1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2001
Commission File Number: 0-27072
HEMISPHERx BIOPHARMA, INC.
------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(215) 988-0080
------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
/X/ Yes / / No
30,330,382 shares of common stock issued and outstanding as of
June 30, 2001.
2
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, June 30,
2000 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $3,721 $2,585
Short Term investments 4,657 2,395
Accounts receivable 60 11
Prepaid expenses and other current assets 607 536
----------- ----------
Total current assets 9,045 5,527
Property and equipment, net 373 302
Patent and trademark rights, net 1,204 1,051
Investments in unconsolidated affiliates 2,421 2,392
Other assets 24 55
----------- ----------
Total assets $13,067 $ 9,327
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,341 $ 919
Accrued expenses 154 203
----------- ----------
Total current liabilities 1,495 1,122
----------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 30 31
Additional paid-in capital 97,984 99,798
Accumulated other comprehensive income 34 38
Treasury stock - at cost (3,910) (4,273)
Accumulated deficit (82,566) (87,389)
----------- ----------
Total stockholders' equity 11,572 8,205
----------- ----------
Total liabilities and stockholders' equity $13,067 $ 9,327
=========== ==========
See accompanying notes to condensed consolidated financial statements.
3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three months ended
June 30,
--------------------------
(Unaudited)
2000 2001
---------- ----------
Revenues:
Cost recovery - clinical treatment programs $ 216 $ 101
---------- ----------
Costs and expenses:
Research and development 1,587 1,468
General and administrative 823 1,036
---------- ----------
Total cost and expenses 2,410 2,504
Interest and other income 160 86
Equity in loss of unconsolidated
affiliate (Note4) (26) (26)
---------- ----------
Net loss $(2,060) $(2,343)
========== ==========
Basic and diluted loss per share $ (.07) $ (.08)
========== ==========
Basic and diluted weighted
average common shares outstanding 29,031,926 30,109,219
=========== ==========
See accompanying notes to condensed consolidated financial statements.
4
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Six months ended
June 30,
--------------------------
(Unaudited)
2000 2001
---------- ----------
Revenues:
Cost recovery - clinical treatment programs $ 426 $ 228
---------- ----------
Costs and expenses:
Research and development 3,022 3,176
General and administrative 1,722 2,004
---------- ----------
Total cost and expenses 4,744 5,180
Interest and other income 312 180
Equity in loss of unconsolidated
affiliate (Note 4) (26) (51)
---------- ----------
Net loss $(4,032) $ (4,823)
========== ==========
Basic and diluted loss per share $ (.14) $ (.16)
========== ==========
Basic and diluted weighted
average common shares outstanding 28,801,993 30,035,522
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six months ended
June 30,
--------------------------
(Unaudited)
2000 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (4,032) $(4,823)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 62 71
Amortization of patents rights 132 191
Write-off of patent rights 2 29
Stock option and warrant compensation and
service expense 322 595
Equity in loss of unconsolidated affiliate 26 51
Changes in assets and liabilities:
Accounts receivable (13) 49
Prepaid expenses and other current assets (225) 71
Accounts payable 13 (422)
Accrued expenses (259) 49
Advances to affiliates (500) -
Other assets 17 (21)
--------- ----------
Net cash (used in) operating activities (4,455) (4,160)
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment (119) -
Additions to patent rights (64) (67)
Maturity of short term investments 2,153 4,657
Purchase of short term investments (2,237) (2,401)
Investments in unconsolidated affiliates (411) (22)
Other investments (34) -
-------- ---------
Net cash (used in) provided by investing activities (712) 2,167
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock 2,250 73
Proceeds from exercise of warrants 7,989 1,147
Purchase of warrants (113) -
Purchase of treasury stock (3,107) (363)
-------- ---------
Net cash provided by financing activities 7,019 857
--------- ---------
Net increase(decrease) in cash and cash equivalents 1,852 (1,136)
Cash and cash equivalents at beginning of period 6,397 3,721
--------- ---------
Cash and cash equivalents at end of period $ 8,249 $ 2,585
========= ==========
See accompanying notes to condensed consolidated financial statements.
6
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2001
(in thousands, except share data)
Accumulated
Common Stock Additional Other Treasury Treasury Total
--------------- Paid-In Comprehensive Stock Stock Accumulated Stockholders'
Shares Amount Capital Income shares deflict Equity
------- ------- ----------- ------------- --------- -------- ----------- -------------
Balance 12/31/2000 30,367,888 $30 $97,984 $34 395,646 $(3,910) $(82,566) $11,572
Common Stock Issued 441,800 1 1,219 1,220
Treasury Stock
Purchased 83,660 (363) (363)
Stock issued for R&D
expenses 87 87
Stock warrant
Compensation 508 508
Net Comprehensive
loss 4 (4,823) (4,819)
------- ------- ----------- ------------- --------- -------- ----------- -------------
Balance 6/30/2001 30,809,688 $31 $99,798 $38 479,306 $(4,273) $(87,389) $8,205
======= ======= =========== ============= ========= ======== =========== =============
See accompanying notes to condensed consolidated financial statements.
7
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 all its wholly owned
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, 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 2000 consolidated financial
statements included in our annual report on Form 10-K
for the year ended December 31, 2000, as amended on
Form 10K/A, second amendment, filed with the SEC on
June 19, 2001.
Prior year amounts have been reclassified to conform to
current period presentations.
NOTE 2: STOCK COMPENSATION:
Stock compensation expense was $595,000 in the six
month period ended June 30, 2001.
The expiration date of certain non-public stock
warrants was extended by the Board of Directors. The
extension produced non-cash stock/warrant compensation
of $262,000 in the three month period ended March 31,
2001. Stock/warrant compensation expense in the three
month period ended March 31, 2000 was $155,000.
Stock/warrant compensation expense was $333,000 during
the three month period ended June 30, 2001 versus
$167,000 in the three month period ended June 30, 2000.
Stock/warrant compensation expense had no effect on
total shareholders equity as it is offset by an
increase in additional paid in capital.
In 2001 we retained a nationally based consultant group
with expertise in executive compensation in the
biotechnology sector to analyze the compensation of
both the Chairman of the Board and Chief Executive
Officer and the Chief Financial Officer. In accordance
with the review, the Company granted 376,650 warrants
to purchase our common stock to William A. Carter for
services performed and to be performed and 30,000
warrants to the Chief Financial Officer. The Chief
8
Financial Officer's warrants are exercisable at $5.00
per share. The 376,650 warrants granted to the Chairman
of Board and CEO consist 188,325 that are exercisable
at $6.00 per share and 188,325 that are exercisable at
$9.00 per share. We applied APB Opinion No. 25 in
accounting for stock-based compensation of our company
employees and directors and, accordingly, no
compensation expense has been recognized for stock
warrants rights issued to employees and directors in
the financial statements because the exercise prices of
the warrants exceeded the quoted market price of our
stock on the dates of grant.
NOTE 3: COMPREHENSIVE INCOME:
In January, 1998, we adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"), Statement 130 establishes new
rules for the reporting and display of comprehensive
income and its components; however, the adoption of
this Statement had no impact on our net loss or
stockholders' equity. Comprehensive income is defined
as the change in equity of a business enterprise during
a period from transactions and other events and
circumstances from non-owner sources. It includes all
changes in equity during a period except those
resulting from investments by owners and distributions
to owners. The term "other comprehensive income"
refers to revenues, expenses, gains and losses that
under generally accepted accounting principles are
included in comprehensive income but excluded from net
income.
The components of comprehensive (loss) are:
(000's omitted)
---------------------------
For six months ending
--------------------------
June 30, 2000 June 30, 2001
-------------- ---------------
Net Loss $(4,032) $(4,823)
Unrealized gain on short
term investments 4
----------- ------------
Total comprehensive loss $(4,032) $(4,819)
========== ============
Note 4: INVESTMENTS:
Investments in unconsolidated affiliates:
In 1998, we invested $1,074,000 for a 3.3% equity
interest in R.E.D. Laboratories ("R.E.D."). R.E.D. is
a privately held biotechnology company for the
development of diagnostic markers for Chronic Fatigue
Syndrome and other chronic immune diseases. We have a
research collaboration agreement with R.E.D. to assist
in this development. R.E.D. is headquartered in
Belgium. The investment has been recorded at cost.
On May 11, 1999, we acquired a 15% interest in
California Institute of Molecular Medicine ("CIMM")
9
for $375,000. On May 16, 2000, we acquired an
additional 15% interest in CIMM for an additional
$375,000. The Company currently has a total interest
of 30% in CIMM for a total of $750,000. CIMM is
developing therapy for Hepatitis C virus. The
investment has been recorded by the equity method.
The balance at June 30, 2001 was $619,000.
Other investments include an initial equity investment
of $290,625 in Chronix Biomedical ("Chronix").
Chronix focuses upon the development of diagnostics
for chronic diseases. This initial investment was
made in May 31, 2000 by the issuance of 50,000 shares
of Hemispherx Biopharma, Inc. common stock from the
treasury. On October 12, 2000, we issued an additional
50,000 shares of Hemispherx Biopharma, Inc. common
stock and on March 7, 2001 we issued 12,000 more
shares of Hemispherx Biopharma, Inc. common stock from
our the treasury to Chronix for an aggregate equity
investment of $700,000. Pursuant to a strategic
alliance agreement, we provided Chronix with $250,000
during 2000 to conduct research in an effort to
develop intellectual property on potential new
products for diagnosing and treating various chronic
illnesses such as chronic fatigue syndrome. The
strategic alliance agreement provides us certain
royalty rights with respect to certain diagnostic
technology developed from this research and a right of
first refusal to license certain therapeutic
technology developed form this research.
Note 5: LIQUIDITY:
Our current cash and cash equivalents should fund
operations through March 2002. In the event that our
warrantholders do not exercise warrants at the level of
funding needed to support our operations, we will seek
access to the private or public equity market for the
funding capital needed. 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 the our clinical
trials for which cost recovery
from participants has been approved.
ITEM 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
--------------------------------------------------
Certain statements in this Report on Form 10-Q ("Form
10-Q"), constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of
10
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995 (collectively,
the "Reform Act"). Certain, but not necessary all, of
such forward-looking statements can be identified by
the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by
discussions of strategy that involve risks and
uncertainties. Such forward-looking statements involve
known and unknown risks, uncertainties and other
factors, including but not limited to, the risk factors
discussed below, which may cause the actual results,
performance or achievements of Hemispherx Biopharma,
Inc. and its subsidiaries (collectively, the "Company",
"we or "us") to be materially different from any future
results, performance or achievements expressed or
implied by such forward-looking statements and other
factors referenced in this Form 10-Q. The Company does
not undertake and specifically declines any obligation
to publicly release the results of any revisions which
may be made to any forward-looking statement to reflect
events or circumstances after the date of such
statements or to reflect the occurrence of anticipated
or unanticipated events.
Overview
We have spent almost thirty years in the exploration,
understanding, and mastering the mechanism of
ribonucleic acid (RNA) drug technology. The Company's
longevity as a biomedical research and drug development
institution, coupled with its record of enduring
scientific achievement, is evidence of long-term
commitment to these promising new classes of drugs for
the chronically ill and to bring new therapeutic
choices to the global health care community. Using
nucleic acid technologies to develop therapeutic
products for the treatment of viral diesease and
certain cancers, the company has pioneered a new class
of specially-configured ribonucleic acid (RNA) which
targets the potential treatments of chronic fatigue
syndrome (CFS), HIV associated disorders, chronic
hepatitis B&C infection and cancers which include
kidney cancer and metastatic malignant melanoma.
Hemispherx and its predecessor (HEM Pharmaceuticals) is
believed to be the only globally-operating
biotechnology company using nucleic acid drug
methodology which targets the body's natural anti-viral
defense system. The company's intellectual property
consists of over 350 patents issued and approximately
90 patents pending worldwide, which represents one of
the larger patent portfolios in the worldwide
biopharmaceutical sector.
A Food and Drug Administration authorized, randomized,
double-blind, placebo-controlled Phase III clinical
trial is currently underway at multiple locations in
the United States to test the efficacy of Ampligenr in
the treatment of 230 patients afflicted with CFS. Some
85% of the required patients have completed the pre-
trial clinical phase and have been admitted to the
program. Upon completion of this trial, we will
evaluate the clinical data collected and submit the
results to the FDA for review and approval. Our
European subsidiary, Hemispherx Biopharma Europe, is
11
engaged in establishing and conducting clinical trials
in Europe for the treatment of patients afflicted with
CFS.
The Food and Drug Administration has authorized us to
commence two phase II clinical trials designed to
evaluate the use of Ampligenr in augmenting immunologic
gains in patients receiving intense antiviral therapy
for HIV disease. We expect to enroll over 200 patients
in these clinical trials, which will be partly
conducted in Europe.
We were incorporated in Maryland in August 1966 under
the name HEM Research, Inc. and originally served as a
supplier of research support products. We redirected
our focus in the early 1980's to the development of
nucleic acid pharmaceutical technology and the
commercialization of RNA drugs. We were reincorporated
in Delaware and changed our name to HEM Pharmaceutical
Corp. in January 1991. In June, 1995 we became
Hemispherx Biopharma, Inc. The Company has three
domestic subsidiaries BioPro Corp., BioAgean Corp.and
Core BioTech Corp., all of which are incorporated in
Delaware. Our foreign subsidiary, Hemispherx Biopharma-
Europe was established in 1998.
We expect to continue our research and clinical efforts
for the next several years and may continue to incur
losses due to clinical costs incurred in the continued
development of Ampligenr 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.
Our research, development, clinical trials and the
manufacturing and marketing of the Company's products
are subject to extensive regulation by numerous
governmental agencies in the United States and other
countries. None of our products have been approved for
commercial sale by the Food and Drug Administration or
other foreign regulatory authorities.
RISK FACTORS
The following cautionary statements identify important
factors that could cause our actual results 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:
Our drug and related technologies are investigational
and subject to regulatory approval.
All of our drugs and associate technologies 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. Our
principal development efforts are currently focused on
Ampligen, which has not been approved for commercial
use. Our products, including Ampligenr are subject to
12
extensive regulation by numerous governmental
authorities in the U.S. and other countries,
including, but not limited to, the Food and Drug
Administration in the U.S., the Health Protection
Branch of Canada, and the European Medical Evaluation
Agency 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
cannot assure you that the drug will ultimately be
demonstrated to be safe or efficacious. In addition,
while Ampligenr 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
Ampligenr or one of our other products does not
receive regulatory approval in the U.S. or elsewhere,
our operations will be materially adversely effected.
We may continue to incur substantial losses and our
future profitability is uncertain.
We began operations in 1966 and last reported
net profit from 1985 through 1987. Since 1987, we
have incurred substantial operating losses. As of
June 30, 2001 our accumulated deficit was
approximately $87,389,000. We have not yet generated
significant revenues from our products and may incur
substantial and increased losses in the future. We
cannot assure that we will ever achieve significant
revenues from product sales or become profitable. We
require, and will continue to require, the commitment
of substantial resources to develop our products. We
cannot assure that our product development efforts
will be successfully completed or that required
regulatory approvals will be obtained or that any
products will be manufactured and marketed
successfully, or profitability.
Additional financing requirements.
The development of our products will require the
commitment of substantial resources to conduct the
time-consuming research, preclinical development, and
clinical trials that are necessary to bring
pharmaceutical products to market. Based on our
current operating plan, we anticipate receipt of
limited revenues from the sales of Ampligenr under the
Cost Recovery Clinical Programs and investors
exercising our Class A Redeemable Warrants. The
Company may need to raise substantial 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 its products. There can be
no assurances that our Class A Redeemable Warrants
will be exercised or that we will raise any proceeds
from possible equity financing, which may have a
material effect on our ability to develop our
products.
13
No regulatory agency has approved the full commercial
sale of any of the our products.
We cannot assure you that Ampligenr will
ultimately be demonstrated to be safe or efficacious.
While Ampligenr 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
Ampligenr or one of our other products does not
receive regulatory approval in the United States or
elsewhere, our operations will be significantly
affected.
We may not be profitable unless we can protect our
patents and/or receive approval for additional pending
patents.
We need to acquire enforceable patents covering
the use of Ampligenr for a particular disease in order
to obtain exclusive rights for the commercial sale of
Ampligenr for such disease. Our success depends, in
large part, on our ability to obtain patent protection
for our products and to obtain and preserve our trade
secrets and expertise. We have been issued certain
patents on the use of Ampligenr and Ampligenr in
combination with certain other drugs for the treatment
of HIV. We have also been issued patents on the use
of Ampligenr 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 Ampligenr in patients with
chronic fatigue syndrome. We have not been issued any
patents in the United States for the use of Ampligen
as a sole treatment for any of the cancers which we
have sought to target. If we cannot protect our
patents covering the use of Ampligenr for a particular
disease, or obtain additional pending patents, we may
not be able to successfully market Ampligenr.
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 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. 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 market our products
or to obtain or maintain any competitive position the
we may achieve with respect to our products. Our
patents also may not prevent others from developing
competitive products using related technology.
14
There can be no assurance that we will have the
financial resources necessary to enforce patent rights
we may hold.
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. 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 may not be profitable unless we can produce
Ampligenr in commercial
quantities at costs acceptable to us.
We have never produced Ampligenr or any other
products in large commercial quantities. Ampligenr is
currently produced only for use in clinical trials.
We must manufacture our products in compliance with
regulatory requirements in 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 Ampligenr or enter into third
party agreements for its manufacture at costs
acceptable to us, our operations will be significantly
affected.
If our distributors do not market our product successfully,
we may notgenerate significant revenues or become profitable.
We have limited marketing and sales capability.
We need to enter into marketing agreements and third
party distribution agreements for our products in
order to generate significant revenues and become
profitable. To the extent that we enter into
co-marketing or other licensing arrangements, any
revenues received by us will be dependent on the
efforts of third parties, and there is no assurance
that these efforts will be successful. Our agreement
with Gentiva Health Services offers the potential to
provide significant marketing and distribution
capacity in the United States while licensing and
marketing agreements with certain foreign firms should
provide an adequate sales force in South America,
Africa, United Kingdom, Australia and New Zealand,
Canada and Austria.
Gentiva Health Services is able to deliver
treatment and services to chronic disease patients
including infusion services, home nursing and other
medical services through a national network of more
than 500 locations. We cannot assure that Gentiva
Health Services or our foreign marketing partners will
be able to successfully distribute our products, or
15
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. If we cannot
enter into future marketing and distribution agreements
at terms acceptable to us, or if these distributors
cannot effectively market and distribute our products,
our operations will be negatively affected.
No assurance of successful product development of
Ampligenr.
The development of Ampligenr and our other
products is subject to a number of significant risks.
Ampligenr 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 rights
of third parties. Our products are in various stages of
clinical and pre-clinical development and, require
further clinical studies and appropriate regulatory
approval processes before any such products can be
marketed. We do not know when, or if ever, Ampligenr
will be generally available for commercial sale for any
indication for at least the next several years, if at
all. Generally, only a small percentage of potential
therapeutic products are eventually approved by the FDA
for commercial sale.
Ampligenr safety profile.
We believe that Ampligenr 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
erythema, a tightness of the chest, tachycardia,
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, urticaria (swelling of the skin),
bronchospasm, hypotension, photophobia, rash,
bradycardia, transient visual disturbances, transient
arrhythmias, decreased visual activity in platelets and
white blood cell counts, anemia, dizziness, confusion,
elevation of kidney function tests, occasional
temporary hair loss and various flu-like symptoms,
including fever, chills, fatigue, muscular aches, joint
pains, headaches, nausea and vomiting. These flu-like
side effects typically subside within several months.
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
16
affect the chemical structure of Ampligen and other
such 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
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 efforts 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.
Rapid technological change.
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.
Substantial competition.
Competitors have developed or are in the process
of developing technologies that are, or in the future
may be, the basis for competitive products. Some of
these 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 will 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 and HPB
product approvals more rapidly than us. If any of our
products receive regulatory approvals and we commence
commercial sales of our products, we will also be
competing with respect to manufacturing efficiency and
marketing capabilities, areas in which we have no
experience. Our competitors may possess or obtain
patent protection or other intellectual property rights
that prevent, limit or otherwise adversely affect our
ability to develop or exploit our products.
Limited manufacturing experience and capacity.
17
Ampligenr is currently produced only in limited
quantities for use in our clinical trials and we are
dependent upon certain third party supplies 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 Good
Manufacturing Practices ("GMP") regulations. There can
be no assurance that such facilities can be used,
built, or acquired on commercially acceptable terms,
that such facilities, if used, built, or acquired, will
be adequate for our long-term needs.
We may be subject to product liability claims from the
use of Ampligen 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
Ampligenr or other of our products results in adverse
effects. This liability might result from claims made
directly by patients, hospitals, clinics or other
consumers, or by pharmaceutical companies or others
manufacturing these products on our behalf. Our future
operations may be negatively effected from the
litigation costs, settlement expenses and lost product
sales inherent to these claims. While we will continue
to attempt to take appropriate precautions, we cannot
assure that we will avoid significant product liability
exposure. Although we currently maintain worldwide
product liability insurance coverage in the amount of
$1,000,000, there can be no assurance that this
insurance will provide adequate coverage against
product liability claims. While no product liability
claims are pending or threatened against us to date, a
successful product liability claim against us in excess
of our insurance coverage could have a negative effect
on our business and financial condition.
Members of our Scientific Advisory Board may have
conflicting interests and
may disclose data and technical know how to our
competitors.
All of our Scientific Advisory Board members are
employed by other entities, which may include our
competitors. Although we require each of our
Scientific Advisory Board members to sign a
non-disclosure and non-competition agreement with
respect to the data and information that he or she
receives from us, we cannot assure you that members
will abide by them. If a member were to reveal this
information to outside sources, accidentally or
otherwise, our operations could be negatively effected.
18
Since our business depends in large part on our
ability to keep our technical expertise confidential,
any revelation of this information to a competitor or
other source could have an adverse effect on our
operations.
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.
The loss of Dr. Carter's services could hurt our
chances for success.
Our success is dependent on the continued efforts of
Dr. William A. Carter because of his position as a
pioneer in the field of nucleic acid drugs, his being
the co-inventor of Ampligenr, and his knowledge of the
company's overall activities, including patents,
clinical trials, corporate relationships and
relationships with governmental agencies which regulate
our business. The loss of Dr. Carter's services could
have a material adverse effect on our operations and
chances for success. While we have an employment
agreement with Dr. William A. Carter, and have secured
key man life insurance in the amount of $2 million on
the life of Dr. Carter, the loss of Dr. Carter or other
personnel, or the failure to recruit additional
personnel as needed could have a materially adverse
effect on our ability to achieve our objectives.
Uncertainty of health care reimbursement and potential
legislation.
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.
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
19
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. The company does not maintain insurance
coverage against such liabilities.
Exercise of Class A Redeemable Warrants may have
dilutive effect on market.
Holders of the Class A Redeemable Warrants may
exercise the Class A Redeemable Warrants and purchase
the underlying Common Stock at a time when we may be
able to obtain capital by a new offering of securities
on terms more favorable than that provided by such
Class A Redeemable Warrants, in which event our
ability to obtain additional capital would be affected
adversely.
Litigation in Pennsylvania involving us and Manuel
Asensio and Asensio & Company,Inc.
In 1998, we filed a multi-count complaint against
Manuel P. Asensio, Asensio & Company, Inc., and others
in the United States District Court for the Eastern
District of Pennsylvania. The action presently includes
claims of defamation, disparagement, tortious
interference with existing and prospective business
relations and conspiracy, arising out of the current
defendants' false and defamatory statements. The
complaint further alleges that defendants defamed and
disparaged the Company in furtherance of a
manipulative, deceptive and unlawful short-selling
scheme between August, 1998, and the present.
In 1999, Manuel P. Asensio, and Asensio & Company,
Inc., and others filed an answer and counterclaim
against the Company. The counterclaim alleges that in
or around September 1998, and in response to
defendants' strong sell recommendation and other press
releases about the Company and its officers and
directors, the Company made defamatory statements about
defendants, including statements that defendants'
attack and manipulative short-selling scheme may have
constituted criminal wrongdoing on the part of
defendants. The Company has denied the material
allegations of the counterclaim and is vigorously
defending against 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
defendents responded to the complaint as amended. In
May 2001, the defendents moved for a summary judgement
on all counts of the amended complaint. The motion is
presently pending and no trial date has been set.
Litigation in New York involving us and Manuel Asensio,
Asensio & Company Inc., and Asensio.com Inc.
In May 2000, we received notice of a claim by
Manuel P. Asensio and Asensio & Company, Inc., in the
Supreme Court of the State of New York against the
Company, the Chairman and Chief Executive Officer,
William A. Carter, and our prior auditors (the "first
New York action") in which they allege that defendants
defamed them in oral and written communications made in
20
March 2000. The allegations of Manuel P. Asensio and
Asensio & Company, Inc. in the first New York action
are similar in substance to the alleged defamation
which is the subject of the counterclaims filed by them
in the action presently pending in Pennsylvania State
Court. In March 2001, Dr. Carter's motion to dismiss
was granted. In July 2001, the company moved to dismiss
the action based on the prior pendency of the action of
the Pennsylvania State Court. The motion is presently
pending.
In June 2000, Manuel P. Asensio, Asensio & Company,
Inc. and Asensio.com Inc.,("Asensio plaintiffs") filed
a second action against the Company and Dr. William
Carter, the Company's Chairman and Chief Executive
Officer in the Supreme Court of the State of New York.
(the "second New York action"). In September 2000, we
were served with a complaint in this action. The second
New York action purports to seek a declaratory judgment
that the Asensio plaintiffs statements regarding the
Company constituted protected speech, and that they did
not engage in any actionable interference with our
existing or prospective business relations. In June
2001, Asensio plaintiffs voluntarily withdrew the
second New York action. We intend to vigorously defend
against the claims asserted in the first New York
actions. However, this litigation could subject us to
significant liability for damages and, even if it does
not subject us to liability for damages, it could be
time-consuming and expensive to defend, and could
result in the diversion of management time and
attention.
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 of 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.
RESULTS OF OPERATIONS
Three months ended June 30, 2001 versus Three months
-----------------------------------------------------
ended June 30, 2000
---------------------
Our net loss for the three months ended June 30,
2001 was $2,343,000 or approximately $283,000 more than
recorded for the same period in 2000. Overall costs and
expenses were higher by some $94,000 and cost recovery
treatment revenue and interest income was down by
$189,000.
Revenues from Cost Recovery Clinical Treatment programs
in the U.S. and Europe were down $115,000 primarily due
21
to our focus on recruiting patients for the double
blind, placebo controlled phase III CFS clinical trial.
Interest income was down by $74,000 due to lower money
market interest rates and a smaller amount of invested
funds.
Overall Research and Development costs in the three months
ended June 30, 2001 were lower by $119,000 compared to
the same period in 2000. Most of this decrease relates
to lower clinical trial and related costs. The costs
related to the CFS phase III clinical trial were down
some $379,000 as this trial nears completion. Costs
related to cost recovery treatment revenues were lower
by $73,000 due to lower revenues recorded in the three
months ended June 30, 2001. Clinical costs related to
the new HIV clinical trials were $42,000.
Manufacturing and quality control costs
increased $329,000 reflecting the increased cost of
working with a new liquid Ampligenr producer as well
as increased product testing and release efforts.
General and Administrative expenses were $760,000
exclusive of $276,000 recorded for stock compensation
in the three months ended June 30, 2001 compared to
$656,000 exclusive of $167,000 of stock compensation
recorded for the same period in 2000. The net increase
in expenses of $104,000 basically reflects an increase
in professional fees in the amount of $214,000 with
offsets in lower Public Relations expenses of $50,000,
lower temporary help costs of $20,000 and lower cost
related to telephone, travel and other expenses.
Stock Compensation expense was $276,000 in the three
months ended June 30, 2001. This is an increase of
$109,000 over the same period in 2000. Stock
Compensation expense is a non-cash expense that
reflects the fair value of common stock or warrants
granted to non-employees of the Company.
Six months ended June 30, 2001 versus six months ended
------------------------------------------------------
June 30,2000
------------
Our net loss was approximately $4,823,000 for the six
months ended June 30, 2001. This reflects an increase
in losses in the amount of $791,000 compared to the
same period in 2000. Elements contributing to the
increase in losses include lower cost recovery
treatment revenues totaling $198,000, increased R&D
costs of $241,000, higher stock compensation expenses
of $186,000, and lower interest income of $132,000.
CFS cost recovery treatment revenues were $228,000 in
the six months ended June 30, 2001 compared to $426,000
in the same period in 2000. This decline in revenue is
reflected in the U.S. as well in Europe. U.S. revenues
were down primarily due to our focus on recruiting CFS
patients for the Phase III CFS trial. European revenues
are basically produced by one clinic located in
Belgium. Enrollment in the Belgium program has been
slowed to allow the clinical investigator to compile
and review the clinical data collected in the treatment
of approximately 150 patients over the past several
years. This data, when finalized, will be used to
supplement the data collected from the phase III CFS
22
clinical trial in the U.S. Our European personnel are
working to establish CFS cost recovery treatment
programs in other European countries.
Research & Development costs were $3,176,000 in the six
months ended June 30, 2001 versus $3,022,000 for the
same period in 2000. This increase of $154,000 is
primarily due to costs related to the increased
production and testing of Ampligenr in 2001. Compared
to the first six months of 2000, the need for Ampligenr
has increased in 2001 due to increased clinical trial
activity.
General and Administrative Expenses before charges for
stock compensation, were $1,409,000 in the six months
ended June 30, 2001 compared to expense of $1,400,000
for the same period in 2000. Basically, General and
Administrative expenses in 2001 remained flat when
compared to the six month period ended June
30,2000.
Stock Compensation expense of $595,000 in the six
months ended June 30, 2001 is $273,000 higher than
recorded for the same period in 2000. The 2001 expense
includes a cost of $262,000 due to the extension of the
expiration dates of certain warrants granted to
officers and Directors.
Interest income of $180,000 in the six month end June
30, 2001 was down by $132,000 due to lower interest
rates earned on money market instruments as well as
less funds were available to invest.
LIQUIDITY AND CAPITAL RESOURCES
Our cash, cash equivalents and short term investments
were $4,980,000 as of June 30, 2001 compared to
$8,378,000 million at December 31, 2000 reflecting a
net decrease of cash in the amount of $3,398,000 in
the first six months of 2001.
Operating activities consumed $4,160,000 million
reflecting major cash outlays in support of the ME/CFS
phase III clinical trial as well as support of the
European clinical efforts. All clinical trial drug
products were fully expensed although some of the
costs are expected to be recovered under the expanded
access, cost-recovery, pre-marketing programs
authorized by FDA and various regulatory bodies in
other countries. As the clinical testing effort in
the United States accelerates and the European market
development activity increases, the operating burn
rate may increase periodically. However, certain of
the operating, as well as the non-operating cash
outlays are of a one time nature and are expected to
decline. Also revenues from expanded
access cost recovery treatments are expected to
improve in the coming months.
Proceeds from the exercise of warrants totaled
$1,147,000 which is significantly lower than
23
experienced in the first six months of 2000. The
decline in warrants being exercised is primarily due to
the depressed market price of biotech stocks including
ours. In the six months ended June 30,2001, our stock
price traded in a range of $3.01 to $7.15. We have
3,916,208 outstanding publicly traded class A preferred
redeemable warrants exercisable at $4.00 per share and
8,122,510 non-public warrants that are exercisable at
an weighted average price of $4.12. The shares of
common stock underlying 4,269,000 shares of the
oustanding non-public warrants have been registered for
sale under the Securities Act of 1933, as amended, by
the holders thereof. We expect warrantholders to
continue exercising both the public and non-public
warrants from time to time depending on the trading
price of our common stock. The publicly traded class A
redeemable preferred warrants expire on November 2,
2001.
Our current cash and cash equivalents should fund
operations through April 2002. In the event that our
warrantholders do not exercise warrants at the level of
funding needed to support our operations, we will seek
access to the private or public equity markets for the
funding capital needed. 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.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board
finalized FASB Statements No. 141, Business
Combinations (SFAS 141), and NO. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141 requires
the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method
of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the
Company recognize acquired intangible assets apart
from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business
combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after
July 1, 2001. It also requires, upon adoption of SFAS
142, that the Company reclassify the carrying amounts
of intangible assets and goodwill based on the
criteria in SFAS 141.
SFAS 142 requires, among other things, that companies
no longer amortize goodwill, but instead test goodwill
24
for impairment at least annually. In addition, SFAS
142 requires that the Company identify reporting units
for the purposes of assessing potential future
impairments of goodwill, reassess the useful lives of
other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite
useful life. An intangible asset with an indefinite
useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is
required to be applied in fiscal years beginning after
December 15, 2001 to all goodwill and other intangible
assets recognized at that date, regardless of when
those assets were initially recognized. SFAS 142
requires the Company to complete a transitional
goodwill impairment test six months from the date of
adoption. The Company is also required to reassess the
useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's investment in CIMM was accounted for
using the equity method. As of June 30, 2001, the net
carrying amount of goodwill included in the investment
balance was $503,000. Other intangible assets are
primarly patents which currently have a net value of
$1,051,000. Amortization expense of goodwill and
patents during the six-month period ended June 30,
2001 was $18,000 and $191,000 respectively. Currently,
the Company is assessing but has not yet determined
how the adoption of SFAS 141 and SFAS 142 will impact
its financial position and results of operations.
ITEM 3: Quantitative and Qualitative Disclosures
About Market Risk
We had $4,980,000 in cash, cash equivalents and short
term investments at June 30, 2001. 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 financial instruments. The
Company employs established policies and procedures to
manage any risks with respect to investment exposure.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
In September, 1998, we filed a multi-count complaint
against Manuel P. Asensio, Asensio & Company, Inc.,
and others in the United States District Court for the
Eastern District of Pennsylvania. In October 1998 and
August 1999, we amended the complaint to add
additional counts and to add Asensio.com, Inc.
(formerly known as Asensio Holding, Inc.), the holding
company of the defendant, Asensio & Company Inc., and
25
to add a conspiracy charge against the remaining
defendants and certain unnamed John Does. As amended,
our complaint seeks recovery on common law theories of
intentional interference with existing and prospective
business relations, defamation, commercial
disparagement, and conspiracy on account of
defendants' short selling of our stock and the
publication, by defendants Asensio and ACI, of
defamatory statements regarding the Company. In April
1999, defendants Asensio and ACI answered the
complaint and asserted defamation and disparagement
counterclaims against us seeking damages in an
unspecified amount. Defendants' counterclaims allege
that we, through our officers, defamed Asensio in oral
and written communications accusing Asensio and ACI of
having engaged in possibly criminal behavior with
respect to the short selling of our stock and the
subsequent publication of various defamatory
statements regarding us . In May 1999, we filed an
answer, including affirmative defenses, to these
counterclaims.
In June 2000, the United States District Court
dismissed the Company's complaint and the defendants'
counterclaims for lack of federal subject matter
jurisdiction over the action. In July 2000, we
transferred the action to the Pennsylvania State
Court. In May 2001, the defendants moved for summary
judgement on all counts. The motion is presently
pending. No trial date has been re-set for this
action.
In May 2000, Asensio and ACI filed a separate action
in the Supreme Court of the State of New York against
our company, our Chairman and Chief Executive Officer,
William A. Carter and our prior auditors ("the first
New York action"). The action was commenced by
Summons. In July 2000, Asensio and ACI filed a
Complaint in which they alleged that the defendants
defamed them in oral and written communications made
in March 2000. Plaintiff's allegations in the first
New York action are similar in substance to the
alleged defamations which are the subject of the
counterclaim filed by them in the action presently
pending in Pennsylvania State Court. In August 2000,
we filed an answer, including affirmative defenses to
these claims, and Dr. Carter moved to dismiss the
claims. In March 2001, Dr. Carter's motion to dismiss
was granted. In July 2001, the Company moved to
dismiss the action based on the prior pendency of the
action of the Pennsylvania State Court. The motion is
presently pending.
In June 2000, Asensio, ACI and Asensio.Com, Inc. filed
a second action against us and Dr. Carter in the
Supreme Court of the State of New York ("the second
New York action"). The action was commenced by
Summons. In September 2000, plaintiffs filed a
Complaint in the second New York action which purports
to seek a declaratory judgment that the statements of
Asensio, ACI and Asensio.com, Inc. about the Company
constituted protected speech, and that plaintiffs did
not engage in any actionable interference with
existing or prospective business relations of the
Company. In essence, the second New York action seeks
to establish the validity of the affirmative defenses
asserted by the defendants in the action now being
26
litigated in the Pennsylvania State Court. In June
2001, the plaintiffs voluntarily withdrew the second
New York action.
We intend to vigorously defend against the "claims"
asserted by Asensio, ACI and Asensio.com, Inc. in the
New York actions and we have moved to consolidate and
dismiss the first New York action.
Cook Imaging Corp. ("Cook") commenced action against us
in March 2000, in the United States District Court for
the Eastern District of Pennsylvania. From
approximately 1997 through 1999, Cook manufactured the
drug Ampligenr (as well as Ampligenr placebo) for us.
Cook sued for in excess of $300,000 in unpaid invoices,
including interest, related to four Ampligenr batches
manufactured by Cook and delivered to us in 1999. The
Company denied that such amounts are owed and asserted
a counterclaim for failure to consistently manufacture
Ampligenr in strict conformance with federal
regulations known as current good manufacturing
practices ("cGMP"). The court awarded Cook Imaging
approximately $248,000 which reflects the amount of the
unpaid invoices plus interest, less approximately
$63,800 awarded the Company on its counterclaims. We
paid this amount to Cook during the quarter ended June
30, 2001.
ITEM 2: Changes in Securities
None
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security
Holders
None
ITEM 5: Other Information
None
27
ITEM 6: Exhibits and Reports on Form 8K
(a)Exhibits
3.1* Amended and Restated Certificate of Incorporation of the
Company, as amended, along with Certificates of Designations
3.1.1** Series E Preferred Stock
3.2 By-laws of Registrant, as amended and restated
4.1* Specimen certificate representing our common stock
4.2* Form of Class A Redeemable Warrant Certificate
4.3* Form of Underwriter's Unit Option Purchase Agreement
4.4* Form of Class a Redeemable Warrant Agreement with Continental
Stock and Transfer and Trust Company
10.1 Amended and Restated Employment Agreement by
and between the Company and Dr. William A.
Carter, dated as of December 3, 1998
10.2 Amended and Restated Engagement Agreement by
and between the Company and Robert E.
Peterson, dated April 1, 2001.
* These exhibits were filed with the Securities and Exchange Commission
("SEC") as exhibits to the Company's Form S-1 Registration Statement
(No. 33-93314) or amendments thereto and are hereby incorporated by
reference.
** This exhibit was filed with the SEC as Exhibit
3.1.1 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and is hereby
incorporated by reference.
(b) Reports on Form 8-k
None
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
/S/ William A. Carter
---------------------------
Date: August 14, 2001 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
--------------------------
Date: August 14, 2001 Robert E. Peterson
Chief Financial Officer