UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A1
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
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
24,692,340 shares of common stock issued and outstanding as of September 30,
1998.
1
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PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
1997 1998
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,965,714 $ 14,341,545
Short term investments 1,001,410 1,089,127
Accounts receivable 32,408 52,670
Prepaid expenses and other current assets 66,618 27,062
------------ ------------
Total current assets 10,066,150 15,510,404
Property and equipment, net 70,637 151,703
Patent and trademark rights, net 1,387,523 1,325,474
Other assets 18,323 28,835
------------ ------------
Total assets $ 11,542,633 $ 17,016,416
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 465,166 $ 653,716
Accrued expenses 332,045 262,426
------------ ------------
Total current liabilities 797,211 916,142
Commitments and contingencies
Stockholders' equity:
Preferred stock 37 15
Common stock 21,042 24,692
Additional paid-in capital 65,255,571 75,304,084
Deferred compensation (137,132) (78,140)
Accumulated other comprehensive gain(loss) (2,183) 714
Accumulated deficit (54,391,913) (59,151,091)
------------ ------------
Total stockholders' equity 10,745,422 16,100,274
------------ ------------
Total liabilities and stockholders' equity $ 11,542,633 $ 17,016,416
============ ============
See accompanying notes to condensed consolidated financial statements.
2
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three months ended
September 30
--------------------------
1997 1998
----------- -----------
Revenues:
Cost recovery - clinical treatment programs $ 93,457 $ 107,484
----------- -----------
Total revenues 93,457 107,484
----------- -----------
Costs and expenses:
Research and development 917,123 1,101,842
General and administrative 678,721 835,277
----------- -----------
Total cost and expenses 1,595,844 1,937,119
Interest income 31,758 129,621
----------- -----------
Net loss $(1,470,629) $(1,700,014)
=========== ===========
Basic loss per share $ (0.09) $ (0.07)
=========== ===========
Weighted average shares outstanding 16,554,333 23,267,908
=========== ===========
Diluted loss per share $ (0.09) $ (0.07)
=========== ===========
Weighted average common and dilutive
equivalent shares outstanding 16,554,333 23,267,908
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine months ended
September 30
----------------------------
1997 1998
----------- -----------
Revenues:
Cost recovery - clinical treatment programs $ 155,282 $ 289,334
----------- -----------
Total revenues 155,282 289,334
----------- -----------
Costs and expenses:
Research and development 2,244,056 3,109,366
General and administrative 1,705,124 2,324,437
Preferred stock conversion expense 1,227,864 --
----------- -----------
Total cost and expenses 5,177,044 5,433,803
Interest income 142,476 385,291
----------- -----------
Net loss $(4,879,286) $(4,759,178)
=========== ===========
Basic loss per share $ (0.32) $ (0.22)
=========== ===========
Weighted average shares outstanding 15,395,817 21,907,536
=========== ===========
Diluted loss per share $ (0.32) $ (0.22)
=========== ===========
Weighted average common and dilutive
equivalent shares outstanding 15,395,817 21,907,536
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(DEFICIT)
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Additional other
Preferred Common Preferred C/S .001 paid- Deferred comprehensive Accumulated
stock shares stock shares stock Par value in capital Compensation gain (loss) deficit
------------ ------------ ----- --------- ---------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance 12/31/97 3,650 21,042,606 $37 $ 21,042 $65,255,571 $(137,132) $(2,183) $(54,391,913)
Common stock
issued 2,574,734 2,575 9,623,728
Preferred stock
converted (2,150) 1,075,000 (22) 1,075 (1,053)
Unrealized gain 2,897
Repayment of
lock up (79,587)
Stock compensation 505,425 (58,992)
Net loss (4,759,178)
----- ---------- --- -------- ----------- --------- ------- ------------
Balance 9/30/98 1,500 24,692,340 $15 $ 24,692 $75,304,084 $ (78,140) $ 714 $(59,151,091)
===== ========== === ======== =========== ========= ======= ============
</TABLE>
Total
stockholders'
equity(deficit)
---------------
Balance 12/31/97 $ 10,745,422
Common stock
issued 9,626,303
Preferred stock
converted --
Unrealized gain 2,897
Repayment of
lock up (79,587)
Stock compensatio 564,417
Net loss (4,759,178)
------------
Balance 9/30/9 $ 16,100,274
============
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine months ended
September 30
---------------------------
1997 1998
-------- --------
Cash flows from operating activities:
Net loss $(4,879,286) $(4,759,178)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 20,610 23,545
Amortization of patents rights 91,491 152,650
Write-off of patent rights 59,985 74,302
Preferred stock conversion expense 1,227,864 --
Stock option compensation expense 24,108 564,417
Changes in assets and liabilities:
Accounts receivable 17,091 (20,262)
Prepaid expenses and other current assets 18,637 39,556
Accounts payable 346,301 188,550
Accrued expenses (39,259) 32,280
Other assets 10,000 10,512
---------- -----------
Net cash used in operating activities (3,102,458) (3,714,652)
---------- -----------
Cash flows from investing activities:
Purchase of property and equipment (5,661) (104,611)
Additions to patent rights (227,046) (164,903)
Marketable securities matured -- 1,003,593
Purchase of marketable securities -- (1,088,413)
---------- -----------
Net cash used in investing activities (232,707) (354,334)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock 4,834,923 --
Preferred stock redeemed (5,000,000) --
Common stock issued 1,282 9,626,303
Stock issuance cost -- (181,486)
---------- -----------
Net cash provided by (used in) financing
activities (163,795) 9,444,817
---------- -----------
Net decrease in cash and cash equivalents (3,498,960) 5,375,831
Cash and cash equivalents at beginning of period 5,279,429 8,965,714
---------- -----------
Cash and cash equivalents at end of period $1,780,469 $14,341,545
========== ===========
See accompanying notes to condensed consolidated financial statements.
6
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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. (the "Company"), a Delaware corporation and all its
wholly owned subsidiaries. All significant intercompany accounts and transac-
tions have been eliminated. The Company's interim consolidated financial
statements are unaudited.
In the opinion of management, all adjustments necessary for a fair presentation
of such consolidated financial statements have been included. Such adjustments
consist of normal recurring items. Interim results are not necessarily
indicative of results for a full year.
The interim consolidated financial statements and notes thereto are presented as
permitted by the Securities and Exchange Commission (SEC), and do not contain
certain information which will be included in the Company's annual consolidated
financial statements and notes thereto.
These consolidated financial statements should be read in conjunction with the
Company's 1997 consolidated financial statements included in the Company's Form
10K statement filed with the SEC on March 27, 1998.
NOTE 2: SERIES E CONVERTIBLE PREFERRED STOCK
On March 7, 1997, the Company used the services of an investment banking firm to
privately place $5 million of Series E Convertible Preferred Stock. The proceeds
from placement were used to retire the $5 million balance of Series D
Convertible Stock issued on July 3, 1996. In conjunction with this transaction,
the Company issued 200,000 shares of common stock with a value of $6.00 per
share in exchange for a lock-up in the shares through November 30, 1997.
Consequently, the Company incurred a $1.2 million charge which had no effect on
the total stockholders' equity as it was offset by an increase in additional
paid-in capital. On January 15, 1998, the Company paid GFL Advantage Fund
("GFL") $181,486 and issued 100,000 registered shares as settlement of the
amount due GFL for the difference between the actual selling price and the $6.00
value.
NOTE 3: STOCK COMPENSATION:
The Company recorded stock/warrant compensation expense of $143,128 during the
quarter ended September 30, 1998 and $564,417 on a year to date basis for
warrants granted to purchase Common stock to non-employees of the Company. This
expense had no effect on shareholder equity as it was offset by an increase in
additional paid-in capital.
In the first nine months of 1998, the Company granted 1,261,000 stock options to
certain employees in recognition of services performed and services to be
performed. These options are exercisable at the fair value price on the date of
grant ranging from $3 - $6 per share. The Company applies APB Opinion No. 25 in
accounting for stock-based compensation of its employees and, accordingly, no
compensation expense has been recognized for stock purchase rights issued to
employees in the financial statements.
7
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NOTE 4: PENDING LITIGATION:
On September 14, 1998, VMW, Inc. filed a complaint against the Company in the
United States District Court, Southern Division of New York, The complaint
alleges that the Company failed to fulfill its financial obligations to VMW,
Inc. with respect to a certain letter agreement pertaining to services. VMW,
Inc. claims damages of less than $100,000. We have counter-claimed, alleging
breach of contract by VMW and have demanded damages of approximately $25,000.
This case is currently in the discovery phase. We do not believe that the
complaint will have a material effect on our results of operations or our
financial position.
Ell & Co., and the Northern Trust Company, as Trustee of the AT&T Master Pension
Trust filed a complaint against the Company in the Court of Chancery of the
State of Delaware in and for New Castle County on September 23, 1998. This
complaint alleges that the Company breeched its contractual obligations as set
forth in the Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock of the Company. The Plaintiffs seek to enforce their
rights to convert 1,500 shares of Series E Preferred Stock into 750,000 shares
of freely traded common stock and to recover damages for its inability to
convert the preferred stock when it requested to do so. Although we maintain
that the 1,500 shares of Series E Preferred Stock had been properly redeemed
and, therefore, the plaintiff was not contractually able to effect a proper
conversion into common shares, we agreed, in December 1998, to convert the
plaintiff's preferred stock into common stock. Currently, the claim is still in
litigation. We do not believe that the complaint will have a material effect on
our results of operations or our financial position.
The Company filed a complaint against Manual P. Asensio, Asensio & Company, Inc.
and others in the United States District Court for the Eastern District of
Pennsylvania on September 30, 1998. This action arises out of our belief that
the defendants unlawful manipulated and illegally sold shares short of the
Company's common stock on the American Stock Exchange on or about August 1998
through the present. Certain of the defendants have entered motions to dismiss
all or part of the case. In the meantime, all discovery has been suspended
pending the disposition of the dismissal motions.
NOTE 5: NEW ACCOUNTING PRONOUNCEMENTS:
In February, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings Per Share", which was effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
This statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing earnings per
share previously found in APB Opinion NO. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement requires restatement of all prior-
period EPS data presented. The adoption of this Statement by the Company in 1997
did not have any impact on the Company's EPS disclosure, as the Company's stock
options and warrants are anti-dilutive and are excluded from the denominator of
loss per share; thus, loss per common share is equal to basic loss per share as
computed under SFAS No. 128.
NOTE 6: COMPREHENSIVE INCOME:
In January, 1998, the Company 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 the
Company's 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 nonowner 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.
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The components of comprehensive (loss):
\ For the three months For the nine months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net Income (loss) $(1,470,629) $(1,700,014) $(4,879,286) $(4,759,178)
Unrealized gain
(loss) on short term
investments -- 3.837 -- 2,897
----------- ----------- ----------- -----------
Total comprehensive
loss (1,470,629) (1,696,177) (4,879,286) (4,756,281)
=========== =========== =========== ===========
The components of accumulated other comprehensive income are as follows:
December 31, 1997 September 30, 1998
----------------- ------------------
Unrealized gain $ (2,183) $ 714
(loss) in marketable
securities
Other comprehensive $ (2,183) $ 714
income ========== ======
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.
GENERAL
Hemispherx Biopharma, Inc. (the "Company") has developed a large body of
knowledge in the development and testing of therapeutic products based on
nucleic acid technologies. Ampligen(R), its lead compound, a type of
double-stranded RNA, is in advanced human clinical development for various
therapeutic indications. It has been clinically evaluated as an investigational
drug in over 350 patients for different therapeutic indications. The clinical
profile that is emerging from these studies is that the drug has broad-spectrum
antiviral and immune modulating activity and is generally well tolerated.
Prior to 1995, the Company's business strategy had been focused on the clinical
development of Ampligen(R) for regulatory approval in treating the HIV disease,
followed by treating Hepatitis B (HBV) Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome (ME/CFS). In 1996, the understanding of ME/CFS and its prevalence grew
substantially. Studies conducted by the Center For Disease Control (CDC) and
Harvard Medical School indicated that ME/CFS was 20 times more common than
previously thought and that probably some 500,000 Americans were afflicted.
Other medical researchers were reporting evidence that ME/CFS was related to
viral infection and immune system disorders. These findings and reports led the
Company to focus on pursuing the clinical development of Ampligen(R) for
regulatory approval to use it in the treatment of those afflicted with ME/CFS.
In 1997, the Company received FDA approval for a Phase II ME/CFS treatment
9
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protocol for Ampligen(R) with Cost Recovery, which allows the Company to fund
certain clinical programs by charging patients for the cost of the drug. The
Company launched this clinical program that same year at five clinical sites
across the U.S. (Philadelphia, PA; Washington, DC; Charlotte, NC; Houston, TX;
and Incline Village, NV). A similar Phase II clinical cost recovery program was
set up in Canada at three sites (Montreal, Vancouver and Edmonton) and in
Brussels, Belgium. These clinical programs are continuing and are providing
useful additional medical data on potential benefits and safety of Ampligen(R).
The programs also have permitted additional insight into the natural history of
ME/CFS and examination of new ways to monitor disease morbidity such as personal
activity monitors (PAMs). In connection with the ME/CFS Cost Recovery Treatment
Program, the Company agreed to conduct a confirmatory Phase III, randomized,
double-blind, placebo-controlled clinical trial with an enrollment of up to 230
patients. The cost of this major clinical trial is expected to be borne by the
Company.
The Company expects to continue its research and clinical efforts for the next
several years with significant benefit accruing as a result of revenues expected
from various cost recovery treatment programs, notably in Canada, Europe and the
United States. However, the Company may continue to incur losses over the next
several years due to clinical costs incurred in the continued development of
Ampligen(R) for various commercial applications. 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 Belgium, Canada and the United States. The Company is also pursuing
similar programs in other countries, especially within the European Union where
resources have been substantially increased with respect to pursuing regulatory
approvals. The Company is sponsoring a ME/CFS scientific conference/workshop in
November 1998 in Rome to discuss the latest advances in etiology, diagnosis and
possible treatment of CFS. Clinical experts from more than 15 countries have
been invited to participate in this conference (see below).
Product Development
As of October 28, 1998, the Company has initiated the Phase III ME/CFS clinical
trial at four investigative sites. Negotiations are being finalized with other
investigative sites to assist in implementing the ME/CFS confirmatory Phase III
clinical trial. In total, the Company expects to sign up eight to ten
investigators to conduct this confirmatory Phase III clinical trial. ME/CFS
patients who are not eligible for the confirmatory Phase III trial in the United
States may seek treatment under the cost recovery treatment program authorized
by the Food and Drug Administration (FDA). Thirty patients have initiated
Ampligen(R) treatment under this program to date.
Similar cost recovery clinical treatment programs have been initiated in Canada,
Belgium and Austria. The cost recovery program in Belgium was initiated in 1993
and in Austria in 1998. More than 60 patients have been treated since the
inception of the program in Belgium and the Company is now reviewing the medical
records of thirty (30) new applicants for possible inclusion in this program.
Efforts are underway to seek reimbursement by the regulatory authorities in
Austria under certain provisions of the national health insurance policies.
The Company continues to increase the in-house clinical, regulatory and
biostatistical expertise necessary to direct and support the clinical programs
underway. A Director of Clinical Operations was recruited from a major
multinational, independent clinical research organization to oversee the
Company's clinical activity. Prior to his recruitment, these duties were
performed by the Medical Director with assistance from the clinical research
associate (CRA) staff of the Company and its strategic partner, Olsten Health
Care.
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R.E.D. Laboratories of Brussels, Belgium reports significant progress in
developing a diagnostic test for ME/CFS. The testing platform is based on the
measurement of an abnormal form of the protein RNase L, an antiviral enzyme
found in the white blood cells of CFS patients. This abnormal enzyme was first
discovered in 1996 by researchers at Temple University who have been actively
collaborating with the Company's scientists for a number of years. Initial
research data indicates a high degree of correlation between levels of the
enzyme and the severity of the disease. These results, along with treating
ME/CFS patients of with Ampligen(R), were discussed in detail recently at the
American Association of CFS meeting in Cambridge, Massachusetts, October, 1998.
Manufacturing
In October 1998 the Company started treating ME/CFS patients in the United
States with a new "ready to use liquid" Ampligen(R) dose format. Prior to the
development of the ready to use liquid form, Ampligen(R) was supplied either as
a freeze-dried powder or in a frozen format to the clinical sites where it was
stored in a special frost free freezer. Thereafter, clinical site personnel
(nurses/physicians) were required to thaw according to a detailed "drug
reconstitution protocol". In the alternative, hospital pharmacies were required
to combine up to 8 small vials each consisting of 50 mg freeze dried powder into
a final "dosage unit" by use of special sterilized environments including use of
a laminar flow hood. These time-consuming steps are no longer required with the
use of the "ready to use liquid" format of Ampligen(R). Thus, the availability
of "the ready to use liquid format" of Ampligen(R) offers multiple conveniences
related to storage and administration while reducing the chance of potential
mistakes occurring during drug preparation at various locations removed from the
Company's manufacturing facility.
The new process allows the Company to ship ready to use doses directly from the
Company's manufacturing/quality assurance facility in Rockville, Maryland to
various clinical locations around the country. Extensive testing in various
laboratories (under direction of the Company's scientists) of the "ready to use
liquid" form of Ampligen(R) has revealed it to be stable, without the use of
preservatives, under refrigerated conditions while preserving full potency. The
results of the stability and all bio-equivalency tests on the "ready to use
liquid" form of Ampligen(R) were submitted to FDA during the third quarter of
1998 for full review and comment prior to its use in clinical settings. This
liquid dose format can be manufactured more efficiently and allows for the
potential production of greater volumes for commercial needs.
Ribotech, Ltd., (a company partially owned by the Company in South Africa),
currently produces most of the biochemicals for the production of the Company's
lyophilized product and has also initiated a program to produce the liquid dose
product. Ribotech announced the completion of their first pilot run of liquid
doses in the third quarter. The liquid doses produced by this run are currently
undergoing extensive testing. Five lots of Ampligen(R) were produced in the
third quarter by the Company utilizing U.S. based facilities. The Company used
these five lots to produce nearly 1,000 doses of lyophilized product and over
3,000 doses of liquid product. These doses will be used in the ME/CFS Cost
Recovery Clinical Treatment Programs as well as the confirmatory Phase III
ME/CFS clinical trials. The Company is also actively evaluating new
manufacturing locations in Western and Eastern Europe in order to provide
similar diversity in Ampligen(R) product formats (liquid vs. lyophilized)
similar to its U.S.-based programs.
Europe
As noted above the Company's foreign subsidiary, Hemispherx Biopharma Europe, is
sponsoring an international CFS Research Symposium in Rome, Italy in November,
1998. This meeting will focus on new developments in diagnosis and medical
11
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management of CFS. Physicians and Researchers from more than fifteen (15)
countries are expected to attend.
The European Union (EU) countries consisting of 15 members are in the process of
establishing a comprehensive policy with respect to authorizing the marketing of
new pharmaceutical products. Instead of the historical procedure whereby
individual countries grant national authorizations, the EU has established two
systems based on 1) the mutual recognition of authorizations and 2) one single
authorization to be valid for the 15 member states. The company is preparing a
dossier to be submitted to the EU authorities (the European Medicines Evaluation
Agency - EMEA) for approval of Ampligen(R) specifically to be used in the EU for
treatment of patients with ME/CFS. This dossier will contain all available
information generated on the quality, safety and efficacy of Ampligen(R) with
respect to ME/CFS in the United States and Europe as of a specified date in 1998
for all clinical "data collection". The Company plans to submit this completed
dossier to the EMEA in December, 1998, following an earlier submission of
certain summary documents.
Also, the Company is evaluating various European facilities to be responsible
for affirming overall product quality for use in the EU. This program may
involve the packing and distribution of the product to be used in the European
Union, including the product labeling in approximately 15 different EU
languages.
Year 2000 Update
The Company's Year 2000 Compliance Program (Program) is steadily moving forward.
The program was implemented in the spring of 1998 with the objective of 1)
updating and/or replacing aging hardware/software, 2) establishing new platforms
for data bases and 3) assuring company-wide Y2K compliance.
With respect to Y2K compliance, the program is addressing the issue of computer
programs and embedded computer chips being unable to distinguish between the
year 1900 and the year 2000. The Company's program is divided into three groups:
clinical, manufacturing and financial. Outside hardware/software consultants
have been employed to review all hardware and software in terms of Y2K
compliance as well as upgrades for certain aged equipment. In most cases, it
appears that the upgrades will solve the Y2K compliance problem.
Solutions for the clinical group issues have been identified. Management is
presently preparing to present the clinical group proposal to the Board of
Directors at their December 1998 meeting. Upon approval, the recommendations
could be implemented and in place by March 30, 1999. The manufacturing group has
also identified the hardware/software to be upgraded to be Y2K compliant. The
Company has engaged the services of a developer of integrated systems to review
these needs and determine the hardware/software best suited to serve the
manufacturing process and data base. The developer's recommendations are to be
available by mid-December at which time the Company will react. Management
believes that the manufacturing group will be Y2K compliant by May 30, 1999.
The financial group has identified very minor Y2K hardware/software problems and
expects to be compliant by December 31, 1998.
12
<PAGE>
Some major vendors and suppliers have been contacted and have provided
certification that they are Y2K compliant or have provided reports reflecting
the status of their Y2K programs. By mid-December, 1998 the Company expects to
have contacted all major vendors with respect to this matter.
The total cost of the program is unknown at this time, but the Company expects
that the cost will range from $150,000 to $200,000.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Program is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material external agents. The Company believes that, with the implementation of
new business systems and completion of the Program as scheduled, the possibility
of significant interruptions of normal operations should be reduced.
Recent Developments
New clinical investigative sites were added to the ME/CFS clinical cost recovery
treatment program bringing the total number of clinical sites to ten. In
October, 1998 the Company received notice of allowance from the United States
Patent Office of a new patent application entitled "Diagnosis and Treatment of
euro- Cognitive Disorders Associated with Systematic Immunological Malfunction."
This new patent is directed towards novel methods of diagnosing persons
afflicted with neuro-cognitive disorders. The newly designated specific central
nervous system (CNS) disease afflictions include those with "partial loss of
cognitive functions, impaired attention and abstraction ability, memory loss,
and immunological derangement." The associated novel diagnostic methodologies
include detecting certain aberrations in the patient's antiviral/immunological
defenses which reside within a critical antiviral cascade or natural protective
system termed "2'-5" A pathway". Hemispherx now has more than 25 issued U.S.
patents and more than 300 issued internationally to protect its proprietary
drugs and medicinal technology.
RESULTS OF OPERATIONS
Nine months ended September 30, 1998 versus Nine months ended September 30, 1997
The Company reported a net loss of $4,759,178 for the nine months ended
September 30, 1998 versus a net loss of $4,879,286 for the same period in 1997.
Several factors, including increased revenues, contributed to the $120,108
reduction in losses in 1998.
The nine months ended September 30, 1997 results include a one time non-cash
preferred stock conversion expense of $1,227,864 primarily due to the buy back
and settlement of the Series D Preferred Stock. Also, common stock compensation
expense of $564,417 was incurred in the nine months ended September 30, 1998,
based on the value of warrants to purchase common stock granted to non-employees
of the Company.
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Revenues were up $134,052 (increased 86%) for the nine months ending September
30, 1998 over the comparable period in 1997 due to the increased enrollment of
patients in the Cost Recovery Clinical Treatment Programs being conducted in
Belgium, Canada and the United States for the treatment of ME/CFS.
Research and development costs increased $865,310 in the nine months ended
September 30, 1998. This increase reflects the expenses associated with
increased drug production efforts and the increase in personnel necessary to
support the forthcoming clinical programs in the United States and European
Union including the anticipated filings for final drug marketing approvals.
General and administrative expenses in the nine months ending September 30, 1998
increased by $619,313. This was due primarily to a common stock compensation
expense of $564,417 which is included in general and administrative expense.
This expense relates to the grant of warrants to non-employees for services
performed.
Interest income increased $242,815 in the nine months ended September 30, 1998
compared to the same period in 1997 due to higher cash and cash equivalents
available for short term investments.
Three months ended September 30, 1998 versus three months ended September 30,
1997
The Company reported a net loss of $1,700,014 for the three months ended
September 30, 1998 versus a net loss of $1,470,629 for the same period in 1997.
Several factors contributed to the $229,385 increase in losses in 1998.
Revenues were up $14,027 (approximately 15%) for the three months ending
September 30, 1998 over the comparable period for 1997 due to the increased
enrollment of patients in the Cost Recovery Clinical Treatment Programs being
conducted in Belgium, Canada and the United States for the treatment of ME/CFS.
Research and development costs increased $184,719 in the third quarter. This
increase reflects the expenses associated with increased drug production efforts
and the increase in personnel necessary to support the forthcoming clinical
programs in the United States and preparation for drug marketing approvals in
Europe.
General and administrative expenses in the three months ending September 30,
1998 increased by $156,556. This was due primarily to common stock compensation
expense of $143,128 which is included in general and administrative expense.
This expense relates to the grant of warrants to non-employees for services
performed.
Interest income increased $97,863 in the three months ended September 30, 1998
due to higher cash and cash equivalents available for short term investments.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at September 30, 1998 was $14,341,545 compared to
$8,965,714 at December 31, 1997, reflecting a net cash increase of $5,375,831 in
the first nine months of 1998. In addition to the cash and cash equivalents of
$14,341,545 at September 30, 1998, the Company had $1,089,127 in short term
investments. These funds with an aggregate total of $15,430,672 reflect the
residual of the $9.4 million net proceeds of two private placements of equity in
October 1997, the exercise of warrants by shareholders and a private placement
totaling $2,250,000 in the third quarter.
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Revenues from the ME/CFS clinical treatment cost recovery programs underway in
the United States, Canada and Belgium produced $289,334` in funds for the first
nine months of 1998. Interest income on the short term investment of surplus
funds produced $385,291. Funds from shareholders exercising warrants and options
to purchase common stock totaled $7,376,303 in the first nine months of 1998. In
September, 1998 the Company privately placed an equity offering totaling
$2,250,000.
The $7,376,303 received through the first nine months of 1998 includes
$2,462,360 from warrant holders exercising Class A redeemable warrants and
$2,494,800 from the exercise of Option Units issued in connection with the
initial public offering in November, 1995. The option units were exercised at
5.78 per unit which includes one share of common stock and one Class A
redeemable warrant exercisable at $6.60 per share.
The Company expects warrant holders to continue exercising the Class A
redeemable warrants and private warrants from time to time depending on the
trading price of the Company common stock. As of September 30, 1998, the company
has 5,696,310 Class A redeemable warrants outstanding. These warrants can be
exercised at $4.00 per share. In addition, there are 432,000 Class A redeemable
warrants outstanding at an exercise price of $6.60 per share.
Because of the Company's long-term capital requirements, it may seek to access
the public equity market whenever conditions are favorable, even if it does not
have an immediate need for additional capital at that time. Any additional
funding may result in significant dilution and could involve the issuance of
securities with rights which are senior to those of existing stockholders. The
Company may also need additional funding earlier than anticipated, and the
Company's cash requirements in general may vary materially from those now
planned, for reasons including, but not limited to, changes in the Company's
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 Company's
clinical trials for which cost recovery from participants has been approved.
Other
The Company recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 hardware and software issues. The Company is
in the process of reviewing its compliance regarding Year 2000 issues for both
internal and external information systems by the end of 1998. This process will
entail communicating with significant suppliers, financial institutions,
insurance companies and other parties that provide significant services to the
Company. Expenditures required to make the Company Year 2000 compliant will be
expensed as incurred and are not expected to be material to the Company's
consolidated financial position or results of operations.
Part II - OTHER INFORMATION
ITEM 1: Legal Proceedings
On September 14, 1998, VMW, Inc. filed a complaint against the Company in the
United States District Court, Southern Division of New York, The complaint
alleges that the Company failed to fulfill its financial obligations to VMW,
Inc. with respect to a certain letter agreement pertaining to services. VMW,
Inc. claims damages of less than $100,000. The Company is opposing this
complaint and believes it to be without merit.
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Ell & Co., and the Northern Trust Company, as Trustee of the AT&T Master Pension
Trust filed a complaint against the Company in the Court of Chancery of the
State of Delaware in and for New Castle County on September 23, 1998. This
complaint alleges that the Company breeched its contractual obligations as set
forth in the Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock of the Company. The Plaintiffs seek to enforce their
rights to convert 1,500 shares of Series E Preferred Stock into 750,000 shares
of freely traded common stock. The Company maintains that the 1,500 shares of
Series E Preferred Stock had been properly redeemed and that the plaintiff is
not contractually able to effect a proper conversion into common shares. This
legal dispute is currently in the discovery phase.
The Company filed a complaint against Manual P. Asensio, Asensio & Company, Inc.
and others in the United States District Court for the Eastern District of
Pennsylvania on September 30, 1998. This action arises out of the Company's
belief that the defendants unlawful manipulated and illegally sold shares short
of the Company's common stock on the American Stock Exchange on or about
September 15, 1998 through the present.
ITEM 2: Changes in Securities
In February, 1998, the Company filed a Registration Statement with the
Securities and Exchange Commission (SEC) to register the common stock placed in
the September 1997 private placements. The statement included common stock
underlying certain stock purchase warrants with registration rights.
In July, 1998 the Company's Common Stock and Class A Warrants were listed on the
Berlin Stock Exchange. The shares and warrants will trade under the symbols HXB
and HXBA respectively. The listing on the Berlin Stock Exchange has been
facilitated by Berliner Freiverkehr, a major German investment banking and
brokerage firm, with assistance from Value Management & Research, GmbH, a
European based Research and Investment Firm.
ITEM 3: Defaults in Senior Securities
None
ITEM 4: Submission of Matters to a Vote of Security Holders
None
ITEM 5:Other Information
None
ITEM 6: Exhibits and Reports on Form 8K
Reports on Form 8K - None
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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: February 2, 1999 William A. Carter, M.D.
Chief Executive Officer & President
/S/ Robert E. Peterson
-----------------------------------------
Date: February 2, 1999 Robert E. Peterson
Chief Financial Officer
17
