UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2004
Commission File Number: 0-27072
HEMISPHERx BIOPHARMA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
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(Address of principal executive offices) (Zip Code)
(215) 988-0080
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). / / Yes /X/ No
42,363,928 shares of common stock were issued and outstanding as of April 26,
2004.
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, March 31,
2003 2004
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,764 $ 3,249
Short term investments 1,495 3,989
Inventory 2,896 2,785
Accounts and other
receivables 282 280
Prepaid expenses and other current assets 170 139
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Total current assets 8,607 10,442
Property and equipment, net 94 3,387
Patent and trademark rights, net 1,027 992
Investments 408 408
Deferred acquisition costs 1,546 -
Deferred financing costs 393 495
Advance receivable 1,300 1,300
Other assets 29 29
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Total assets $ 13,404 $ 17,053
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 488 $ 424
Accrued expenses 1,119 899
Deferred revenue - 497
Current portion of long-term debt (net of
discounts of $1,330) - 670
Redemption obligation - 2,191
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Total current liabilities 1,607 4,681
Long-Term Debt-net of current portion and
discounts of $4,533 and $3,136, respectively 2,058 1,916
Commitments and contingencies:
Redeemable Common Stock 491 1,166
Stockholders' equity:
Common stock 39 42
Additional paid-in capital 123,054 131,136
Treasury stock - at cost (2) (2)
Accumulated deficit (113,843) (121,886)
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Total stockholders' equity 9,248 9,290
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Total liabilities and stockholders' equity $ 13,404 $ 17,053
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See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three months ended
March 31,
-------------------------
2003 2004
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(Unaudited) (Unaudited)
Revenues:
Sales of product, net $ 19 $ 259
Clinical treatment programs 47 49
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66 308
Costs and expenses:
Production/cost of goods sold 118 601
Research and development 873 964
General and administrative 667 2,844
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Total cost and expenses 1,658 4,409
Interest and other income 50 11
Interest expenses (17) (101)
Financing costs (58) (3,851)
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Net loss $(1,617) $(8,042)
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Basic and diluted loss per share $ (.05) $ (.20)
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Basic and diluted weighted
average common shares outstanding 32,393,754 40,668,478
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See accompanying notes to condensed consolidated financial statements.
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Three months ended
March 31,
--------------------------
2003 2004
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Cash flows from operating activities:
Net loss $(1,617) $(8,042)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 22 23
Amortization of patents rights 36 134
Amortization of deferred financing costs 57 2,905
Financing costs related to redemption obligation - 946
Stock warrant compensation expense - 1,769
Changes in assets and liabilities:
Inventory - 111
Accounts receivable (12) 2
Deferred Revenue - 497
Prepaid expenses and other current assets (72) 30
Accounts payable 189 21
Accrued expenses (336) (118)
Other assets 41 -
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Net cash used in operations (1,692) (1,722)
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Cash flows from investing activities:
Purchase of land and building - (143)
Additions to patent rights (18) (99)
Maturity of short term investments 520 1,496
Purchase of short term investments - (3,986)
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Net cash provided by(used in)
investing activities 502 (2,732)
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Cash flows from financing activities:
Proceeds from exercise of stock warrants - 244
Proceeds from long-term borrowings 3,100 4,000
Payments on long-term borrowings (440) -
Deferred financing costs (268) (305)
Purchase of treasury stock (49) -
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Net cash provided by (used in) financing activities 2,343 3,939
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Net increase (decrease) in cash and cash equivalents 1,153 (515)
Cash and cash equivalents at beginning of period 2,256 3,764
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Cash and cash equivalents at end of period $ 3,409 $3,249
======== =========
Supplementary disclosures of cash flow information:
Issuance of common stock for accounts payable $ - $ 85
Issuance of common stock for purchase of building $ - $1,626
Issuance of common stock for debt conversion and
interest payments $ - $3,641
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/A for the year ended December 31, 2003, as filed with the
SEC on March 30, 2004.
NOTE 2: STOCK BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards(SFAS) No. 123,
"Accounting for Stock-Based Compensation." We chose to apply Accounting
Principal Board Opinion 25 and related interpretations in accounting for stock
options granted to our employees.
The Company provides pro forma disclosures of compensation expense under the
fair value method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
and SFAS No. 148, "Accounting for Stock-Based Compensation- Transition and
Disclosure."
The weighted average assumptions used for the period presented are as follows:
March 31,
2003 2004
Risk-free interest rate 5.23% - %
Expected dividend yield - -
Expected lives 2.5 years - years
Expected volatility 63.17% - %
Had compensation cost for the Company's option plans been determined using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the three months ended March 31, 2003 and 2004 would have
been as follows:
(In Thousands)
Three Months Ended
March 31,
--------------------
2003 2004
Net (loss) as reported $(1,617) $(8,042)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects - -
Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards, net
of related tax effects (137) -
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Pro forma net loss $(1,754) $(8,042)
======= =======
Basic and diluted loss
per share
As reported $(.05) $(.20)
Pro forma $(.05) $(.20)
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 the Company's common stock from the treasury. On
October 12, 2000, the Company issued an additional 50,000 shares of its common
stock and on March 7, 2001 the Company issued 12,000 more shares of its common
stock from the treasury to Chronix for an aggregate equity investment of
$700,000. The percentage ownership in Chronix is approximately 5.4% and is
accounted for under the cost method of accounting. During the quarter ended
December 31, 2002, we recorded a non cash charge of $292,000 with respect to our
investment in Chronix. This impairment reduces our carrying value to reflect a
permanent decline in Chronix's market value based on its then proposed
investment offerings.
NOTE 4: INVENTORIES
The Company uses the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.
Inventories consist of the following:
March 31, 2004 December 31, 2003
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Raw materials-work in process $ 1,729,000 $1,729,000
Finished goods 1,056,000 1,167,000
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$ 2,785,000 $2,896,000
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NOTE 5: REVENUE AND LICENSING FEE INCOME
We executed a Memorandum of Understanding in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The option period ends 12 weeks after Fuji has
had a chance to review the report on the results of our Amp 516 clinical trial
and meet with the trial's principal investigators. We received an initial fee of
400,000 Euros (approximately $497,000 US). If we do not provide Fuji with the
full report by May 31, 2004 we will be required to repay half of this fee and if
we do not provide them with the report by December 31, 2004, we will be required
to refund the entire fee. If Fuji exercises the option, Fuji would be required
to pay us an additional 1,600,000 Euros upon execution of the Sales and
Distribution agreement, purchase Ampligen(R) exclusively from us and meet
certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would receive
an additional 1,000,000 Euros and, upon approval by the EMEA, an additional
2,000,000 Euros. If we failed to meet the December 31, 2005 filing deadline, we
would be required to return 40% of all payments that we had received from Fuji.
We would be required to sell Ampligen(R) to Fuji at a 20% price discount until
the aggregate amount of the discount reached $1,000,000 Euros (representing 50%
of the initial 2,000,000 fee paid to us on and prior to execution of the
definitive agreement). The foregoing is a summary of the memorandum of
understanding. Although we anticipate preparing and issuing the AMP 516 report
in the time frame noted, we cannot ensure this will occur. We also cannot ensure
that Fuji will exercise the option or that the proposed terms of the Sales and
Distribution Agreement will not change materially.
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 Fuji initial fee of $497,000 has been deferred as of March
31, 2004.
During the periods ending December 31, 2003 and March 31, 2004. The Company did
not receive any grant monies from local, state and or Federal Agencies.
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues from the sale of product are recognized when the product is shipped, as
title is transferred to the customer. The Company has no other obligation
associated with its products once shipment has occurred.
Note 6: ACQUISITION OF ASSETS OF INTERFERON SCIENCES, INC.
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, assumed certain
liabilities and agreed to pay ISI 6% of the net sales of product. Pursuant to
our agreements with ISI, we registered the foregoing shares for public sale.
Except for 62,500 of the shares issued to ISI, we had 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 would have been
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 were initially recorded as redeemable
common stock outside of stockholders' equity. As of March 31, 2004, ISI had sold
the 424,528 guaranteed shares at prices in excess of $1.59 per share.
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
registered the foregoing shares for public sale. The value of these guaranteed
shares totaled $925,000 and these shares were redeemable under certain
conditions, accordingly they were initially reflected as redeemable common stock
and deferred acquisition costs on the balance sheet as of December 31, 2003. As
of March 31, 2004, GP Strategies had sold all of their 267,296 shares and the
American National Red Cross had not sold their 314,465 shares. Additionally
other liabilities associated with the real estate in the amount of $621,000 had
been recorded as deferred acquisition costs. Upon ISI stockholder approval,
which occurred on March 17, 2004, substantially all of the deferred purchase
price was allocated to real estate.
Additionally, in March 2004, we issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well as its
production facility in New Brunswick, NJ. Except for 62,500 of the 487,028
shares issued to ISI at closing of this second asset acquisition, we have
guaranteed the market value of the shares retained by ISI on terms substantially
similar to those for the guaranteed shares issued to ISI on the first
acquisition of ISI assets. As a result, the liability for ISI redeemable stock
was $675,000 as of March 31, 2004. Pursuant to our agreement with ISI, we
registered the foregoing shares for public sale.
On March 17, 2004, the Company acquired the land and buildings located in New
Brunswick, NJ. The aggregated cost of the land and buildings was approximately
$3,316,000. The cost of the land and buildings was allocated as follows:
Land $ 423,000
Buildings 2,893,000
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Total cost $ 3,316,000
=========
As of March 31, 2004 the 314,465 guaranteed shares held by the American National
Red Cross had not been sold. As a result, the liability for this redeemable
stock was $491,000.
We accounted for these transactions as a Business Combination under Statement of
Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.
The following table represents the Unaudited pro forma results of operations as
though the ISI acquisitions had occurred on January 1, 2002.
Three Months Ended March 31,
2003 2004
---- ----
(in thousands except for share data)
Net revenues $ 308 $308
Expenses (2,493) (8,365)
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Net Loss $(2,185) $(8,057)
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Basic and diluted loss per share $(.07) $(.20)
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Weighted average shares
outstanding 33,046,092 41,080,579
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Note 7: DEBENTURE FINANCING
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 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 released to us if, and only if, we acquired ISI's facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with 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 were 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
pledged all of our assets, other than our intellectual property, as collateral
and were subject to comply with certain financial and negative covenants, which
include but was not limited to the repayment of principal balances upon
achieving certain revenue milestones.
The March Debentures were 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 was 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 was to 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 was 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 for public sale.
As of December 31, 2003 the investors had converted the $5,426,000 principal of
the March Debentures into 3,716,438 shares of our common stock. The total
imputed interest on these Debentures was $111,711 of which $17,290 was paid in
cash and $94,421 was paid by the issuance of 39,080 shares of common stock. The
investors exercised the 743,288 warrants in July 2003 which produced proceeds in
the amount of $1,248,724
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 (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 within a set timeframe. Although we had not acquired
ISI's facility, these funds were released to us in October 2003. 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. Pursuant to the terms and
conditions of the July Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants.
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 the
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, as amended, are to acquire at
any time commencing on July 26, 2004 through January 31, 2009 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 $2.14 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 (collectively, the "June 2008 Warrants") 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 debenture holders extended the deadline to 90 days after January
26, 2004. 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.
Pursuant to the terms and conditions of the October Debentures, we pledged all
of our assets, other than our intellectual property, as collateral and were
subject to comply with certain financial and negative covenants.
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 Debentures. As noted above, $1,550,000 of
the proceeds from the October Debentures were held back pending our completing
the acquisition of the ISI facility and our mortgaging that facility to the
debentureholders.
On March 17, 2004, we closed on the acquisition of all of the worldwide rights
of Alferon N as well as the FDA approved biological production facility in the
New Brunswick, New Jersey, from ISI. As a result, the proceeds held back from
the October Debenture amounting to $1,550,000 were released to the Company in
April 2004. As required by the Debentures, we are in the process of providing a
mortgage on the facility as further security for the Debentures.
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. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors are to acquire
at any time commencing on July 26, 2004 through April 30, 2009 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 $2.19 per share). The exercise price (and the reset
price) under the October 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 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 October Debentures,
as interest shares under the October Debentures and upon exercise of the 2008
Warrants. If, subject to certain exceptions, sales of all shares required to be
registered cannot be made pursuant to the registration statement, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
such conditions exist.
As of January 26, 2004, with respect to the July and October 2003 Debenture
Amendments, specifically, the extension of time of the investor's ability to
exercise warrants, the Company revalued the July and October 2003 warrants,
using the Black Scholes Method. This revaluation resulted in an increased
adjustment to Debenture discounts of $282,000, reflected as additional paid in
capital, and an adjustment to the amortization of Debenture discounts of
approximately $77,000, reflected in financing costs, for the three months ended
March 31, 2004.
On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures", an aggregate of 790,514 warrants (the "2009 Warrants") and 158,103
shares of common stock, and Additional Investment Rights (to purchase up to an
additional $2,000,000 principal amount of January 2004 Debentures commencing in
six months) ("AIR") in a private placement for aggregate anticipated net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Commencing six months after issuance, the Company is
required to start repaying the then outstanding principal amount under the
January 2004 Debentures in monthly installments amortized over 18 months in cash
or, at the Company's option, in shares of common stock. Any shares of common
stock issued to the investors as installment payments shall be valued at 95% of
the average closing price of the common stock during the 10-day trading period
commencing on and including the eleventh trading day immediately preceding the
date that the installment is due. Pursuant to the terms and conditions of the
January 2004 Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants.
The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures is fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
There are two classes of July 2009 warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005
(but in no event less than $2.58 per share with regard to the Class A warrants
and $3.54 per share with regard to the Class B warrants). The exercise price
(and the reset price) under the July 2009 Warrants also is subject to similar
adjustments for anti-dilution protection.
The Company also issued to the investors Additional Investment Rights ("AIR")
pursuant to which the investors have the right to acquire up to an additional
$2,000,000 principal amount of January 2004 Debentures from the Company. These
Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The AIR are exercisable commencing on July 26, 2004
(the "Trigger" date) for a period of 90 days from the Trigger Date or 90 days
from the date which the registration statement registering the shares issuable
upon the conversion of the January 2004 Debentures to be issued pursuant to the
AIR is declared effective, whichever is longer.
The Company entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the AIR), the shares, and the January 2009
Warrants. Pursuant to the Registration Rights Agreement the Company registered
on behalf of the investors the shares issued to the investors and 135% of the
shares issuable upon conversion of the Debentures (including payment of interest
thereon) and upon exercise of the January 2009 Warrants. If the Registration
Statement containing these shares had not been filed within the time period
required by the agreement, had not declared effective within the time period
required by the agreement or, after it was declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we would have been 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.
As of April 26, 2004, the investors have converted $11,902,610 of debt from the
March, July and October Debentures into 7,073,234 shares of our common stock.
The March Debentures have been fully converted. The remaining principal balance
on the remaining 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 $1,300,000 into the debenture cash collateral account as required by
the terms of the October Debentures. The amounts paid through March 31, 2004
have been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of March 31, 2004. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in March, July
and October 2003 and in January 2004, 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 612,500 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, 200,000 are exercisable at $2.50 per share, 87,500 are exercisable at
$2.42 per share and 100,000 are exercisable at $3.04 per share. The $1.74
warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire on March
12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04 warrants
expire on January 5, 2009. By agreement with Cardinal, we have registered all
shares issuable upon exercise of the warrants for public sale.
In connection with the debenture agreements, we have outstanding letters of
credit of $1 Million as additional collateral.
The March 2003, July 2003, October 2003, and January 2004 debenture issuances of
$5,426,000, $5,426,000, $4,142,357, and $4,000,000, respectively, 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 instruments. The Company determined the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method.
As a result, the Company recorded debt discounts of approximately $11.8 and $2.9
million for the 2003 and 2004 debenture issuances, respectively, which, in
effect, reduced the carrying value of our debt. As debt is converted to common
stock, the remaining unamortized debt discount is charged to finance costs.
These costs were initially deferred and charged to finance costs over the life
of the debentures. As of March 31, 2004, the amount of debt discount amortized
to finance cost totaled approximately $10.2 million.
Costs associated with the financings aggregated approximately $1.3 million.
These costs are also deferred and expensed as finance costs over the life of the
debentures.
Excluding the application of related accounting standards, and remaining debt
discounts of $4.4 million, the Company's outstanding debt as of March 31, 2004
totaled $7.1 million with $2.0 million maturing in 2004 and the balance in 2005.
Section 713 of the American Stock Exchange ("AMEX") Company Guide provides that
the Company must obtain stockholder approval before issuance, at a price per
share below market value, of common stock, or securities convertible into common
stock, equal to 20% or more of its outstanding common stock (the "Exchange
Cap"). Taken separately, the July 2003, October 2003 and January 2004 Debenture
transactions do not trigger Section 713. However, the AMEX has taken the
position that the three transactions should be aggregated and, as such,
stockholder approval is required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
the Company could exceed the Exchange Cap amounted to approximately 1,299,000.
In accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, the Company
recorded on January 26, 2004, a redemption obligation of approximately
$1,244,000. This liability represents the fair market value of the warrants and
beneficial conversion feature related to the 1,299,000 shares.
In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. The Company recorded an additional redemption obligation and
finance charge of $947,000 as a result of this revaluation. If the Company
obtains stockholder approval, the Company's redemption obligation will be
recorded as additional paid in capital on the date approval is received.
Note 8: EXECUTIVE COMPENSATION
In order to facilitate the Company's need to obtain financing and prior to our
stockholders approving an amendment to our corporate charter to increase the
number of authorized shares, Dr. Carter agreed to waive his right to exercise
certain warrants and options unless and until our stockholders approved an
increase in our authorized shares of Common Stock.
In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants with an exercise price of $2.20
per share. This additional compensation was reviewed by an independent valuation
firm and found to be fair and reasonable within the context of total
compensation paid to chief executive officers of comparable biotechnology
companies.
In the quarter ended March 31, 2004, Dr. Carter was awarded an additional bonus
of $99,481 by the Compensation Committee. In addition, The Company recorded a
non-cash stock compensation charge of $1,769,000 during the current quarter
resulting from warrants issued to Dr. Carter in 2003 that vested upon the
execution of the second ISI asset closing on March 17, 2004. This was determined
by subtracting the exercise price from the stock closing price on March 17, 2004
and multiplying the result by the number of warrants.
Note 9- SUBSEQUENT EVENT
On May 14, 2004, we issued to the debentureholders warrants to purchase an
aggregate of 1,300,000 shares ("the May 2009 Warrants"). In consideration of the
foregoing, the debentureholders exercised the June 2008 warrants. As a result,
we issued an aggregate of 1,000,000 shares and received gross proceeds of
approximately $2,400,000.
The May 2009 warrants are to acquire at any time, commencing on November 14,
2004 through April 30, 2009, an aggregate of 1,300,000 shares of common stock at
a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005 (but in no event less than $4.008 per share). The
exercise price (and the reset price) under the May 2009 Warrants also is subject
to adjustments for anti-dilution projection similar to those in the other
warrants.
In addition, the debentureholders agreed to amend the provisions of all of the
outstanding warrants and debentures (including the debentures issuable pursuant
to the AIR) to limit the maximum amount of funds that the holders could receive
in lieu of shares upon conversion of the debentures and/or exercise of the
warrants in the event that the Exchange Cap was reached to 119.9% of the
conversion price of the relevant debentures and 19.9% of the relevant warrant
exercise price.
These transactions could result in us recording an additional redemption
obligation for the reasons discussed in Note 7 and will result in additional
financing charges beginning in the second quarter of 2004.
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 the open label portion of phase III clinical
trials in the U.S. for use in treatment of ME/CFS and is in Phase IIb clinical
development in the U.S. for the treatment of patients with HIV infection.
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 have begun to market this product in the United States
through sales facilitated via third party marketing agreements. We are in the
process of implementing studies, beyond those conducted by ISI, for testing the
potential treatment of HIV, Hepatitis C and other indications, including
multiple sclerosis.
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.
RISK FACTORS
The following cautionary statements identify important factors that could cause
our actual result to differ materially from those projected in the
forward-looking statements made in this report. Among the key factors that have
a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and our other
related products is subject to a number of significant risks. Ampligen(R) may be
found to be ineffective or to have adverse side effects, fail to receive
necessary regulatory clearances, be difficult to manufacture on a commercial
scale, be uneconomical to market or be precluded from commercialization by
proprietary right of third parties. Our products are in various stages of
clinical and pre-clinical development and, require further clinical studies and
appropriate regulatory approval processes before any such products can be
marketed. We do not know when, if ever, Ampligen(R) or our other products will
be generally available for commercial sale for any indication. Generally, only a
small percentage of potential therapeutic products are eventually approved by
the U.S. Food and Drug Administration ("FDA") for commercial sale.
ALFERON N Injection(R). Although ALFERON N Injection(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments such as multiple sclerosis and cancer.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly affected.
All of our drugs and associated technologies other than ALFERON N Injection(R)
are investigational and must receive prior regulatory approval by appropriate
regulatory authorities for general use and are currently legally available only
through clinical trials with specified disorders. At present, ALFERON N
Injection(R) is only approved for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older. Use of
ALFERON N Injection(R) for other indications will require regulatory approval.
In this regard, Interferon Sciences, Inc. ("ISI"), the company from which we
obtained our rights to ALFERON N Injection(R), conducted clinical trials related
to use of ALFERON N Injection(R) for treatment of HIV and Hepatitis C. In both
instances, the FDA determined that additional studies were necessary in order to
fully evaluate the efficacy of ALFERON N Injection(R) in the treatment of HIV
and Hepatitis C diseases. We have no obligation or immediate plans to conduct
these additional studies at this time.
Our products, including Ampligen(R), are subject to extensive regulation by
numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the FDA in the U.S., the Health Protection Branch ("HPB") of
Canada, and the European Medical Evaluation Agency ("EMEA") in Europe. Obtaining
regulatory approvals is a rigorous and lengthy process and requires the
expenditure of substantial resources. In order to obtain final regulatory
approval of a new drug, we must demonstrate to the satisfaction of the
regulatory agency that the product is safe and effective for its intended uses
and that we are capable of manufacturing the product to the applicable
regulatory standards. We require regulatory approval in order to market
Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) is authorized for use
in clinical trials in the United States and other countries, we cannot assure
you that additional clinical trial approvals will be authorized in the United
States or in other countries, in a timely fashion or at all, or that we will
complete these clinical trials. If Ampligen(R) or one of our other products does
not receive regulatory approval in the U.S. or elsewhere, our operations most
likely will be materially adversely affected.
We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profit from 1985 through 1987.
Since 1987, we have incurred substantial operating losses, as we pursued our
clinical trial effort and expanded our efforts in Europe. As of March 31, 2004,
our accumulated deficit was $121,866,000. We have not yet generated significant
revenues from our products and may incur substantial and increased losses in the
future. We cannot assure that we will ever achieve significant revenues from
product sales or become profitable. We require, and will continue to require,
the commitment of substantial resources to develop our products. We cannot
assure that our product development efforts will be successfully completed or
that required regulatory approvals will be obtained or that any products will be
manufactured and marketed successfully, or be profitable.
We may require additional financing which may not be available.
The development of our products will require the commitment of substantial
resources to conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products to market.
As of March 31, 2004, we had approximately $7,238,000 million in cash and cash
equivalents and short-term investments. We believe that these funds plus 1) the
gross proceeds received from the exercising of warrants of approximately
$2,400,000, 2) the infusion of approximately $1,550,000 million in remaining net
proceeds from the October Debentures in April 2004, 3) the projected net cash
flow from the sale of ALFERON N Injection(R) and 4) the proceeds from licensing
agreements and/or the expected infusion of $2,000,000 in proceeds from our
investors exercising their AIR should be sufficient to meet our operating cash
requirements including debt service during 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 adverse effect on our ability to develop our products.
If stockholders do not approve the issuance of certain shares of our common
stock upon conversion of our debentures and exercise of related warrants at our
2004 annual stockholders' meeting, a portion of the debentures may no longer be
convertible, certain of the warrants will not be exercisable and we will be
required to pay the holders in cash the difference between the conversion or
exercise price and the market price in lieu of shares. As a result, our
financial condition would be adversely affected.
The American Stock Exchange ("AMEX") has taken the position that the July
Debenture, October Debenture and January 2004 Debenture transactions and the May
2009 Warrant transactions should be aggregated and, as such, under AMEX rules,
stockholder approval is required for our issuance of a significant number of
shares pursuant to the exercise of the warrants and conversion of the Debentures
(see Note 7 to the unaudited financial statements in Part I, Item 1 above). If
stockholders do not approve the issuance of such shares at our 2004 annual
stockholders' meeting, a portion of the debentures may no longer be convertible,
certain of the warrants will not be exercisable and we will be required to pay
the holders the lesser of (a) the difference between (X) the conversion price
(with regard to the debentures) and/or the exercise price (with regard to the
warrants) and (Y) the market price of our shares or (b) 119.9% of the relevant
conversion price, with regard to the debentures and/or 19.9% of the relevant
warrant exercise price, in lieu of shares. At present, the market price is above
the conversion price of all of the debentures and the exercise price of all but
one series of warrants. If we are required to pay cash rather than issue shares
upon conversion of a material amount of debentures and/or exercise of a material
number of warrants, our financial condition would be materially adversely
affected.
We have guaranteed the value of a number of shares issued and to be issued as a
result of our acquisition of assets from Interferon Sciences. If our share price
is not above $1.59 per share 12 or 24 months after the dates of issuance of the
guaranteed shares, our financial condition could be adversely affected.
In March 2004, when we consummated the second ISI asset acquisition, we issued
487,028 shares to ISI. In May 2003 we issued an aggregate of 581,761 shares to
two of ISIs' creditors. We have guaranteed the value of all but 62,500 of these
shares to be $1.59 per share on the relevant termination dates. As of March 31,
2004 738,993 of the guaranteed shares have not been sold. The termination dates
are 24 months after the dates of issuance and delivery of the guaranteed shares
to ISI 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 ISI and the American National Red Cross 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 738,993 shares are still held on the
relevant termination dates, we would be obligated to pay to ISI $675,000 and the
American National Red Cross $500,000. The reported last sale price for our
common stock on the American Stock Exchange on April 26, 2004 was $4.32 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
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), we have
acquired from ISI its patents for natural alpha interferon produced from human
peripheral blood leukocytes and its production process. We cannot assure that
our competitors will not seek and obtain patents regarding the use of similar
products in combination with various other agents, for a particular target
indication prior to our doing such. If we cannot protect our patents covering
the use of our products for a particular disease, or obtain additional patents,
we may not be able to successfully market our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of protection
afforded by pharmaceutical and biotechnology patents. There can be no assurance
that new patent applications relating to our products or technology will result
in patents being issued or that, if issued, such patents will afford meaningful
protection against competitors with similar technology. It is generally
anticipated that there may be significant litigation in the industry regarding
patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position that we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
There can be no assurance that we will be able to obtain necessary licenses if
we cannot enforce patent rights we may hold. In addition, the failure of third
parties from whom we currently license certain proprietary information or from
whom we may be required to obtain such licenses in the future, to adequately
enforce their rights to such proprietary information, could adversely affect the
value of such licenses to us.
If we cannot enforce the patent rights we currently hold we may be required to
obtain licenses from others to develop, manufacture or market our products.
There can be no assurance that we would be able to obtain any such licenses on
commercially reasonable terms, if at all. We currently license certain
proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information developed.
No assurances can be given that such third parties will adequately enforce any
rights they may have or that the rights, if any, retained by the government will
not adversely affect the value of our license.
There is no guarantee that our trade secrets will not be disclosed or known by
our competitors.
To protect our rights, we require certain employees and consultants to enter
into confidentiality agreements with us. There can be no assurance that these
agreements will not be breached, that we would have adequate and enforceable
remedies for any breach, or that any trade secrets of ours will not otherwise
become known or be independently developed by competitors.
If our distributors do not market our products successfully, we may not generate
significant revenues or become profitable.
We have limited marketing and sales capability. We are dependent upon existing
and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, any revenues received by us will be dependent on the
efforts of third parties, and there is no assurance that these efforts will be
successful. Our agreement with Accredo offers the potential to provide some
marketing and distribution capacity in the United States while agreements with
Bioclones (Proprietary), Ltd , Biovail Corporation and Laboratorios Del Dr.
Esteve S.A. should provide a sales force in South America, Africa, United
Kingdom, Australia and New Zealand, Canada, Spain and Portugal.
We cannot assure that our domestic or foreign marketing partners will be able to
successfully distribute our products, or that we will be able to establish
future marketing or third party distribution agreements on terms acceptable to
us, or that the cost of establishing these arrangements will not exceed any
product revenues. The failure to continue these arrangements or to achieve other
such arrangements on satisfactory terms could have a materially adverse effect
on us.
There are no long-term agreements with suppliers of required materials. If we
are unable to obtain the required raw materials, we may be required to scale
back our operations or stop manufacturing ALFERON N Injection.
A number of essential materials are used in the production of ALFERON N
Injection(R), including human white blood cells. We do not have long-term
agreements for the supply of any of such materials. There can be no assurance we
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all. 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. In March 2004 we acquired ISI's 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 having been 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, Merck and Schering-Plough Corp. These potential competitors are
among the largest pharmaceutical companies in the world, are well known to the
public and the medical community, and have substantially greater financial
resources, product development, and manufacturing and marketing capabilities
than we have. Although we believe our principal advantage is the unique
mechanism of action of Ampligen(R) on the immune system, we cannot assure that
we will be able to compete.
ALFERON N Injection(R). Many potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have. ALFERON
N Injection(R) currently competes with Schering's injectable recombinant alpha
interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection(R) also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection(R). If and when we obtain additional approvals of uses of this
product, we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, three recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection(R) for the treatment of new indications, we will
be able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection(R). Currently, our wholesale price on a per
unit basis of ALFERON N Injection(R) is higher than that of the competitive
recombinant alpha and beta interferon products.
General. Other companies may succeed in developing products earlier than we do,
obtaining approvals for such products from the FDA more rapidly than we do, or
developing products that are more effective than those we may develop. While we
will attempt to expand our technological capabilities in order to remain
competitive, there can be no assurance that research and development by others
or other medical advances will not render our technology or products obsolete or
non-competitive or result in treatments or cures superior to any therapy we
develop.
Possible side effects from the use of Ampligen(R) or ALFERON N Injection(R)
could adversely affect potential revenues and physician/patient acceptability of
our product.
Ampligen(R). We believe that Ampligen(R) has been generally well tolerated with
a low incidence of clinical toxicity, particularly given the severely
debilitating or life threatening diseases that have been treated. A mild
flushing reaction has been observed in approximately 15% of patients treated in
our various studies. This reaction is occasionally accompanied by a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of "feeling hot," sweating and nausea.
The reaction is usually infusion-rate related and can generally be controlled by
slowing the infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash,
transient visual disturbances, slow or irregular heart rate, decreases in
platelets and white blood cell counts, anemia, dizziness, confusion, elevation
of kidney function tests, occasional temporary hair loss and various flu-like
symptoms, including fever, chills, fatigue, muscular aches, joint pains,
headaches, nausea and vomiting. These flu-like side effects typically subside
within several months. One or more of the potential side effects might deter
usage of Ampligen(R) in certain clinical situations and therefore, could
adversely affect potential revenues and physician/patient acceptability of our
product.
ALFERON N Injection(R). At present, ALFERON N Injection(R) is only approved for
the intralesional (within the lesion) treatment of refractory or recurring
external genital warts in adults. In clinical trials conducted for the treatment
of genital warts with ALFERON N Injection(R), patients did not experience
serious side effects; however, there can be no assurance that unexpected or
unacceptable side effects will not be found in the future for this use or other
potential uses of ALFERON N Injection(R) which could threaten or limit such
product's usefulness.
We may be subject to product liability claims from the use of Ampligen(R) or
other of our products which could negatively affect our future operations.
We face an inherent business risk of exposure to product liability claims in the
event that the use of Ampligen(R) or other of our products results in adverse
effects. This liability might result from claims made directly by patients,
hospitals, clinics or other consumers, or by pharmaceutical companies or others
manufacturing these products on our behalf. Our future operations may be
negatively affected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against 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. We have secured key man life insurance in the amount of $2 million on
the life of Dr. Carter and we have an employment agreement with Dr. Carter that,
as amended, runs until May 8, 2008. However, Dr. Carter has the right to
terminate his employment upon not less than 30 days prior written notice. The
loss of Dr. Carter or other personnel, or the failure to recruit additional
personnel as needed could have a materially adverse effect on our ability to
achieve our objectives.
Uncertainty of health care reimbursement for our products.
Our ability to successfully commercialize our products will depend, in part, on
the extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health coverage insurers and other organizations. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and from time to time legislation is proposed, which, if adopted,
could further restrict the prices charged by and/or amounts reimbursable to
manufacturers of pharmaceutical products. We cannot predict what, if any,
legislation will ultimately be adopted or the impact of such legislation on us.
There can be no assurance that third party insurance companies will allow us to
charge and receive payments for products sufficient to realize an appropriate
return on our investment in product development.
There are risks of liabilities associated with handling and disposing of
hazardous materials.
Our business involves the controlled use of hazardous materials, carcinogenic
chemicals and various radioactive compounds. Although we believe that our safety
procedures for handling and disposing of such materials comply in all material
respects with the standards prescribed by applicable regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident or the failure to comply with
applicable regulations, we could be held liable for any damages that result, and
any such liability could be significant. We do not maintain insurance coverage
against such liabilities.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock has been and is likely to be volatile. In
addition to general economic, political and market conditions, the price and
trading volume of our stock could fluctuate widely in response to many factors,
including:
o announcements of the results of clinical trials by us or our competitors;
o adverse reactions to products;
o governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory
agency concerns regarding the safety or effectiveness of our products;
o changes in U.S. or foreign regulatory policy during the period of product
development;
o developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
o announcements of technological innovations by us or our competitors;
o announcements of new products or new contracts by us or our competitors;
o actual or anticipated variations in our operating results due to the level
of development expenses and other factors; o changes in financial
estimates by securities analysts and whether our earnings meet or exceed
the estimates;
o conditions and trends in the pharmaceutical and other industries;
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 March 31, 2004, the price of our common stock has ranged
from $1.33 to $4.85. We expect the price of our common stock to remain volatile.
The average daily trading volume of our common stock varies significantly. Our
relatively low average volume and low average number of transactions per day may
affect the ability of our stockholders to sell their shares in the public market
at prevailing prices and a more active market may never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares are
sold in the public market.
As of April 26, 2004, approximately 801,623 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. Substantially all of these shares are registered herein or in a
prior registration statement pursuant to agreements between us and the holders
of these shares. In addition, we have registered 12,006,977 shares issuable (i)
upon conversion of approximately 135% of the Debentures issued in January 2004
(the "January 2004 Debentures"), the October Debentures, the July Debentures and
the January 2004 Debentures issuable upon exercise of AIR (issued in conjunction
with the January 2004 Debentures); (ii) as payment of 135% of the interest on
all of the Debentures; (iii) upon exercise of 135% of the 2009 Warrants issued
in conjunction with the January 2004 Debentures, the October 2008 Warrants, the
July 2008 Warrants and the June 2008 Warrants; (iv) upon exercise of certain
other warrants and stock options and (v) shares issued to certain suppliers and
service providers. Registration of the shares permits the sale of the shares in
the open market or in privately negotiated transactions without compliance with
the requirements of Rule 144. To the extent the exercise price of the warrants
is less than the market price of the common stock, the holders of the warrants
are likely to exercise them and sell the underlying shares of common stock and
to the extent that the conversion price and exercise price of these securities
are adjusted pursuant to anti-dilution protection, the securities could be
exercisable or convertible for even more shares of common stock. We also may
issue shares to be used to meet our capital requirements or use shares to
compensate employees, consultants and/or directors. We are unable to estimate
the amount, timing or nature of future sales of outstanding common stock. Sales
of substantial amounts of our common stock in the public market could cause the
market price for our common stock to decrease. Furthermore, a decline in the
price of our common stock would likely impede our ability to raise capital
through the issuance of additional shares of common stock or other equity
securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may make it more
difficult for someone to acquire control of us or for our stockholders to remove
existing management, and might discourage a third party from offering to acquire
us, even if a change in control or in management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us to issue
shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In this regard, in November, 2002 we adopted a stockholder rights plan
and, under the Plan, our Board of Directors declared a dividend distribution of
one Right for each outstanding share of Common Stock to stockholders of record
at the close of business on November 29, 2002. Each Right initially entitles
holders to buy one unit of preferred stock for $30.00. The Rights generally are
not transferable apart from the common stock and will not be exercisable unless
and until a person or group acquires or commences a tender or exchange offer to
acquire, beneficial ownership of 15% or more of our common stock. However, for
Dr. Carter, our chief executive officer, who already beneficially owns 12.1% 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 November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others" ("Interpretation No. 45"). Interpretation No. 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", and amendment of FASB Statement No. 123
("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative method of transition for an entity that
voluntarily changes to the fair value based of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. We will
continue to account for stock-based compensation using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but
have adopted the enhanced disclosure requirements of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("Interpretation No. 46"), that 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
provisions of Interpretation No. 46 have been deferred to the first quarter of
2004. This Interpretation did not have an effect on our consolidated financial
statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires an issuer to classify certain financial
instruments, such as mandatory redeemable shares and obligations to repurchase
the issuers equity shares, as liabilities. The guidance is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
is otherwise effective at the beginning of the first interim period after June
15, 2003. SFAS 150 did not have an impact on our financial condition or results
of operations.
Disclosure About Off-Balance Sheet Arrangements
Prior to our annual meeting of stockholders in September 2003, we had a limited
number of shares of Common Stock authorized but not issued or reserved for
issuance upon conversion or exercise of outstanding convertible and exercisable
securities such as debentures, options and warrants. Prior to the meeting, to
permit consummation of the sale of the July Debentures and the related warrants,
Dr. Carter agreed that he would not exercise his warrants or options unless and
until our stockholders approve an increase in our authorized shares of common
stock. For Dr. Carter's waiver of his right to exercise certain options and
warrants prior to approval of the increase in our authorized shares, we have
agreed to compensate Dr. Carter. See "Executive Compensation; Employment
Agreements" in amendment no. 1 to our annual report on Form 10-K for the year
ended December 31, 2003, as filed with the SEC on March 30, 2004, for details
related to how Dr. Carter has been compensated with respect to this matter.
In connection with the debenture agreements, HEB has outstanding letters of
credit of $1,000,000 as additional collateral.
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in Notes
to the Consolidated Financial Statements. The significant accounting policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:
Revenue
Revenues for non-refundable license fees are recognized under the Performance
Method-Expected Revenue. This method considers the total amount of expected
revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.
Upon receipt, the upfront non-refundable payment is deferred. The
non-refundable upfront payments plus non-refundable payments arising from the
achievement of defined milestones are recognized as revenue over the performance
period based on the lesser of (a) percentage of completion or (b) non-refundable
cash earned (including the upfront payment).
This method requires the computation of a ratio of cost incurred to date to
total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues from the sale of product are recognized when the product is shipped, as
title is transferred to the customer. We have no other obligation associated
with our products once shipment has occurred.
Patents and Trademarks
Effective October 1, 2001, we adopted a 17-year estimated useful life for the
amortization of our patents and trademark rights in order to more accurately
reflect their useful life. Prior to October 1, 2001, we were using a ten year
estimated useful life.
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over the life of the assets. We review
our patents and trademark rights periodically to determine whether they have
continuing value. Such review includes an analysis of the patent and trademark's
ultimate revenue and profitability potential on an undiscounted cash basis to
support the realizability of our respective capitalized cost. In addition,
management's review addresses whether each patent continues to fit into our
strategic business plans.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risks consist of
cash equivalents and accounts receivable.
Our policy is to limit the amount of credit exposure to any one financial
institution and place investments with financial institutions evaluated as being
credit worthy, or in short-term money markets, which are exposed to minimal
interest rate and credit risks. At times, we have bank deposits and overnight
repurchase agreements that exceed federally insured limits.
Concentration of credit risk, with respect to receivables, is limited through
our credit evaluation process. We do not require collateral on our receivables.
Our receivables consist principally of amounts due from wholesale drug companies
as of March 31, 2004.
RESULTS OF OPERATIONS
Three months ended March 31, 2004 versus Three months ended March 31, 2003
Net loss
Our net loss was approximately $8,042,000 for the three months ended March 31,
2004 versus a net loss of $1,617,000 for the same period a year ago. Per share
loss for the three months ended March 31, 2004 was $0.20 per share versus $0.05
a year earlier for the same period. This year-to-year increase in losses of
$6,425,000 is primarily due to non-cash financing costs of $3,851,000 relating
to our July Debentures, October Debentures and January 2004 Debentures
(Collectively, the "Debentures") as well as a non-cash stock compensation charge
of $1,769,000 resulting from warrants issued to Dr. Carter in 2003 that vested
in the current quarter. These warrants vested upon the execution of the second
ISI asset closing on March 17, 2004. See "Executive Compensation" in amendment
no. 1 to our annual report on Form 10-K for the year ended December 31, 2003, as
filed with the SEC on March 30, 2004, for details related to how Dr. Carter has
been compensated with respect to this matter. In addition, our loss during the
current period includes $606,000 in operating losses relating to our new Alferon
division. The operating loss for the period March 11, 2003 through March 31,
2003 for our Alferon division amounted to $170,000. These three factors
represent 77% of our net loss for the three months ended March 31, 2004. For
comparative purposes, excluding our March 31, 2004 losses for these three
factors, our losses were $1,816,000 for the three months ended March 31, 2004
compared to $1,447,000 for the same period in 2003 after adjustment for the
Alferon division losses or an increase of approximately $369,000. The primary
reason for the increase was attributed to higher general corporate legal costs
and director's fees.
Revenues
Revenues for the three months ended March 31, 2004 were $308,000 as compared to
revenues of $66,000 for the same period in 2003. Revenues from our ME/CFS cost
recovery treatment programs principally underway in the U.S., Canada and Europe
were $49,000 for the three months ended March 31, 2004 versus $47,000 for the
three months ended March 31, 2003. These clinical programs allow us to provide
Ampligen(R) therapy at our cost to severely debilitated ME/CFS patients. Under
this program the patients pay for the cost of Ampligen(R) doses infused. These
costs total approximately $7,200 for a 24-week treatment program.
In addition, revenues for the three months ended March 31, 2004 from sales of
ALFERON N totaled $259,000 versus $19,000 for the 20-day period of March 11,
2003, the date we acquired the rights to the Alferon N business from ISI,
through March 31, 2003. Sales of Alferon N are anticipated to increase as we are
producing more product and our marketing/sales programs are underway.
Since acquiring the right to manufacture and market Alferon N on March 11, 2003,
we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N.
Preliminary work has started on completing the second lot of approximately
16,000 vials. Our production and quality control personnel in our newly acquired
New Brunswick, NJ 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 18,000 vials now in very early stages of
production.
Our marketing and sales plan for ALFERON N consists of engaging sales force
contract organizations and supplementing 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 on
recurring external genital warts in patients of age 18 or older and to assist
primary prescribers in expanding their practice.
In addition, in August 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.
We executed a Memorandum of Understanding in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The option period ends 12 weeks after Fuji has
had a chance to review the report on the results of our Amp 516 clinical trial
and meet with the trial's principal investigators. We received an initial fee of
400,000 Euros (approximately $497,000 US). If we do not provide Fuji with the
full report by May 31, 2004 we will be required to repay half of this fee and if
we do not provide them with the report by December 31, 2004, we will be required
to refund the entire fee. If Fuji exercises the option, Fuji would be required
to pay us an additional 1,600,000 Euros upon execution of the Sales and
Distribution agreement, purchase Ampligen(R) exclusively from us and meet
certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would receive
an additional 1,000,000 Euros and, upon approval by the EMEA, an additional
2,000,000 Euros. If we failed to meet the December 31, 2005 filing deadline, we
would be required to return 40% of all payments that we had received from Fuji.
We would be required to sell Ampligen(R) to Fuji at a 20% price discount until
the aggregate amount of the discount reached $1,000,000 Euros (representing 50%
of the initial 2,000,000 fee paid to us on and prior to execution of the
definitive agreement). The foregoing is a summary of the memorandum of
understanding. We cannot assure that we can prepare and issue the AMP 516 report
within the time frames noted or that Fuji will exercise the option or that the
proposed terms of the Sales and Distribution Agreement will not change
materially. The initial fee has been recorded on our balance sheet at March 31,
2004 as deferred revenue.
On March 17, 2004, we closed on the acquisition of all of the worldwide rights
of ALFERON N as well as the FDA approved biological production facility in New
Brunswick, New Jersey. In addition, there are currently 70 sales representatives
in the U.S domestic market, which we provide with sales training and
professional marketing materials. We will also continue to focus our efforts on
a worldwide sales plan for Alferon N.
Production costs/cost of goods sold
Production costs for the three months ended March 31, 2004 and 2003 were
$601,000 and $118,000, respectively. These costs reflect approximately $111,000
for the cost of sales of ALFERON N Injection(R) for the three months ended March
31, 2004. In addition, costs of salesfor Alferon N Injection(R) for the period
March 11, 2003 (acquisition date of inventory from ISI) through March 31, 2003
amounted to $12,000. The remaining production costs represent expenditures
associated with the ramping up of the New Brunswick facility for further
production of Alferon N Injection(R).
Research and Development costs
Overall research and development direct costs for the three months ended March
31, 2004 were $964,000 as compared to $873,000 during the same period a year
earlier. 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 primarily consists of
on-going clinical trials involving patients with HIV.
Our strategy is to develop our lead compound, the experimental immunotherapeutic
Ampligen(R), to treat chronic diseases for which there is currently no adequate
treatment available. We seek the required regulatory approval, which will allow
the commercial introduction of Ampligen for ME/CFS and HIV/AIDS in the U.S.,
Canada, Europe and Japan.
We recently completed the double-blind segment of our AMP 516 ME/CFS Phase III
clinical trial for use of Ampligen(R) in the treatment of ME/CFS. Clinical data
on the primary endpoint exercise treadmill duration was presented at the 17th
International Conference on Anti-viral Research in Tucson, AZ on May 3, 2004.
The data showed that patients receiving Ampligen for 40 weeks improved exercise
treadmill performance 19.4% vs. 5.1% in the placebo group (p=0.022). Ampligen is
also currently in two Phase IIb studies for the treatment of HIV to overcome
multi-drug resistance, virus mutation and toxicity associated with current HAART
therapies. One study, the AMP-719, is a Salvage Therapy, conducted in the U.S.
and evaluating the potential synergistic efficacy of Ampligen in multi-drug
resistant HIV patients for immune enhancement. The second study, the AMP-720, is
a clinical trial designed to evaluate the effect of Ampligen under Strategic
Treatment Intervention and is also conducted in the U.S. Enrollment in the AMP
719 study is presently on hold as we devote our efforts on the AMP 720 study.
General and Administrative Expenses
General and Administrative ("G&A") expenses for the three months ended March 31,
2004 and 2003 were approximately $2,844,000 and $667,000, respectively. The
increase in G&A expenses of $2,177,000 during this period is primarily due to a
non-cash stock compensation charge of $1,769,000 resulting from warrants issued
to Dr. Carter in 2003 that vested in the current quarter. These warrants vested
upon the execution of the second ISI asset closing on March 17, 2004. Aside from
the expenses related to our Alferon division totaling $265,000 and $58,000 in
2004 and 2003, respectively, and the non-cash stock compensation charge noted
above, our G&A expenses were $810,000 for the three months ended March 31, 2004
as compared to $609,000 during the same three months in 2003. The primary reason
for the increase in G&A costs of $201,000 was attributable to higher general
corporate legal costs and directors' fees in the current quarter.
Other Income/Expense
Interest and other income for the three months ended March 31, 2004 and 2003
totaled $11,000 and $50,000, respectively. The primary reason for the decrease
in interest and other income during the current quarter can be attributed to
lower cash available for investment, a shorter holding period for investments
and lower interest rates versus the same period a year ago. All funds in excess
of our immediate need are invested in short-term high quality securities.
Interest Expense and Financing Costs
Interest expense and financing costs were $3,952,000 for the three months ended
March 31, 2004 versus $75,000 for the same three months a year ago. Non-cash
financing costs consist of the amortization of debenture closing costs, the
amortization of Original Issue Discounts and the amortization of costs
associated with beneficial conversion features of our debentures and the fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated Statements of Operations under the caption "Financing Costs."
In connection with the redemption obligation recorded in connection with the
January 2004 Debentures, we recorded additional financing costs of approximately
$947,000. Please see Note 7 in the consolidated financial statements contained
herein for more details on these transactions.
Liquidity And Capital Resources
Cash used in operating activities for the three months ended March 31, 2004 was
$1,722,000. Cash provided by financial activities for the three months ended
March 31, 2004 amounted to $3,939,000, substantially from proceeds from a
debenture offering (see below). As of March 31, 2004, we had approximately
$7,238,000 million in cash and short-term investments. We believe that these
funds plus 1) the gross proceeds received from the exercising of warrants of
approximately $2,400,000, 2) the infusion of approximately $1,550,000 million in
remaining net proceeds from the October Debentures in April 2004, 3) the
projected net cash flow from the sale of ALFERON N Injection(R), and 4) the
proceeds from licensing agreements and/or the expected infusion of $2,000,000 in
proceeds from our investors exercising their AIR should be sufficient to meet
our operating cash requirements including debt service during the next 12
months. Sales of ALFERON N Injection(R) could be greater than expected which
would improve our cash position during the next twelve months. Also, we have the
ability to curtail discretionary spending, including some research and
development activities, if required to conserve cash.
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 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 released to us if, and only if, we acquired ISI's facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with 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 were 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
pledged all of our assets, other than our intellectual property, as collateral
and were subject to comply with certain financial and negative covenants, which
include but was not limited to the repayment of principal balances upon
achieving certain revenue milestones.
The March Debentures were 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 was 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 was to 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 was 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 for public sale.
As of December 31, 2003 the investors had converted the $5,426,000 principal of
the March Debentures into 3,716,438 shares of our common stock. The total
imputed interest on these Debentures was $111,711 of which $17,290 was paid in
cash and $94,421 was paid by the issuance of 39,080 shares of common stock. The
investors exercised the 743,288 warrants in July 2003 which produced proceeds in
the amount of $1,248,724
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 (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 within a set timeframe. Although we had not acquired
ISI's facility, these funds were released to us in October 2003. 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. Pursuant to the terms and
conditions of the July Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants.
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 the
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, as amended, are to acquire at
any time commencing on July 26, 2004 through January 31, 2009 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 $2.14 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 debenture holders extended the deadline to 90 days after January
26, 2004. 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.
Pursuant to the terms and conditions of the October Debentures, we pledged all
of our assets, other than our intellectual property, as collateral and were
subject to comply with certain financial and negative covenants.
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 Debentures. As noted above, $1,550,000 of
the proceeds from the October Debentures were held back pending our completing
the acquisition of the ISI facility and our mortgaging that facility to the
debentureholders. On March 17, 2004, we closed on the acquisition of all of the
worldwide rights of Alferon N as well as the FDA approved biological production
facility in the New Brunswick, New Jersey, from ISI. As a result, the proceeds
held back from the October Debenture amounting to $1,550,000 were released to
the Company in April 2004. As required by the Debentures, we are in the process
of providing a mortgage on the facility as further security for the Debentures.
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. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors are to acquire
at any time commencing on July 26, 2004 through April 30, 2009 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 $2.19 per share). The exercise price (and the reset
price) under the October 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 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 October Debentures,
as interest shares under the October Debentures and upon exercise of the 2008
Warrants. If, subject to certain exceptions, sales of all shares required to be
registered cannot be made pursuant to the registration statement, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
such conditions exist.
On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures"), an aggregate of 790,514 warrants (the "2009 Warrants") and 158,103
shares of common stock, and AIR (to purchase up to an additional $2,000,000
principal amount of January 2004 Debentures commencing in six months) in a
private placement for aggregate anticipated net proceeds of $3,695,000. The
January 2004 Debentures mature on January 31, 2006 and bear interest at 6% per
annum, payable quarterly in cash or, subject to satisfaction of certain
conditions, common stock. Any shares of common stock issued to the investors as
payment of interest shall be valued at 95% of the average closing price of the
common stock during the five consecutive business days ending on the third
business day immediately preceding the applicable interest payment date.
Commencing six months after issuance, the Company is required to start repaying
the then outstanding principal amount under the January 2004 Debentures in
monthly installments amortized over 18 months in cash or, at the Company's
option, in shares of common stock. Any shares of common stock issued to the
investors as installment payments shall be valued at 95% of the average closing
price of the common stock during the 10-day trading period commencing on and
including the eleventh trading day immediately preceding the date that the
installment is due. Pursuant to the terms and conditions of the January 2004
Debentures, we pledged all of our assets, other than our intellectual property,
as collateral and were subject to comply with certain financial and negative
covenants.
The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures is fixed at $2.53 per share,
subject to adjustment for anti-dilution protection for issuance of common stock
or securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
There are two classes of July 2009 warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005
(but in no event less than $2.58 per share with regard to the Class A warrants
and $3.54 per share with regard to the Class B warrants). The exercise price
(and the reset price) under the July 2009 Warrants also is subject to similar
adjustments for anti-dilution protection.
The Company also issued to the investors AIR pursuant to which the investors
have the right to acquire up to an additional $2,000,000 principal amount of
January 2004 Debentures from the Company. These Debentures are identical to the
January 2004 Debentures except that the conversion price is $2.58. The AIR are
exercisable commencing on July 26, 2004 (the "Trigger" date) for a period of 90
days from the Trigger Date or 90 days from the date which the registration
statement registering the shares issuable upon the conversion of the January
2004 Debentures to be issued pursuant to the AIR is declared effective,
whichever is longer.
The Company entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the AIR), the shares, and the January 2009
Warrants. Pursuant to the Registration Rights Agreement the Company registered
on behalf of the investors the shares issued to the investors and 135% of the
shares issuable upon conversion of the Debentures (including payment of interest
thereon) and upon exercise of the January 2009 Warrants. If the Registration
Statement containing these shares had not been filed within the time period
required by the agreement, had not declared effective within the time period
required by the agreement or, after it was declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we would have been 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.
As of April 26, 2004, the investors have converted $11,902,610 of debt from the
March, July and October Debentures into 7,073,234 shares of our common stock.
The March Debentures have been fully converted. The remaining principal balance
on the remaining 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 $1,300,000 into the debenture cash collateral account as required by
the terms of the October Debentures. The amounts paid through March 31, 2004
have been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of March 31, 2004. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in March, July
and October 2003 and in January 2004, 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 612,500 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, 200,000 are exercisable at $2.50 per share, 87,500 are exercisable at
$2.42 per share and 100,000 are exercisable at $3.04 per share. The $1.74
warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire on March
12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04 warrants
expire on January 5, 2009. By agreement with Cardinal, we have registered all
warrants and underlying shares for public sale.
Section 713 of the American Stock Exchange ("AMEX") Company Guide provides that
the Company must obtain stockholder approval before issuance, at a price per
share below market value, of common stock, or securities convertible into common
stock, equal to 20% or more of its outstanding common stock (the "Exchange
Cap"). Taken separately, the July 2003, October 2003 and January 2004 Debenture
transactions do not trigger Section 713. However, the AMEX has taken the
position that the three transactions should be aggregated and, as such,
stockholder approval is required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
the Company could exceed the Exchange Cap amounted to approximately 1,299,000.
In accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, the Company
recorded on January 26, 2004, a redemption obligation of approximately
$1,244,000. This liability represents the fair market value of the warrants and
beneficial conversion feature related to the 1,299,000 shares.
In addition, in accordance with EITF 00-19, the Company revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. The Company recorded an additional redemption obligation and
finance charge of $947,000 as a result of this revaluation. If the Company
obtains stockholder approval, the Company's redemption obligation will be
recorded as additional paid in capital on the date approval is received.
The Company anticipates receiving stockholder and Exchange approval for the
issuance of the shares in excess of the Exchange limit. However, the Company
cannot ensure it will obtain the proper approval from both parties.
In connection with the debenture agreements, we have outstanding letters of
credit of $1 million as additional collateral.
On March 11, 2003, we acquired from 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. ISI has sold all of these shares. We also agreed
to pay ISI 6 % of the net sales of ALFERON N Injection(R).
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 to be $1.59 per share on the termination date. 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 487,028 guaranteed shares to ISI and 12 months after the date of
issuance of the guaranteed shares to the American National Red Cross. These
stockholders are permitted to periodically sell certain amounts of their shares.
If, within 30 days after the respective termination date, one or more of these
stockholders requests that we honor the guarantee, we will be obligated to
reacquire their remaining guaranteed shares and pay them $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 or 24 months after the dates of issuance
of the guaranteed shares, our financial condition could be adversely affected"
in "Risk Factors," above.
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. As of March 31, 2004 GP
Strategies had sold all of its shares and the American National Red Cross has
not sold any of their 314,465 shares.
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 Debentures and the related warrants,
Dr. Carter agreed that he would not exercise his warrants or options unless and
until our stockholders approve an increase in our authorized shares of common
stock. For Dr. Carter's waiver of his right to exercise certain options and
warrants prior to approval of the increase in our authorized shares, we agreed
to compensate Dr. Carter. See "Executive Compensation; Employment Agreements" in
amendment no. 1 to our annual report on Form 10-K for the year ended December
31, 2003, as filed with the SEC on March 30, 2004, for details related to how
Dr. Carter has been compensated with respect to this matter.
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.
On May 13, 2004, we issued to the debentureholders warrants to purchase an
aggregate of 1,300,000 shares ("the May 2009 Warrants"). In consideration of the
foregoing, the debentureholders exercised the June 2008 warrants. As a result,
we issued an aggregate of 1,000,000 shares and received gross proceeds of
approximately $2,400,000.
The May 2009 warrants are to acquire at any time, commencing on November 14,
2004 through April 30, 2009, an aggregate of 1,300,000 shares of common stock at
a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 Warrants will reset to the lesser of the exercise price then in effect or a
price equal to the average of the daily price of the common stock between May
15, 2004 and May 13, 2005 (but in no event less than $4.008 per share). The
exercise price (and the reset price) under the May 2009 Warrants also is subject
to adjustments for anti-dilution projection similar to those in the other
warrants.
In addition, the debentureholders agreed to amend the provisions of all of the
outstanding warrants and debentures (including the debentures issuable pursuant
to the AIR) to limit the maximum amount of funds that the holders could receive
in lieu of shares upon conversion of the debentures and/or exercise of the
warrants in the event that the Exchange Cap was reached to 119.9% of the
conversion price of the relevant debentures and 19.9% of the relevant warrant
exercise price.
These transactions could result in us recording an additional redemption
obligation for the reasons discussed in Note 7 and will result in additional
financing charges beginning in the second quarter of 2004.
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 $7,238,000 in cash and cash equivalents and short-term investments
at March 2004. 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 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.
ITEM 2: Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the quarter ended March 31, 2004, 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. In addition, the Company
made certain changes to its Debentures and related warrants. For information on
the foregoing, see Part I. Item 2: "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations; Liquidity And Capital Resources."
The Company did not repurchase any of its securities during the quarter ended
March 31, 2004.
ITEM 3: Defaults in Senior Securities
None.
ITEM 4: Submission of Matters to a Vote of Security Holders
None.
ITEM 5: Other Information
As noted in Part I, on May 14, 2004, we issued to the holders of our debentures
warrants to purchase an aggregate of 1,300,000 shares ("the May 2009 Warrants").
In consideration of the foregoing, the debentureholders exercised our June 2008
warrants (for an aggregate of 1,000,000 shares) and we received gross proceeds
of $2,400,000. For a description of the May 2009 Warrants please see Part I,
ITEM 2: "Management's Discussion and Analysis of Financial Condition and Results
of Operations; Liquidity And Capital Resources."
In addition, the debentureholders agreed to amend the provisions of all of the
outstanding debentures (including the debentures issuable pursuant to their
Additional Investement Rights) and warrants to limit the maximum amount of funds
that the holders could receive in lieu of shares upon conversion of the
debentures and/or exercise of the warrants in the event that the Exchange Cap
was reached to 119.9% of the conversion price of the relevant debentures and
19.9% of the relevant warrant exercise price.
ITEM 6: Exhibits and Reports on Form 8K
(a) Exhibits
10.1 Form of Warrant for Common Stock issued on
May 14, 2004
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/A (amending 8-K filed on March 13, 2003) filed March 26, 2004 Form 8-K
filed on March 15, 2004 Form 8-K filed on January 27, 2004
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
/S/ William A. Carter
---------------------------
William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Robert E. Peterson
Chief Financial Officer
Date: May 14, 2004
EXHIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, William A. Carter, Chief Executive Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control
over financial reporting.
Date: May 14, 2004
/s/ William A. Carter
----------------------
William A. Carter
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Robert Peterson, Chief Financial Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-QSB of the Registrant;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the Registrant as
of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the Registrant's internal control
over financial reporting that occurred during the Registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the Registrant's ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal control
over financial reporting.
Date: May 14, 2004
/s/ Robert E. Peterson
-----------------------
Robert Peterson
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended March 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William A. Carter, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 14, 2004
/s/ William A. Carter
-----------------------
William A. Carter
Chief Executive Officer
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ended March 31, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert E. Peterson, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
Date: May 14, 2004
/s/ Robert E. Peterson
-------------------
Robert E. Peterson
Chief Financial Officer