
On October 29, 2003, we issued an aggregate of $4,142,357 in principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October Debentures")
and an aggregate of 410,134 Warrants (the "October 2008 Warrants") in a private
placement for aggregate anticipated gross proceeds of $3,550,000. Pursuant to
the terms of the October Debentures, $1,550,000 of the proceeds from the sale of
the October Debentures have been held back and will be released to us if, and
only if, we acquired ISI's facility within 90 days of October 29, 2003 and
provide a mortgage on the facility as further security for the October
Debentures. The October Debentures mature on October 31, 2005 and bear interest
at 6% per annum, payable quarterly in cash or, subject to satisfaction of
certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive business days ending on
the third business day immediately preceding the applicable interest payment
date.
Upon completing the sale of the October debentures, we received $3,275.000 in
net proceeds consisting of $1,725.000 from the October debentures and $1,550.000
that had been withheld from the July, 2005 debentures. As noted above,
$1,550.000 of the October 2008 denture proceeds have been held back pending our
completing the acquisition of the ISI facility.
The October Debentures are convertible at the option of the investors at any
time through October 31, 2005 into shares of our common stock. The conversion
price under the October Debentures is fixed at $2.02 per share, subject to
adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
The October 2008 Warrants received by the investors are to acquire at any time
through October 31, 2008 an aggregate of 410,134 shares of common stock at a
price of $2.32 per share. On October 29, 2004, the exercise price of these
October 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 October 29, 2003 and October 27, 2004 (but in no event less than $1.624
per share). The exercise price (and the reset price) under the October 2008
Warrants also is subject to similar adjustments for anti-dilution protection.
As of October 28, 2003, the investors had converted $4,427,580 of debt into
3,032,589 shares of our common stock. The remaining principal balance on the
debentures is convertible into shares of our stock at the option of the
investors at any time, through the maturity date. In addition, we have paid $1.3
million ($951,000 paid through September 30, 2003) into the debenture cash
collateral account as required by the terms of the October Debentures. These
amounts have been accounted for as advances receivable and are reflected as such
on the accompanying balance sheet as of September 30,2003. The cash collateral
account provides partial security for repayment of the March, July and October,
2008 debentures in the event of default.
We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the October Debentures and the October 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the Debentures, as
interest shares under the Debentures and upon exercise of the 2008 Warrants. If
the Registration Statement containing these shares 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 to the investors their
pro rata share of $3,635 for each day any of the above conditions exist with
respect to this Registration Statement.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the July 2003 private debenture offering and
the March 2003 private debenture offering on substantially the same terms, we
paid Cardinal Securities, LLC an investment banking fee equal to 7% of the
investments made by the two Debenture holders and issued to Cardinal certain
warrants. A portion of the investment banking 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 registered 455,000
shares for public sale. In conjunction with the October 2003 private debenture
offering, we paid Cardinal an investment banking fee of $245,000 and Cardinal
will receive 87,500 five year warrants to purchase an aggregate of 87,500 shares
at an exercise price of $2.42 per share.
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI"), ISI's
inventory of ALFERON N Injection(R), a pharmaceutical product used for
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older, 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 to ISI Pursuant to our agreements
with ISI, we have registered these shares for public sale. We also agreed to pay
ISI 6 % of the net sales of ALFERON N Injection(R).
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, ISI requests that we
honor the guarantee, we will be obligated to reacquire ISI's remaining
guaranteed shares and pay the ISI $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
guaranteed shares, our financial condition could be adversely affected" in "Risk
Factors," above.
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
Corporation, two creditors of ISI. 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 and delivery 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 also agreed to satisfy
other liabilities of ISI which are past due and secured by a lien on ISI's real
estate and to pay ISI 6% of the net sales of products containing natural alpha
interferon.
On May 30, 2003, 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
registered the foregoing shares for public sale.
In connection with the debenture agreements, we have outstanding letters of
credit of $1 million as additional collateral.
In addition, as of September 30, 2003, we have $200,000 in restricted cash under
other letter of credit agreements required by our insurance carrier. Prior to
our annual meeting of stockholders in September 2003, we had a limited number of
shares of Common Stock authorized but not issued or reserved for issuance upon
conversion or exercise or outstanding convertible and exercisable securities a
such as debentures, options and warrants. Prior to the meeting, to permit
consummation of the sale of the July 2005 Debentures and the related warrants,
Dr. Carter agreed that he would not exercised his warrants or options unless and
until our stockholders approve an increase in our authorized shares of common
stock. For Dr. Carter's waiver of his right to exercise certain options and
warrants prior to approval of the increase in our authorized shares, we agreed
to compensate Dr. Carter. (refer to note 11: Executive compensation)
On November 6, 2003 we acquired some of the outstanding ISI property tax lien
certificates in the aggregate amount of $456,839 from certain investors. These
tax liens were issued for property taxes and utilities due for 2000, 2001 and
2002.
Because of our long-term capital requirements, we may seek to access the public
equity market whenever conditions are favorable, even if we do not have an
immediate need for additional capital at that time. Any additional funding may
result in significant dilution and could involve the issuance of securities with
rights, which are senior to those of existing stockholders. We may also need
additional funding earlier than anticipated, and our cash requirements, in
general, may vary materially from those now planned, for reasons including, but
not limited to, changes in our research and development programs, clinical
trials, competitive and technological advances, the regulatory process, and
higher than anticipated expenses and lower than anticipated revenues from
certain of our clinical trials for which cost recovery from participants has
been approved.
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Excluding obligations to pay us for various licensing related fees, we had
approximately $5,100,000 in cash, cash equivalents and short term investments at
September, 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.
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. This claim was settled for $12,000
and dismissed.
On September 16, 2003, we filed and subsequently served and moved for expedited
proceedings on, a complaint filed in the Court Of Chancery of the State of
Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the first and
second asset acquisition agreements with ISI. Specifically, we allege that ISI
has delayed its performance pursuant to the agreements and, as a result, the
second asset purchase did not close within 180 days of the date of the
agreements. Paragraph 7.7 of the second asset purchase agreement states that
either party to the agreement may terminate the agreement if there is no closing
within 180 days of the date of the agreement. We request that the Court require
ISI to specifically perform its obligations under the agreement or, in the
alternative, that paragraph 7.7 of the agreement be eliminated or reformed to
eliminate ISI's ability to terminate pursuant to that paragraph. We also request
that ISI, as a result of its conduct, not be permitted to terminate the
agreements pursuant to paragraph 7.7 or due to the passage of time. At a hearing
held on September 29, 2003, the Court set a trial of our case for January 6-7,
2004 and accepted the agreement of the parties pursuant to which the date on
which ISI may exercise its termination right is extended until no earlier than
two weeks following trial. In response to our complaint, ISI has filed a motion
to dismiss.
ITEM 2: Changes in Securities and Use of Proceeds
During the quarter ended September 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
We held our annual meeting of stockholders on September 10, 2003. For
information related to this meeting, see our current report on Form 8-K dated
September 12, 2003.
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 July 14, 2003
Form 8-K/A (amending 8-K filed on March 31, 2003)filed August 13, 2003 Form 8-K
filed on September 12, 2003 Form 8-K filed on September 24, 2003 Form 8-K filed
on October 30, 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: November 18, 2003 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: November 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: November 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: November 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 September 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.
2539:
/s/William A. Carter
-----------------------
Chief Executive Officer
November 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 September 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.
2572:
/s/ Robert E. Peterson
------------------------
Chief Financial Officer
November 18, 2003