1 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, 2002 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 32,085,994 shares of common stock issued and outstanding as of March 31, 2002.
2 PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> December 31, March 31, 2001 2002 ----------- ----------- (Unaudited) ASSETS <S> <C> <C> Current assets: Cash and cash equivalents $3,107 $3,473 Short Term investments 5,310 2,720 Accounts receivable 8 17 License fee receivable _ 545 Prepaid expenses and other current assets 381 770 ----------- ---------- Total current assets 8,806 7,525 Property and equipment, net 246 222 Patent and trademark rights, net 1,025 1,025 Investments in unconsolidated affiliates 1,878 1,857 Other assets 80 80 ----------- ---------- Total assets $12,035 $ 10,709 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 979 $ 1,165 Accrued expenses 293 185 ----------- ---------- Total current liabilities 1,272 1,350 ----------- ---------- Commitments and contingencies Stockholders' equity: Common stock 33 33 Additional paid-in capital 106,832 106,924 Accumulated other comprehensive income 17 9 Treasury stock -at cost (4,470) (4,470) Accumulated deficit (91,649) (93,137) --------- ---------- Total stockholders' equity 10,763 9,359 --------- ---------- Total liabilities and stockholders' equity $ 12,035 $ 10,709 ========= ========== </TABLE> 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) <TABLE> <CAPTION> For the Three months ended March 31, -------------------------- (Unaudited) 2001 2002 ---------- ---------- <S> <C> <C> Revenues: Cost recovery - clinical treatment programs $ 127 $ 68 License fee income - 545 ---------- ---------- 127 613 Costs and expenses: Research and development 1,765 1,292 General and administrative 911 829 ---------- ---------- Total cost and expenses 2,676 2,121 Interest and other income 94 42 Equity in loss of unconsolidated Affiliate (25) (22) ---------- ---------- Net loss $(2,480) $(1,488) ========== ========== Basic and diluted loss per share $ (.08) $ (.05) ========== ========== Basic and diluted weighted average common shares outstanding 29,957,975 32,072,092 =========== ========== </TABLE> See accompanying notes to condensed consolidated financial statements.
4 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) <TABLE> <CAPTION> For the three months ended March 31, (Unaudited) 2001 2002 -------- --------- <S> <C> <C> Cash flows from operating activities: Net loss $(2,480) $(1,488) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 35 24 Amortization of patents rights 94 29 Write-off of patent rights 29 - Stock option and warrant compensation and service expense 262 - Equity in loss of unconsolidated affiliate 24 22 Changes in assets and liabilities: Accounts receivable 24 (9) License fee receivable - (545) Prepaid expenses and other current assets 79 (389) Accounts payable (256) 213 Accrued expenses - (108) -------- ---------- Net cash (used in) operating activities (2,189) (2,251) -------- ---------- Cash flows from investing activities: Additions to patent rights (29) (29) Maturity of short term investments 4,613 5,293 Purchase of short term investmentS (4,028) (2,711) --------- --------- Net cash provided by investing activities 556 2,553 --------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 110 5 Proceeds from exercise of warrants 176 59 Purchase of treasury stock (317) - -------- --------- Net cash (used in) provided by financing activities (31) 64 --------- --------- Net increase (decrease) in cash and cash equivalents (1,664) 366 Cash and cash equivalents at beginning of period 3,721 3,107 --------- --------- Cash and cash equivalents at end of period $2,057 $3,473 ========= ========= Supplemental disclosures of cash flow information: Issuances of common stock for accounts payable - 28 ========= ========= See accompanying notes to condensed consolidated financial statements. </TABLE>
5 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 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 year 2001 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2001, as filed with the SEC on April 9, 2002. NOTE 2: STOCK COMPENSATION: This charge consists of the fair market value of warrants issued to outside parties for services rendered on behalf of the Company. Stock/Warrant compensation expense has no effect on shareholder equity as it is offset by an increase in additional paid in capital. In January, 2001 the Board of Directors extended the expiration date of certain non public warrants which produced non-cash stock compensation expense of $262,000 for the three months ended March 31, 2001. Note 3: INVESTMENTS: Investments in unconsolidated affiliates: In 1998, the Company 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.
6 On May 11, 1999, the Company acquired a 15% interest in California Institute of Molecular Medicine ("CIMM") for $375,000. On May 16, 2000, the Company acquired an additional 15% interest in CIMM. The Company currently has a total interest of 30% in CIMM for a total of $750,000. CIMM is developing therapy for treating Hepatitis C virus. The investment has been recorded by the equity method. During the fourth quarter of 2001, the Company recorded a non-cash charge of $485,000 to operations with respect to the Company investment in CIMM. This charge is a result of the Company determination that CIMM'S operation had not yet evolved to the point where the Company's full carrying value of this investment could be supported pursuant to the guidelines of APB opinion No. 18. The $485,000 represents the unamortized balance of goodwill included as part of the Company investment. The Company's net investment was $82,468 at March 31, 2002. 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, the Company issued an additional 50,000 shares of Hemispherx Biopharma, Inc. common stock and on March 7, 2001 the Company issued 12,000 more shares of Hemispherx Biopharma, Inc. common stock from the treasury to Chronix for an aggregate equity investment of $700,000. Pursuant to a strategic alliance agreement, the Company 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 from this research. Note 4: Licensing Fee Income On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A. ("Hemispherx, S.A.") entered into a Sales and Distribution agreement with a European Entity. Pursuant to the terms of the Agreement, the European Entity was granted the exclusive right to market Ampligen in Spain, Portugal and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue Syndrome ("ME/CFS"). In addition to other terms and other projected payments, the European Entity paid an initial and non refundable fee of 625,000 Euros (approximately $545,000) to Hemispherx S.A. on April 24, 2002.
7 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS Certain statements in this Report on Form 10-Q ("Form 10- Q"), constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but not 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 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 drugs technology, including our lead Ampligen, to treat certain diseases for which adequate treatment is not available. We seek the required regulatory approvals which will allow the progressive introduction of Ampligen for Myalgic Encephalomyelitis/Chronic Fatique Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. Ampligen is currently in Phase III clinical trials in the U.S. for use in the treatment of ME/CFS and is in Phase IIb clinical trials in the U.S. for the treatment of newly emerged multi- drug resistant HIV, and for the control of HIV RNA blood levels after stopping potentially toxic anti-HIV drug cocktail which had been controlling the HIV virus. The Objective of the Phase III ME/CFS clinical study, deemed Amp 516, is to evaluate the safety and efficacy of Ampligen as a treatment for patients afflicted with ME/CFS. This clinical trial now has more than 200 patients participating. The patients complete a Stage I forty week, double blind, randomized, placebo, controlled portion of the trial and
8 then move into the Stage II or the open label treatment portion of the trial. Our newly initiated AMP 719 and 720 HIV Clinical Trial are being conducted with individuals infected with HIV who are being treated with a combination of three or more antiviral drugs. The use of these various anti-HIV drug combinations is often referred to as Highly Active anti-retroviral therapy ("HAART"). Our Amp 720 clinical trial is enrolling patients who are chronically HIV infected and have been receiving a HAART regimen prior to starting what is termed strategic treatment intervention ("STI"). STI is the cessation of HAART therapy until HIV rebounds. STI becomes necessary for many HIV patients receiving HAART therapy as the combination of antiviral drugs eventually results in significant cumulative toxicities. By using Ampligen in combination with STI of HAART, we will undertake to boost the patients' own immune system's response to help them control their HIV when they are off HAART. The Company's expectation is that Ampligen has potential to lenghten the HAART-free time interval with a resultant decrease in HAART- induced toxicities. The ultimate potential, which of course requires full clinical testing to accept or reject, is that Ampligen may potentiate STI of HAART to the point that the cell mediated immune system will be sufficient to eliminate requirement for HAART. Our newly initiated AMP 720 HIV Clinical Trial is being conducted with individuals infected with HIV who are responding well to HAART at the moment. All patients will have been receiving the indicated HAART regimen prior to starting STI. This trial applies STI of HAART based on the hypothesis that careful management of HIV rebound following STI may have potential to result in the development of protective immune responses to HIV in order to achieve control of HIV replication. The Company believes that the addition of Ampligen, with its potential immunomodulatory properties, may reasonably be expected to achieve this outcome, although no positive results can be assured. The targeted enrollment of the AMP 720 Clinical Trial is 120 HIV-infected person's. We expect to have 60 people on STI with Ampligen and 60 people on STI without Ampligen. The length of this stage of the trial and other studies will be determined by an analysis of the interim results. The Company expects enrollment in this clinical trial to accelerate as we recruit more investigators and based on the analysis and presentation of interim results at International HIV meetings. The length of this stage of the trial and other studies will be determined by an analysis of the interim results. Our proprietary drug technology utilizes specifically configured ribonucleic acid (RNA) and is protected by more than 350 patents worldwide, with over 80 additional patent applications pending to provide further proprietary protection in various international markets. Certain patents apply to the use of Ampligen alone and certain patents apply to the use of Ampligen in combination with certain other drugs. Some composition of matter patents pertain to other new potential medications which have a similar mechanism of action.
9 On March 20, 2002 our European Subsidiary Hemispherx Europe, S.A. ("Hemispherx, S.A.")entered into a Sales and Distribution agreement with a European Entity. Pursuant to the terms of the agreement, the European Entity was granted the exclusive right to market Ampligen in Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue Syndrome ("ME/CFS"). In addition to other terms and other projected payments, the European Entity paid an initial and non-refundable fee of 625,000 Euros (approximately $545,000) to Hemispherx, S.A. on April 24, 2002. The European Entity is to pay a fee of 1,000,000 Euros after FDA approval of Ampligen for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval of the final marketing authorization for using Ampligen for the treatment of ME/CFS. Also, the European Entity is to purchase from Hemispherx S.A. 1,000,000 Euros of its convertible securities due September 30, 2003. We have three domestic subsidiaries: BioPro Corp., BioAegean Corp. and Core BioTech Corp., all of which are incorporated in Delaware. Our foreign subsidiaries include Hemispherx BioPharma Europe, N.V./S.A. which was established in Belgium in 1998 and Hemispherx Biopharma, S.A. which was established in Luxembourg during 2002. Our principal executive offices are located at One Penn Center, 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103, and our telephone number is (215) 988-0080. 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 Annual Report. Among the key factors that have a direct bearing on our results of operations are: No assurance of successful product development of Ampligen. The development of Ampligen and our other products is subject to a number of significant risks. Ampligen 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, Ampligen 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 FDA for commercial sale.
10 Our drug and related technologies are investigational and subject to regulatory approval All of our drugs and associated 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. Ampligen and other proposed products are subject to 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 Medicines 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 require regulatory approval in order to market Ampligen or any other proposed product and receive product revenues or royalties. We cannot assure you that the drug will ultimately be demonstrated to be safe or efficacious. In addition, while Ampligen 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 or one of our other proposed products does not receive regulatory approval in the U.S. or elsewhere, our operations will be materially adversely effected. We may continue to incur substantial losses and our future profitability is uncertain We began operations in 1966 and last reported net profit from 1985 through 1987. Since 1987, we have incurred substantial operating losses, as we pursued our Clinical trial effort and expanded our efforts in Europe. As of March 31, 2002 our accumulated deficit was approximately $93,137,000. 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 profitably.
11 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 and proceeds from the sale of Ampligen under the Cost Recovery Treatment Clinical Programs and holders of non-public warrants exercising warrants from time to time. We believe these proceeds and the cash on hand will be sufficient to meet our capital requirements for the near future. 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 non- public 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. No regulatory agency has approved the full commercial sale of any of the our products. We cannot assure you that Ampligen or any of our other products being developed will ultimately be demonstrated to be safe or efficacious. While Ampligen 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 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 Ampligen and other products for a particular disease in order to obtain exclusive rights for the commercial sale of Ampligen 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 including those on the use of Ampligen and Ampligen in combination with certain other drugs for the treatment of HIV. We have also been issued patents on the use of Ampligen 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 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. We cannot assure you that any of these applications will be approved or that our competitors will not seek and obtain patents regarding the use of Ampligen in combination with various other agents, for a particular target indication prior to us. If we cannot protect our patents covering the use of Ampligen for a particular disease, or obtain additional pending patents, we may not be able to successfully market Ampligen.
12 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 that we may achieve with respect to our products. Our patents also may not prevent others from developing competitive products using a different technology. 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 fully patentable, particularly the procedures for the manufacture of our Ampligen drug product which are carried out according to standard operating procedure manuals. We may not be profitable unless we can produce Ampligen in commercial quantities at costs acceptable to us. We have never produced Ampligen or any other products in large commercial quantities. Ampligen 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 facili- ties. We are dependent upon certain third party supplies
13 for key components of the proposed products and for substantially all of the production process. If we cannot manufacture commercial quantities of Ampligen 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 not generate significant revenues or become profitable. We have limited marketing and sales capability. Accordingly we may need to enter into marketing agreements and third party distribution agreements for our products in order to generate significant revenues and become profitable. To the extent that we enter into co-marketing or other licensing arrangements, any revenues received by us will be dependent on the efforts of third parties, and there is no assurance that these efforts will be successful. Our agreement with Gentiva Health Services offers the potential to provide significant marketing and distribution capacity in the United States while licensing and marketing agreements with certain foreign firms should provide an adequate sales force in South America, Africa, United Kingdom, Australia and New Zealand, Canada, Austria, Spain and Portugal. Our partners may not be 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 our domestic or our foreign marketing partners will be able to successfully distribute our products, or that we will be able to establish future marketing or third party distribution agreements on terms acceptable to us, or that the cost of establishing these arrangements will not exceed any product revenues. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a materially adverse effect on us. Ampligen safety profile and scientific literature. We believe that Ampligen 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, transient hypotension, photophobia, rash, bradycardia, transient visual disturbances, arrhythmias, 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,
14 muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effect typically subside within several months. One or more of the potential side effects might deter usage of Ampligen in certain clinical situations and therefore, could adversely effect potential revenues and physician/patient acceptability of our product. In general, we believe that the relative safety profile to date has been well tolerated given the severe Chronic diseases being targeted. 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 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 we do, 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
15 greater experience than us in pre-clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA, EMEA HPB and other regulatory approvals of products. Accordingly, our competitors may succeed in obtaining FDA EMEA 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. Ampligen 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. The failure to continue these 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 EMEA 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 Ampligen 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, 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.
16 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. 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 co-inventor of Ampligen and his knowledge of the Company's overall activities, including patents, clinical trials, corporate relationships and relationships with various governmental regulatory agencies. The loss of Dr. Carter's services could have a material adverse effect on our operations. 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 key personnel, such as Dr. David Strayer or Dr. Carol Smith, 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.
17 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 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. Litigation involving us and Manuel Asensio and Asensio & Company,Inc. In 1998, we filed a multi-count complaint against Manuel P. Asensio, Asensio & Company, Inc.("Asensio"). The action included claims of defamation, disparagement, tortious interference with existing and prospective business relations and conspiracy, arising out of the Asensio's false and defamatory statements. The complaint further alleges that Asensio defamed and disparaged us in furtherance of a manipulative, deceptive and unlawful short-selling scheme between August, 1998, and the present. In 1999, Asensio filed an answer and counterclaim alleging that and 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 resulting in a withdrawl with prejudice of the counterclaim against us. The Court's dismissal of our claims of tortuous interference and conspiracy resulted in a jury verdict disallowing the claims against the defendants for defamation and disparagement. The Court now has under consideration a motion to enter a verdict in favor of the Company against the defendants and award a new trial only on the issues of causation and damage or to award a new trial on all claims of the Company against the defendants. In May 2000, we received notice of a claim by Asensio in the Supreme Court of the State of New York against us, our Chairman and Chief Executive Officer, William A Carter and our prior auditors in which it was alleged that we defamed them in oral and written communications made in March 2000. The Supreme Court of the State of New York dismissed the claim against Dr. Carter in March, 2001 and dismissed the claim against us in January, 2002.
18 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 factors, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our research and 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 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. Critical Accounting Policies Financial Reporting Realese No. 60., which was released by the Securities and Exchange Commision, requires all companies to include a discussion of critical accounting policies or method used in the preparation of financial statements. The significant accounting policies that we believe are most critical to aid in fully understanding our reported financial results are the following: Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. Impairment of Long-Lived Assets Statement of Financial Accounting Standards ("SFAS") No. 121. "Accounting for Long-Lived Assets and Long Lived Assets to be disposed of," requires that long-lived assets and certain identifiable intangibles, including goodwill, to be held and used by an entity, be reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of the assets may not be recoverable. We assess the recoverability of fixed assets and intangibles based on
19 undiscounted estimated future operating cash flows. If we determine that the carrying values have been impaired, the measurement and recognition of the impairment will be based on estimated future operating cash flows. During the fourth quarter of 2001, we recognized an impairment of $485,000 in connection with goodwill related to equity investments of ours. As of March 31, 2002, management believes that the carrying value of the remaining long- lived assets and identifiable intangibles have not been impaired. Patents and Trademarks Effective October 1, 2001, the Company adopted a 17 year estimated useful life for amortization of its patent and trademark rights in order to more accurately reflect their useful life. Prior to October 1, 2001, the company was using a 10 year estimated useful life. The adoption of the 17 life has been accounted for as a change in accounting estimate. As a result the effect on the Company was a $68,000 reduction of research and development costs in the fourth quarter of the calendar year 2001. Patents and trademarks are stated at cost (primarily legal fees) and are amortized using the straight line method over the life of the assets. The Company reviews its 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 its respective capitalized cost. In addition, management's review addresses whether each patent continues to fit into Company's strategic business plans. Research and Developments Costs Research and development costs are direct costs related to both future and present products and are charged to operations as incurred. The Company recognized research and development costs of $1,765,000, and $1,292,000 in the quarters ending March 31, 2001 and 2002 respectively. RESULTS OF OPERATIONS Three months ended March 31, 2002 versus Three months ended March 31, 2001 Our net loss for the three months ended March 31, 2002 was approximately $1,488,000 compared to a $2,480,000 loss recorded for the comparable period in 2001. This $992,000 reduction in losses recorded in March 2002 reflects the
20 benefits of licensing fee income in the amount of $545,000 recorded in March 2002 and lower operating expenses totaling $555,000. Licensing fee income of $545,000 was realized in the first quarter of 2002 as a result of the Sales and Distribution agreement executed with a European Entity in March 2002. This agreement grants the European Entity the right to market Ampligen for use in treating ME/CFS patients in Spain, Portugal and Andorra. Refer to note 4 of this report for more information on this agreement. Revenues from our ME/CFS Cost Recovery Clinical Treatment programs ("cost recovery")in the U.S. and Europe were down $59,000. Our U.S. cost recovery efforts have been reduced as expected during the past year due to our renewed focus and efforts to recruit and enroll ME/CFS patients for the double blind, randomized, placebo controlled, Phase III ME/CFS clinical trial. Interest income was down $52,000 when compared to the same three months in 2001, a reduction which can be contributed primarily to lower interest rates earned on short term money market securities and also to a lower amount of funds available to invest. Our overall Research and Development Costs of $1,292,000 in the three months ended March 31, 2002 were also down $473,000 compared to the same period in 2001. Costs relating to manufacturing, research, clinical and other expense relating to our ME/CFS Phase III clinical trial were down $292,000. This study was initiated for the purpose of testing the safety and efficacy of Ampligen in treating ME/CFS patients. We expect to complete the study and start analyzing the clinical data this year. Total costs relating to the HIV trials initiated last year were up approximately $56,000 reflecting the recruitment of patients to participate in the two HIV studies involving the use of Ampligen in treating HIV afflicted patients in connection with their regular therapy. General and Administrative expenses (excluding stock compensation expenses) were $829,000 in the three months ended March 31, 2002 compared to $911,000 for the same period in 2001. The increase in expenses of $180,000 basically reflects increased legal expenses related to the jury trial conducted in the Asensio matter in January/February 2002. While the Court now has under consideration a motion to enter a verdict in our favor against the defendants and award a new trial only on the issues of causation and damage or to award a new trial on all of our claims against the defendants, our legal expenses should be much lower in the ensuing months. Stock compensation expenses were lower by $262,000 in the three months period ended March 31, 2002 compared to the same period in 2001 as there were no warrants issued in 2002.
21 LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and short term investments were $6,194,000 as of March 31, 2002 compared to $8,417,000 at December 31, 2001 reflecting a net decrease of cash in the amount of $2,223,000 in the first three months of 2002. Overall working capital (current assets less current liabilities) only decreased $1,359,000 during this three month period, reflecting the benefit of the license fee receivable and increase in prepaid expenses. Operating activities utilized $2,251,000 million reflecting cash outlays in support of the ME/CFS Phase III clinical trial as well as the Phase IIb HIV trials now underway. In addition we have significantly invested in expanding our capacity to manufacture liquid Ampligen doses through outside suppliers as well as expended funds to increase our inventories and supply of Ampligen. These expenditures were made to assure an adequate and stable supply of Ampligen to support the ongoing clinical trials as well as provide the capacity to manufacture Ampligen in commercial quantities. Some portion of these costs are expected to be recovered under the expanded access, cost- recovery, programs authorized by FDA and regulatory bodies in other countries. Overall, clinical trial costs should decline somewhat over the next six months as the phase III ME/CFS clinical trial winds down. The costs of the Phase IIb HIV trials should increase as more patients are recruited. However the timing and costs of the HIV trials should produce lower overall clinical costs due to certain inherent efficiencies of running the two clinical trials in parallel. During March 2002, Hemispherx Biopharma Europe, S.A. (Hemispherx S.A.) was authorized to issue up to 22,000,000 Euros of seven percent (7%) convertible securities. Such securities will be converted into a specified number of Hemispherx S.A. shares of stock pursuant to the securities agreement. These securities are to be privately placed as the market allows. Pursuant to the terms of the Sales and Distribution agreement executed in March 2002, a European Entity paid Hemispherx Europe, S.A. an initial and non refundable fee of 625,000 Euros (approximately $545,000) on April 24, 2002. In addition, the European Entity is to pay a fee of 1,000,000 Euros after FDA approval of Ampligen for the treatment of ME/CFS in the U.S. and a fee of 1,000,000 Euros after issuance of final marketing authorization by Spain for the use of Ampligen for the treatment of ME/CFS. Additionally, the European Entity is to purchase from Hemispherx S.A. 1,000,000 Euros of its seven percent (7%) convertible securities due September 30, 2003. In the event that additional funding is needed to support our operations, we believe that such funding will be available by one or more of the following: 1) a private or public placement of equity in either Hemispherx Biopharma, Inc.
22 or our European subsidiary, Hemispherx Europe S.A. 2) funds derived from the granting of licensing agreements or 3) proceeds from warrantholders exercising warrants. Any additional equity 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 $6,194,000 in cash, cash equivalents and short term investments at March 31, 2002. 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. Part II OTHER INFORMATION ITEM 1: Legal Proceedings Refer to Part I, item 2: "Management's discussion and Analysis" of Financial Condition and Results of Operation, Risk Factors: Litigation involving us and Manuel Asensio and Asensio & Company, Inc. ITEM 3: Defaults in Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders None ITEM 5: Other Information We plan to conduct our Annual Meeting of Shareholders in Philadelphia, PA on August 14, 2002. More details will be forthcoming in our notice of Shareholder meeting and proxy statement now scheduled to be released in late June, 2002.
23 Dr. Iraj-Eghbal Kiani, M.B.A., M.Phil/Phd., President and owner of the Atlantic Oil Company has acepted a position on the Board of Directors and Executive Committee. ITEM 6: Exhibits and Reports on Form 8K (a)Exhibits None filed with this report (b) Reports on Form 8-K None
24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEMISPHERx BIOPHARMA, INC. /S/ William A. Carter --------------------------- Date: May 15, 2002 William A. Carter, M.D. Chief Executive Officer & President /S/ Robert E. Peterson -------------------------- Date: May 15, 2002 Robert E. Peterson Chief Financial Officer 4 5 30