AIM ImmunoTech Inc. - Quarter Report: 2010 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d)
of the
Securities Exchange Act of 1934
For the
Quarterly Period Ended September 30, 2010
Commission
File Number: 1-13441
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
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or such shorter period that the registrant was required to submit and
post such files).
¨Yes x No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
¨
|
Large
accelerated filer
|
x
|
Accelerated
filer
|
¨
|
Non-accelerated
filer
|
¨
|
Smaller
reporting company
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨
Yes x No
135,241,609
shares of common stock were issued and outstanding as of November 03,
2010.
PART I - FINANCIAL
INFORMATION
ITEM
1: Financial Statements
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(in
thousands, except for share and per share amounts)
December
31, 2009
|
September
30, 2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents (Note 11)
|
$ | 58,072 | $ | 3,044 | ||||
Marketable
securities maturing in less than one year (Note 5)
|
- | 34,202 | ||||||
Inventories
(Note 4)
|
- | 1,075 | ||||||
Prepaid
expenses and other current assets
|
332 | 235 | ||||||
Total
current assets
|
58,404 | 38,556 | ||||||
Property
and equipment, net
|
4,704 | 4,794 | ||||||
Marketable
securities maturing in one year or greater (Note 5)
|
- | 11,015 | ||||||
Patent
and trademark rights, net
|
830 | 974 | ||||||
Investment
|
35 | 35 | ||||||
Construction
in progress (Note 8)
|
135 | 464 | ||||||
Other
assets (Note 4)
|
886 | 38 | ||||||
Total
assets
|
$ | 64,994 | $ | 55,876 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 1,294 | $ | 1,729 | ||||
Accrued
expenses (Note 6)
|
1,321 | 572 | ||||||
Current
portion of capital lease (Note 7)
|
- | 61 | ||||||
Total
current liabilities
|
2,615 | 2,362 | ||||||
Long-term
liabilities
|
||||||||
Long-term
portion of capital lease (Note 7)
|
- | 112 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders’
equity (Note 9):
|
||||||||
Preferred
stock, par value $0.01 per share, authorized 5,000,000; issued and
outstanding; none
|
- | - | ||||||
Common
stock, par value $0.001 per share, authorized 200,000,000 shares; issued
and outstanding 132,787,447 and 135,241,609, respectively
|
133 | 135 | ||||||
Additional
paid-in capital
|
273,093 | 274,371 | ||||||
Accumulated
other comprehensive income
|
- | 717 | ||||||
Accumulated
deficit
|
(210,847 | ) | (221,821 | ) | ||||
Total
stockholders’ equity
|
62,379 | 53,402 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 64,994 | $ | 55,876 |
See
accompanying notes to consolidated financial statements.
2
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(in
thousands, except share and per share data)
(Unaudited)
Three months ended September 30,
|
||||||||
2009
|
2010
|
|||||||
Revenues:
|
||||||||
Clinical
treatment programs
|
$ | 25 | $ | 35 | ||||
Total
revenues
|
25 | 35 | ||||||
Costs
and expenses:
|
||||||||
Production/cost
of goods sold
|
146 | 181 | ||||||
Research
and development
|
1,173 | 1,808 | ||||||
General
and administrative
|
1,164 | 1,738 | ||||||
Total
costs and expenses
|
2,483 | 3,727 | ||||||
Operating
loss
|
(2,458 | ) | (3,692 | ) | ||||
Interest
expense from capital leases
|
- | (5 | ) | |||||
Interest
and other income
|
23 | 443 | ||||||
Net
loss
|
$ | (2,435 | ) | $ | (3,254 | ) | ||
Basic
and diluted loss per share (Note 2)
|
$ | (.02 | ) | $ | (.02 | ) | ||
Weighted
average shares outstanding, basic and diluted
|
127,788,640 | 134,869,730 |
See
accompanying notes to consolidated financial statements.
3
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(in
thousands, except share and per share data)
(Unaudited)
Nine months ended September 30,
|
||||||||
2009
|
2010
|
|||||||
Revenues:
|
||||||||
Clinical
treatment programs
|
$ | 71 | $ | 108 | ||||
Total
revenues
|
71 | 108 | ||||||
Costs
and expenses:
|
||||||||
Production/cost
of goods sold
|
419 | 649 | ||||||
Research
and development
|
4,750 | 5,498 | ||||||
General
and administrative
|
4,192 | 5,495 | ||||||
Total
costs and expenses
|
9,361 | 11,642 | ||||||
Operating
loss
|
(9,290 | ) | (11,534 | ) | ||||
Financing
costs
|
(241 | ) | - | |||||
Interest
expense from capital leases
|
- | (5 | ) | |||||
Interest
and other income
|
139 | ) | 565 | |||||
Net
loss
|
$ | (9,392 | ) | $ | (10,974 | ) | ||
Basic
and diluted loss per share (Note 2)
|
$ | (.09 | ) | $ | (.08 | ) | ||
Weighted
average shares outstanding, basic and diluted
|
101,706,216 | 133,605,973 |
See
accompanying notes to consolidated financial statements.
4
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders' Equity and Comprehensive
Loss
(in thousands except
share data)
(Unaudited)
Common
Stock
Shares
|
Common
Stock
$.001
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Other
Compre-
hensive
Income
|
Accumulated
Deficit
|
Total
Stockholders’
Equity
|
Compre-
hensive
Loss
|
||||||||||||||||||||||
Balance
at December 31, 2009
|
132,787,447 | $ | 133 | $ | 273,093 | $ | - | $ | (210,847 | ) | $ | 62,379 | $ | - | ||||||||||||||
Stock
issued for settlement of accounts payable
|
498,867 | - | 328 | - | - | 328 | - | |||||||||||||||||||||
Equity
based compensation
|
1,435,295 | 1 | 658 | - | - | 659 | - | |||||||||||||||||||||
Shares
sold at the market
|
520,000 | 1 | 292 | - | - | 293 | - | |||||||||||||||||||||
Unrealized
gain in investment securities
|
- | - | - | 717 | - | 717 | 717 | |||||||||||||||||||||
|
||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | (10,974 | ) | (10,974 | ) | (10,974 | ) | ||||||||||||||||||
Balance
at September 30, 2010
|
135,241,609 | $ | 135 | $ | 274,371 | $ | 717 | $ | (221,821 | ) | $ | 53,402 | $ | (10,257 | ) |
See
accompanying notes to consolidated financial statements.
5
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For
the Nine Months Ended September 30, 2009 and 2010
(in
thousands)
(Unaudited)
2009
|
2010
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (9,392 | ) | $ | (10,974 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
of property and equipment
|
266 | 295 | ||||||
Amortization
of patent and trademark rights, and royalty interest
|
236 | 57 | ||||||
Financing
cost related to Standby Financing
|
241 | - | ||||||
Equity
based compensation
|
791 | 659 | ||||||
Gain
on disposal of equipment
|
(83 | ) | - | |||||
Change
in assets and liabilities:
|
||||||||
Inventories
|
- | (212 | ) | |||||
Prepaid
expenses and other current assets
|
257 | 97 | ||||||
Other
assets
|
- | (6 | ) | |||||
Accounts
payable
|
1,252 | 763 | ||||||
Accrued
expenses
|
(233 | ) | (749 | ) | ||||
Net
cash used in operating activities
|
$ | (6,665 | ) | $ | (10,070 | ) | ||
Cash
flows from investing activities:
|
||||||||
Purchase
of property plant and equipment
|
$ | (51 | ) | $ | (514 | ) | ||
Additions
to patent and trademark rights
|
(185 | ) | (201 | ) | ||||
Deposits
on capital leases
|
- | (9 | ) | |||||
Maturities
of short-term and long-term investments
|
- | 4,356 | ||||||
Purchase
of short-term and long-term investments
|
- | (48,856 | ) | |||||
Net
cash used in investing activities
|
$ | (236 | ) | $ | (45,224 | ) |
6
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
For
the Nine Months Ended September 30, 2009 and 2010
(in
thousands)
(Unaudited)
2009
|
2010
|
|||||||
Cash
flows from financing activities:
|
||||||||
Payments
on capital lease
|
$ | - | $ | (27 | ) | |||
Warrants
and options converted
|
33,982 | - | ||||||
Proceeds
from sale of stock, net of issuance costs
|
27,842 | 293 | ||||||
Net
cash provided by financing activities
|
$ | 61,824 | $ | 266 | ||||
Net
increase (decrease) in cash and cash equivalents
|
54,923 | (55,028 | ) | |||||
Cash
and cash equivalents at beginning of period
|
6,119 | 58,072 | ||||||
Cash
and cash equivalents at end of period
|
$ | 61,042 | $ | 3,044 | ||||
Supplemental
disclosures of non-cash investing and financing cash flow
information:
|
||||||||
Issuance
of common stock for accounts payable and accrued expenses
|
$ | 1,301 | $ | 328 | ||||
Equipment
acquired by capital lease
|
$ | - | $ | 200 | ||||
Unrealized
gain on investments
|
$ | - | $ | 717 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest expense
|
$ | - | $ | 5 |
See
accompanying notes to consolidated financial statements.
7
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1: Basis Of Presentation
The consolidated financial statements
include the financial statements of Hemispherx Biopharma, Inc. and its
wholly-owned subsidiaries. The Company has three domestic
subsidiaries BioPro Corp., BioAegean Corp. and Core Biotech Corp., all of which
are incorporated in Delaware and are dormant. The Company’s foreign
subsidiary, Hemispherx Biopharma Europe N.V./S.A., established in Belgium in
1998, has minimal
activity. All significant intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of Management, all
adjustments necessary for a fair presentation of such consolidated financial
statements have been included. Such adjustments consist of normal recurring
items. Interim results are not necessarily indicative of results for
a full year.
The interim consolidated financial
statements and notes thereto are presented as permitted by the Securities and
Exchange Commission (“SEC”), and do not contain certain information which will
be included in our annual consolidated financial statements and notes
thereto.
These consolidated financial statements
should be read in conjunction with our consolidated financial statements
included in our annual report on Form 10-K, filed March 12, 2010, and 10-K/A,
filed April 30, 2010, for the year ended
December 31, 2009.
Note 2: Net Loss Per
Share
Basic and
diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Equivalent common shares,
consisting of stock options and warrants including the Company’s convertible
debentures, which amounted to 21,539,946 and 52,686,158 shares, are excluded
from the calculation of diluted net loss per share for the nine months ended
September 30, 2009 and 2010, respectively, since their effect is
antidilutive.
Note
3: Equity Based Compensation
The fair value of each option award is
estimated on the date of grant using a Black-Scholes-Merton option valuation
model. Expected volatility is based on the historical volatility of
the price of the Company’s stock. The risk-free interest rate is
based on U.S. Treasury issues with a term equal to the expected life of the
option. The Company uses historical data to estimate expected
dividend yield, expected life and forfeiture rates. The fair values
of the options granted, were estimated based on the following weighted average
assumptions:
Nine
Months Ended September 30,
|
||||||||
2009
|
2010
|
|||||||
Risk-free
interest rate
|
1.76% - 2.54 | % | 1.02%-2.03 | % | ||||
Expected
dividend yield
|
- | - | ||||||
Expected
lives
|
2.5
– 5.0 yrs.
|
5.0
years
|
||||||
Expected
volatility
|
86.78% - 137.47 | % | 109.57%-110.01 | % | ||||
Weighted
average grant date fair value of options and warrants
issued
|
$ | 528,000 | $ | 610,069 |
8
Stock
option activity for 2009 and during the nine months ended September 30, 2010, is
as follows:
Stock
option activity for employees:
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
December 31, 2008
|
6,258,608 | $ | 2.60 | 7.92 | $ | - | ||||||||||
Options
granted
|
- | - | - | - | ||||||||||||
Options
forfeited
|
(29,856 | ) | 2.24 | 5.75 | - | |||||||||||
Outstanding
December 31, 2009
|
6,228,752 | $ | 2.60 | 6.95 | $ | - | ||||||||||
Options
granted
|
820,000 | .66 | 9.54 | - | ||||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
September 30, 2010
|
7,048,752 | $ | 2.37 | 6.37 | $ | - | ||||||||||
Exercisable
September 30, 2010
|
6,993,752 | $ | 2.38 | 6.40 | $ | - |
The
weighted-average grant-date fair value of options granted during the nine months
ended September 30, 2009 and 2010 was $252,000 and $384,000,
respectively.
Unvested
stock option activity for employees:
Number
of
Options
|
Weighted
Average
Exercise
Price
|
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
December 31, 2008
|
76,944 | $ | 1.41 | 8.89 | $ | - | ||||||||||
Options
granted
|
- | - | - | - | ||||||||||||
Options
vested
|
(38,611 | ) | 1.28 | 7.92 | - | |||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
December 31, 2009
|
38,333 | $ | 1.54 | 8.00 | $ | - | ||||||||||
Options
granted
|
16,667 | .66 | 9.75 | - | ||||||||||||
Options
vested
|
- | - | - | - | ||||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
September 30, 2010
|
55,000 | $ | 1.27 | 8.01 | $ | - |
9
Stock
option activity for non-employees:
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
December 31, 2008
|
2,417,482 | $ | 2.35 | 6.98 | $ | - | ||||||||||
Options
granted
|
361,250 | 2.12 | 7.00 | - | ||||||||||||
Options
exercised
|
(293,831 | ) | 1.56 | 7.93 | - | |||||||||||
Options
forfeited
|
(251,469 | ) | 2.14 | 7.43 | - | |||||||||||
Outstanding
December 31, 2009
|
2,233,432 | $ | 2.44 | 5.73 | $ | - | ||||||||||
Options
granted
|
605,000 | .55 | 9.75 | - | ||||||||||||
Options
exercised
|
- | - | - | - | ||||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
September 30, 2010
|
2,838,432 | $ | 2.04 | 6.00 | $ | - | ||||||||||
Exercisable
September 30, 2010
|
2,726,973 | $ | 2.01 | 6.26 | $ | - |
The
weighted-average grant-date fair value of options granted during the nine months
ended September 30, 2009 and 2010 was approximately $199,000 and $225,959,
respectively.
Unvested
stock option activity for non-employees during the year:
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
December 31, 2008
|
26,667 | $ | 1.43 | 9.00 | $ | - | ||||||||||
Options
granted
|
131,250 | 2.81 | 3.42 | - | ||||||||||||
Options
vested
|
(18,333 | ) | 1.79 | 7.45 | - | |||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
December 31, 2009
|
139,584 | $ | 2.68 | 3.76 | $ | - | ||||||||||
Options
granted
|
- | - | - | - | ||||||||||||
Options
vested
|
(28,125 | ) | 2.81 | 2.75 | - | |||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
September 30, 2010
|
111,459 | $ | 2.65 | 3.70 | $ | - |
The
impact on the Company’s results of operations of recording equity based
compensation for the nine months ended September 30, 2009 and 2010 was to
increase general and administrative expenses by approximately $452,000 and
$659,000 respectively. The impact on basic and fully diluted earnings
per share for the nine months ended September 30, 2009 was $-0- and for
September 30, 2010 was to increase loss per share by $0.01.
As of
September 30, 2009 and 2010, respectively, there was $255,500 and $180,700
of unrecognized equity based compensation cost related to options granted under
the Equity Incentive Plan.
10
Note 4: Inventories
and Other Assets
The Company uses the lower of first-in,
first-out (“FIFO”) cost or market method of accounting for
inventory.
Inventories consist of the following:
|
(in thousands)
|
|||||||
December 31,
|
September 30,
|
|||||||
2009
|
2010
|
|||||||
Inventory
work in process
|
$ | - | $ | 1,075 | ||||
Finished
goods, net of reserves of $282,000 at December 31, 2009
and $250,000 at September 30, 2010.
|
- | - | ||||||
$ | - | $ | 1,075 |
The
conversion of existing Alferon N Injection® Work-In-Progress inventory was
started up again in May 2010 towards the manufacture of new Finished Goods and
is estimated to be available for commercial sales in mid to late
2011. As a result the Work-In-Progress of $864,000, which was
included in “Other assets” in 2009, has been reclassified and included with
current assets at the September 30, 2010 value of $1,075,000.
Other assets consist of the following:
|
(in thousands)
|
|||||||
December 31,
|
September 30,
|
|||||||
2009
|
2010
|
|||||||
Inventory
work in process
|
$ | 864 | $ | - | ||||
Security
deposit
|
15 | 16 | ||||||
Internet
Domain Names
|
7 | 7 | ||||||
Deposit
on new telephone system
|
- | 6 | ||||||
Security
deposit on Capital Lease (see Note 7)
|
- | 9 | ||||||
$ | 886 | $ | 38 |
Note
5: Marketable Securities
Marketable
securities consist of fixed income securities with remaining maturities of
greater than three months at the date of purchase, debt securities and equity
securities. At September 30, 2010, all of our fixed income securities
were classified as available for sale investments and measured as Level 1
instruments of the fair value measurements standard (see Note 10: Fair
Value). Securities classified as available for sale consisted
of:
September
30, 2010
(in
thousands)
Name Of Security
|
Cost
|
Market
Value
|
Unrealized
Gain
(Loss)
|
Maturity
Date
|
|||||||||
Marketable
Securities with maturity periods less than one year:
|
|||||||||||||
GE
Money Bank
|
250 | 250 | - |
10/15/2010
|
|||||||||
Discover
Bank
|
500 | 500 | - |
10/29/2010
|
|||||||||
Beal
Bank
|
250 | 250 | - |
12/8/2010
|
|||||||||
Toyota
Motor Credit
|
1,020 | 1,009 | (11 | ) |
12/15/2010
|
||||||||
Safra
National Bank
|
250 | 250 | - |
1/1/2011
|
|||||||||
GE
Money Bank
|
250 | 250 | - |
1/14/2011
|
|||||||||
Goldman
Sachs
|
1,063 | 1,017 | (46 | ) |
1/15/2011
|
||||||||
Oracle
Corporation
|
785 | 760 | (25 | ) |
1/15/2011
|
||||||||
World
Financial Capital
|
300 | 300 | - |
1/28/2011
|
|||||||||
Cisco
Systems
|
786 | 765 | (21 | ) |
2/22/2011
|
||||||||
IBM
Corporation
|
783 | 767 | (16 | ) |
3/22/2011
|
||||||||
Bank
of America
|
500 | 501 | 1 |
4/21/2011
|
|||||||||
Merrick
Bank
|
250 | 250 | - |
4/21/2011
|
|||||||||
Discover
Bank
|
250 | 251 | 1 |
6/23/2011
|
|||||||||
General
Dynamics
|
763 | 758 | (5 | ) |
7/15/2011
|
||||||||
Wells
Fargo
|
1,081 | 1,049 | (32 | ) |
8/1/2011
|
||||||||
Bank
of America
|
1,066 | 1,039 | (27 | ) |
8/15/2011
|
||||||||
Shell
International
|
756 | 756 | - |
9/22/2011
|
|||||||||
Wachovia
Bank
|
274 | 270 | (4 | ) |
9/28/2011
|
||||||||
PIMCO
|
22,200 | 23,210 | 1,010 |
NA
|
|||||||||
Total
Marketable Securities with maturity periods less than one
year:
|
$ | 33,377 | $ | 34,202 | $ | 825 |
11
Marketable
Securities with maturity periods greater than one year:
|
|||||||||||||
Plainscapital
Bank
|
250 | 251 | 1 |
10/31/2011
|
|||||||||
Bank
One Corporation
|
1,070 | 1,056 | (14 | ) |
11/15/2011
|
||||||||
Merck
& Company
|
818 | 790 | (28 | ) |
11/15/2011
|
||||||||
Morgan
Stanley
|
1,077 | 1,050 | (27 | ) |
1/9/2012
|
||||||||
Wright
Expert Financial Services
|
250 | 252 | 2 |
4/26/2012
|
|||||||||
Citibank
NA
|
250 | 251 | 1 |
4/30/2012
|
|||||||||
GE
Money Bank
|
104 | 103 | (1 | ) |
5/29/2012
|
||||||||
Sallie
Mae Bank
|
104 | 103 | (1 | ) |
5/29/2012
|
||||||||
Bank
of Northern Miami
|
250 | 251 | 1 |
7/30/2012
|
|||||||||
Merrill
Lynch
|
1,089 | 1,074 | (15 | ) |
8/15/2012
|
||||||||
Merrill
Lynch
|
811 | 806 | (5 | ) |
8/15/2012
|
||||||||
Morgan
Stanley
|
1,071 | 1,073 | 2 |
8/31/2012
|
|||||||||
Wells
Fargo
|
1,082 | 1,066 | (16 | ) |
9/1/2012
|
||||||||
Israel
Discount Bank
|
250 | 250 | - |
9/11/2012
|
|||||||||
Allstate
|
115 | 112 | (3 | ) |
9/16/2012
|
||||||||
Park
Sterling Bank
|
250 | 251 | 1 |
10/16/2012
|
|||||||||
Columbus
Bank & Trust Company
|
250 | 253 | 3 |
10/22/2012
|
|||||||||
World's
Foremost Bank
|
100 | 104 | 4 |
1/28/2013
|
|||||||||
Merrill
Lynch
|
544 | 537 | (7 | ) |
2/5/2013
|
||||||||
Merrill
Lynch
|
104 | 104 | - |
3/4/2013
|
|||||||||
Goldman
Sachs
|
250 | 253 | 3 |
6/17/2013
|
|||||||||
Royal
Bank of Scotland
|
1,034 | 1,025 | (9 | ) |
8/23/2013
|
||||||||
Total
Marketable Securities with maturity periods greater than one
year:
|
$ | 11,123 | $ | 11,015 | $ | (108 | ) | ||||||
Total
Marketable Securities
|
$ | 44,500 | $ | 45,217 | $ | 717 |
No
investment was pledged to secure public funds at September 30,
2010.
Note 6: Accrued Expenses
Accrued
expenses consist of the following:
(in thousands)
|
||||||||
December 31,
|
September 30,
|
|||||||
2009
|
2010
|
|||||||
Compensation
|
$ | 716 | $ | 170 | ||||
Professional
fees
|
421 | 180 | ||||||
Other
expenses
|
71 | 109 | ||||||
Other
liability
|
113 | 113 | ||||||
$ | 1,321 | $ | 572 |
12
Note
7: Capital Lease
The
Company has acquired equipment under capital leases as follows:
(in thousands)
|
||||
Asset
|
||||
Balance at
|
||||
September
30,
2010
|
||||
Leased
Equipment included with property and equipment
|
$ | 200 | ||
Less:
accumulated depreciation
|
(11 | ) | ||
$ | 189 |
The
following is a schedule by year of future minimum lease payments under the
capital leases as of September 30, 2010:
2010
|
$ | 48 | ||
2011
|
59 | |||
2012
|
47 | |||
2013
|
38 | |||
2014
|
27 | |||
2015
|
15 | |||
Total
lease payments remaining
|
234 | |||
Less:
amount representing interest
|
(61 | ) | ||
Present
value of remaining minimum lease payments
|
173 | |||
Less:
current obligations under lease obligations
|
(61 | ) | ||
Long-term
capital lease obligations
|
$ | 112 |
Minimum
lease payments under the capital leases range from $1,696 per to $2,994 per
month and the lease periods range from 24 months to 60. Imputed rates are 2% to
24% per annum. Aggregate security deposits of $9,380 were paid and are included
in other assets.
Note
8: Construction in Progress
On
September 16, 2009, our Board of Directors approved up to $4.4 million for full
engineering studies, capital improvements, system upgrades and introduction of
building management systems to enhance production of three products: Alferon N
Injection®, Alferon® LDO and Ampligen®. Construction in progress consists of
accumulated costs for the construction and installation of property and
equipment within the Company’s New Jersey facility until the assets are placed
into service. As of December 31, 2009, construction in progress was $135,000 as
compared to $464,000 for the nine months ended September 30, 2010.
13
Note
9: Stockholders’ Equity
The
Equity Compensation Plan effective May 1, 2004, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 8,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Plan of
2004. Unless sooner terminated, the Equity Compensation Plan of 2004 will
continue in effect for a period of 10 years from its effective date. As of
September 30, 2010, the Company effectively exhausted this plan and issued an
aggregate 7,999,981 shares, stock options and warrants to vendors, Board
Members, Directors and consultants under the 2004 Equity Compensation Plan. The
shares had prices ranging from $0.35 to $0.89 based on the NYSE Amex closing
price. The stock options had various exercise prices ranging from $1.30 to
$6.00, had terms of five to ten years and vesting immediately to three
years.
The
Equity Incentive Plan of 2007, effective June 20, 2007, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 9,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Incentive
Plan of 2007. Unless sooner terminated, the Equity Incentive Plan of 2007 will
continue in effect for a period of 10 years from its effective date. The Company
issued to vendors, Board Members, Directors and consultants, shares, stock
options, warrants and “Incentive Rights” under the Employee Wages or Hours
Reduction Program. As of September 30, 2010, the Company effectively exhausted
this plan and issued an aggregate of 8,980,374 shares and shares issuable upon
exercise/conversion of the foregoing securities. The aggregate shares to
vendors, Board Members, Directors and consultants had prices ranging from $0.32
to $2.54 based on the NYSE Amex closing price. The stock options had various
exercise prices ranging from $0.72 to $3.05, terms of ten years and vesting over
varying periods.
The
Company utilized the Black-Scholes-Merton Pricing Model to arrive at the fair
value of the stock options which had been issued during the nine months ended
September 30, 2010 and accordingly recorded approximately $659,000 as equity
based compensation for these issuances during this period. The stock options
generally vested immediately upon grant with the exception of 20,000 options to
an executive employee which vest over 18 months, and 150,000 options to another
executive employee which vest over 48 months.
In an
effort to conserve our cash, the Employee Wage Or Hours Reduction Program (the
“Program”) was ratified by our Board effective January 1, 2009. The Incentive Rights are
rights for employees to receive Company shares and had prices ranging from $0.13
to $0.80 based on the average daily closing prices of the Company shares on the
NYSE Amex. The Program was suspended as of May 31, 2009 with employees
returning back to their rate of pay as of January 1, 2009. At the passage of six
months for each of their months of participation, non-affiliate employees
executed their right to receive shares for the months ended July 31, August 31,
September 30, October 30 and November 30, 2009. As of September 30, 2010, all
participants have exercised their rights to receive shares of stock related to
this Program.
The
Equity Incentive Plan of 2009, effective June 24, 2009, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 15,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Incentive
Plan of 2009. Unless sooner terminated, the Equity Incentive Plan of 2009 will
continue in effect for a period of 10 years from its effective date. As of
September 30, 2010 the Company issued 3,188,187 securities to Directors and
consultants consisting of an aggregate of 2,666,642 options and 521,545 shares
of common stock issuable upon exercise/conversion of the foregoing securities.
The shares issued to consultants had prices ranging from $0.40 to $0.68 based on
the NYSE Amex closing price.
14
The
aggregate stock options had various exercise prices ranging from $0.51 to $2.81,
had terms of ten years and vested immediately upon grant.
On May
28, 2010, we entered into an Equity Distribution Agreement (the “Agreement”)
with Maxim Group LLC (“Maxim”) to create an At-The-Market (“ATM”) equity program
under which we may sell up to 32,000,000 shares of our Common Stock (the
“Shares”) from time to time through Maxim as our sales agent (the “Agent”).
Under the Agreement, the Agent is entitled to a commission at a fixed commission
rate of 4.0% of the gross sales price per Share sold, up to aggregate gross
proceeds of $10,000,000, and, thereafter, at a fixed commission rate of 3.0% of
the gross sales price per Share sold. Sales of the Shares under the Agreement
may be made in transactions that are deemed to be “at-the-market” offerings as
defined in Rule 415 under the Securities Act of 1933, as amended, including
sales made by means of ordinary brokers’ transactions, including on the NYSE
Amex, at market prices or as otherwise agreed with the Agent. We have no
obligation to sell any of the Shares, and may at any time suspend offers under
the Agreement or terminate the Agreement. The Shares will be issued pursuant to
our previously filed and effective Registration Statement on Form S-3 (File No.
333-159856). On June 22, 2009, we filed a base Prospectus and on May 28, 2010,
filed a Prospectus Supplement relating to the offering with the Securities and
Exchange Commission. During the quarter ended September 30, 2010, we sold no
shares through the ATM equity program and received no net cash proceeds. For the
life of the ATM equity program through September 30, 2010, we sold 520,000
shares that resulted in net cash proceeds of $292,785 and commissions paid to
Maxim of $12,199 with the average daily selling price ranging from $0.53 to
$0.61.
Note
10: Fair Value
The
Company is required under U.S. Generally Accepted Accounting Principles (“GAAP”)
to disclose information about the fair value of all the Company’s financial
instruments, whether or not these instruments are measured at fair value on the
Company’s consolidated balance sheet.
The
Company estimates that the fair values of cash and cash equivalents, marketable
securities, other assets, accounts payable and accrued expenses approximate
their carrying values due to the short-term maturities of these items.
Additionally, the Company has certain warrants with a cash settlement feature
(in the event of a change in control to a non-public company) that are carried
at fair value. Management estimates the fair value using a model which
determines the probability that the cash settlement feature conditions will
arise. The carrying amount and estimated fair value of the above warrants was
zero at September 30, 2010.
On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157 Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in
Generally Accepted Accounting Principles, and expands disclosures about fair
value measurements. The guidance does not impose any new requirements around
which assets and liabilities are to be measured at fair value, and instead
applies to asset and liability balances required or permitted to be measured at
fair value under existing accounting pronouncements. The Company measures its
marketable securities based on quoted prices of active markets and warrant
liability, for those warrants with a cash settlement feature, at fair value. As
of September 30, 2010, the Company had no derivative assets or
liabilities.
FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or liability.
Classification is based on the lowest level of inputs that is significant to the
fair value measurement. The valuation hierarchy contains three
levels:
15
|
·
|
Level
1 – Quoted prices are available in active markets for identical assets or
liabilities at the reporting date.
|
|
·
|
Level
2 – Observable inputs other than Level 1 prices such as quote prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
Level 3 assets and liabilities include financial instruments whose value
is determined using pricing models, discounted cash flow methodologies, or
other valuation techniques, as well as instruments for which the
determination of fair value requires significant management judgment or
estimation. As of December 31, 2009, the Company has classified the
warrants with cash settlement features as Level 3. Management evaluates a
variety of inputs and then estimates fair value based on those inputs. The
primary inputs evaluated by management to determine the likelihood of a
change in control to a non-public company (thereby triggering the cash
settlement feature) were the Company’s FDA approval status including the
additional requirements including required cash outflows prior to
resubmission to the FDA (observable), the industry and market conditions
(unobservable), litigation matters against the Company (observable) and
statistics regarding the number of company’s going private
(observable).
|
The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis by level within the hierarchy as of September 30,
2010:
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Assets:
|
||||||||||||||||
Marketable
Securities
|
$ | 45,217 | $ | 23,210 | $ | 22,007 | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Warrants
|
- | - | - | - | ||||||||||||
Total
|
$ | 45,217 | $ | 23,210 | $ | 22,007 | $ | - |
For
detailed information regarding the change to the fair value of assets recorded
in Level 1 (See Note 5: Marketable Securities). There were no changes in the
fair value for the Level 3 Warrants during the three months ended September 30,
2010.
NOTE 11: Cash And Cash
Equivalents
The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
NOTE 12: Recent Accounting
Pronouncements
The
Financial Accounting Standards Board (“FASB”) has published FASB Accounting
Standards Update 2010-01 through 2010-12. The adoption of published FASB
Accounting Standards Update 2010-01 through 2010-26 has no material effect on
the Company’s financial statements for the nine months ended September 30,
2010.
16
NOTE
13: Subsequent Events
The
Company evaluated subsequent events through the date on which these financial
statements were issued, and determined that no subsequent event constituted a
matter that required disclosure or adjustment to the financial statements for
the nine months ended September 30, 2010.
ITEM 2: Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Special
Note Regarding Forward-Looking Statements
Certain
statements in this document constitute "forwarding-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1995 (collectively, the
"Reform Act"). Certain, but not necessarily all, of such forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. All statements other than
statements of historical fact, included in this report regarding our financial
position, business strategy and plans or objectives for future operations are
forward-looking statements. Without limiting the broader description of
forward-looking statements above, we specifically note that statements regarding
potential drugs, their potential therapeutic effect, the possibility of
obtaining regulatory approval, our ability to manufacture and sell any products,
market acceptance or our ability to earn a profit from sales or licenses of any
drugs or our ability to discover new drugs in the future are all forward-looking
in nature.
Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors, including but not limited to, the risk factors discussed below,
which may cause the actual results, performance or achievements of Hemispherx
and its subsidiaries to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements and other factors referenced in this report. We do not undertake and
specifically decline any obligation to publicly release the results of any
revisions which may be made to any forward-looking statement to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Overview
General
We are a
specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged
in the clinical development of new drug therapies based on natural immune system
enhancing technologies for the treatment of viral and immune based chronic
disorders. We were founded in the early 1970s doing contract research for the
National Institutes of Health. Since that time, we have established a strong
foundation of laboratory, pre-clinical and clinical data with respect to the
development of natural interferon and nucleic acids to enhance the natural
antiviral defense system of the human body and to aid the development of
therapeutic products for the treatment of certain chronic diseases. We have
three domestic subsidiaries BioPro Corp., BioAegean Corp., and Core BioTech
Corp., all of which are incorporated in Delaware and are dormant. Our foreign
subsidiary is Hemispherx Biopharma Europe N.V./S.A. established in Belgium in
1998, which has minimal activity. All significant intercompany balances and
transactions have been eliminated in consolidation.
17
Our
current strategic focus is derived from four applications of our two core
pharmaceutical technology platforms Ampligen® and Alferon N Injection®. The
commercial focus for Ampligen® includes application as a treatment for Chronic
Fatigue Syndrome (“CFS”) and as an influenza vaccine enhancer (adjuvant) for
both therapeutic and preventative vaccine development. Alferon N Injection® is a
Food and Drug Administration (“FDA”) approved product with an indication for
refractory or recurring genital warts. Alferon® LDO (Low Dose Oral) is a
formulation currently under development targeting influenza.
In May
2010, we announced the formation of a Data Safety Monitoring Board (“DSMB”) that
consists of two independent regulatory and medical experts along with a
Biostatistics expert. The function of the DSMB would be to perform independent
safety and efficacy analyses on our clinical trials, including those with
Alferon® LDO. However with Alferon® LDO study on FDA Clinical Hold, the DSMB has
yet to take action.
We own
and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that was
primarily designed to produce Alferon®. On September 16, 2009, our Board of
Directors approved up to $4.4 million for full engineering studies, capital
improvements, system upgrades and introduction of building management systems to
enhance production of three products: Alferon N Injection®, Alferon® LDO and
Ampligen®. As of December 31, 2009, construction in progress on this project was
$135,000 as compared to $464,000 for the nine months ended September 30, 2010.
We outsource certain
components of our research and development, manufacturing, marketing and
distribution while maintaining control over the entire process through our
quality assurance group and our clinical monitoring group.
Our
manufacturing facility in New Brunswick, New Jersey was inspected by the FDA as
part of the Fiscal Year 2010 CDER High Risk Drug Site Workplan on June 21 and
June 22, 2010. The inspection was to provide routine current Good Manufacturing
Practice (“cGMP”) coverage and focused on our approved Alferon N
Injection® product. The inspection was conducted in accordance with Agency
procedures for Therapeutic Biological Products Inspections. The current
inspection covered the Quality and Facilities and Equipment systems. During the
current inspection, a complete tour was conducted of the facility. Also,
documents were reviewed that related to recent Out of Specification
Investigation and Process and Component Deviation Reports. We also discussed
with the Inspector our plans for production of Alferon N Injection®, Alferon®
LDO and Ampligen® at the New Brunswick facility. No deficiencies were found
during the inspection, and no FDA-483, Inspectional Observations were
issued.
Ampligen®
Ampligen®
is an experimental drug currently undergoing clinical development for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (“ME/CFS”). Over
its developmental history, Ampligen® has received various designations,
including Orphan Drug Product Designation (FDA), Treatment IND (e.g., treatment
investigational new drugs, or “Emergency” or “Compassionate” use authorization)
with Cost Recovery Authorization (FDA) and “promising” clinical outcome
recognition based on the evaluation of certain summary clinical reports (“AHRQ”
or Agency for Healthcare Research and Quality). Ampligen® represents the first
drug in the class of large (macromolecular) RNA (nucleic acid) molecules to
apply for New Drug Application (“NDA”) review. Based on the results of
published, peer reviewed pre-clinical studies and clinical trials, we believe
that Ampligen® may have broad-spectrum anti-viral and anti-cancer properties.
Over 1,000 patients have participated in the Ampligen® clinical trials
representing the administration of more than 90,000 doses of this
drug.
On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA. In accordance with its 2008 Complete Response procedure, the FDA reviewers
determined that they could not approve the application in its present form and
provided specific recommendations to address the outstanding
issues.
18
We have
carefully reviewed the CRL and will seek a meeting with the FDA to discuss its
recommendations upon the compilation of necessary data to be used in our
response. We intend to take the appropriate steps to seek approval and
commercialization of Ampligen®. Most notably, the FDA stated that the two
primary clinical studies submitted with the NDA did not provide credible
evidence of efficacy of Ampligen® and recommended at least one additional
clinical study which shows convincing effect and confirms safety in the target
population. The FDA indicated that the additional study should be of sufficient
size and sufficient duration (six months) and include appropriate monitoring to
rule out the generation of autoimmune disease. In addition, patients in the
study should be on more than one dose regimen, including at least 300 patients
on dose regimens intended for marketing. We are presently planning a
confirmatory clinical study which will utilize the exercise treadmill duration
as the primary endpoint as did our earlier Phase III Study but with an enlarged
number of subjects. Lastly, additional data including a well-controlled QT
interval study (i.e., a measurement of time between the start of the Q wave and
the end of the T wave in the heart’s electrical cycle) and pharmacokinetic
evaluations of dual dosage regiments were requested. Other items required by the
FDA include certain aspects of Non-Clinical safety assessment and Product
Quality. In the Non-Clinical area, the FDA recommended among other things that
we complete rodent carcinogenicity studies in two species. While as part of the
NDA submission we had requested that these studies be waived, this waiver had
not been granted by the FDA in their CRL.
In the
October 8, 2009 issue of Science Express, a consortium of researchers from the
Whittemore Peterson Institute (“WPI”), the National Cancer Institute and the
Cleveland Clinic reported a new retrovirus in the blood cells of 67% of Chronic Fatigue Syndrome
(“CFS”) patients and 3.7% in healthy control subjects. The infectious
virus was also greater than 99% identical to that previously detected in
prostate cancer. Retrospective analyses of
patient samples from the completed Phase III trial of Ampligen® in potential treatment of
CFS continues in collaboration with WPI. While an updated agreement is
being finalized, we continue to collaborate with WPI under the terms of an
“Evaluation Agreement” that had expired on July 23, 2010, to evaluate Hemispherx
patient samples for XMRV (xenotropic murine
leukemia related virus) using WPI’s proprietary flow cytometry assay.
We believe that
these studies may provide a new perspective on the design of an additional
confirmatory Phase III study in this disorder. We presented data at the
1st International Workshop on
XMRV held on September 7 and 8, 2010 in Bethesda, Maryland at the U.S.
Department of Health & Human Services’ National Institutes of Health
(“NIH”).
In July
2010, we released a report prepared by Hideki Hasegawa, M.D. Ph.D., Director,
Laboratory of Infectious Disease Pathology, National Institute of Infectious
Disease (“NIID”, formerly Japan’s National Institute of Health), summarizing the
results of a three year Japanese government funded program through the Japanese
Minister of Health Labor and Welfare (“MHLW”)to develop and test on non-human
primates a nasally delivered H5N1 (Avian Flu) vaccine which, when coupled with
Ampligen®, produced positive results in a preclinical testing environment
showing that the combination provided a more robust and longer lasting immune
response as compared to the vaccine used alone. The researchers concluded
that their results could be applied to develop intranasally delivered vaccines
for influenza virus prophylaxis focused on protection of the mucosal immune
system against virus mutations. We expect that the clinical testing phase
of Ampligen®, used in conjunction with a H5N1 (Avian Flu) vaccine, in Japan will begin in
2011.
However, the
timing of clinical testing is dependent upon the successful conclusion of our
negotiations with Biken (operational arm of the non-profit Research
Foundation for Microbial Disease of Osaka University) along with their timely
filing and approval of an Investigatory New Drug (“IND”) application for
Ampligen® in Japan. A Material Evaluation Agreement (MEA) regarding
Ampligen® with Biken that was initiated on August 19, 2009, effectively expired
on September 1, 2010 and has yet to be formally extended. Hemispherx and
Biken are in correspondence concerning both extending this agreement and the
interpretation of experimental results of the two companies, as well as results
reported by the NIID.
19
Alferon
N Injection®
Alferon N
Injection® is the registered trademark for our injectable formulation of natural
alpha interferon, which is approved by the FDA in 1989 for the treatment of
certain categories of genital warts. Alferon® is the only natural-source,
multi-species alpha interferon currently approved for sale in the U.S. for the
intralesional (within lesions) treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older.
Alferon N
Injection® [Interferon alfa-n3 (human leukocyte derived)] is a highly purified,
natural-source, glycosylated, multi-species alpha interferon product. There are
essentially no antibodies observed against natural interferon to date and the
product has a relatively low side-effect profile.
Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired. We continue to
undertake a major capital improvement program to upgrade our manufacturing
capability for Alferon N Injection® at our New Brunswick facility. As a result,
Alferon N Injection® could be available for commercial sales in mid to late
2011.
In April
2010, we began the process to undertake a clinical study with one of the leading
and largest clinical research organizations in India. This collaborative
clinical research effort is intended to utilize Alferon N Injection® for
treatment of seriously ill patients hospitalized with either seasonal influenza
or pandemic influenza. The Indian site selection process was completed and we
obtained approval to begin the study from the Indian Drugs Controller General on
July 13, 2010. We began enrolling subjects in September 2010 and continue to
enroll subjects for this clinical study through the end of monsoon season and
into the winter’s flu season. Currently, we have four operational Clinical
Investigative Sites with the potential to open up to six more sites, if deemed
necessary and upon successful pre-study site visits.
Alferon® Low Dose Oral
(LDO)
Alferon®
LDO [Low Dose Oral Interferon Alfa-n3 (Human Leukocyte Derived)] is an
experimental low-dose, oral liquid formulation of Natural Alpha Interferon and
like Alferon N Injection® should not cause antibody formation, which is a
problem with recombinant interferon. It is an experimental immunotherapeutic
believed to work by stimulating an immune cascade response in the cells of the
mouth and throat, enabling it to bolster systemic immune response through the
entire body by absorption through the oral mucosa. Oral interferon could be
economically feasible for patients and logistically manageable in development
programs in third-world countries primarily affected by influenza and other
emerging viruses. Oral administration of Alferon® LDO, with its anticipated
affordability, low toxicity, no production of antibodies, and broad range of
potential bioactivity, could be a breakthrough treatment or prevention for viral
diseases.
20
In
October 2009, we submitted a protocol to the FDA proposing to conduct a Phase
II, well-controlled, clinical study using Alferon® LDO for the prophylaxis and
treatment of seasonal and pandemic influenza of more than 200 subjects.
Following a teleconference with the FDA in November 2009, the FDA placed the
proposed study on “Clinical Hold” because the protocol was deemed by the FDA to
be deficient in design, and because of the need for additional information to be
submitted in the area of chemistry, manufacturing and controls (“CMC”).
Thereafter in December 2009, we submitted additional information by Amendment
with respect to both the clinical protocol design issues and the CMC items. In
January 2010, the FDA acknowledged that our responses to the clinical study
design issues were acceptable; however, removal of the Clinical Hold was not
warranted because the FDA believed that certain CMC issues had not been
satisfactorily resolved. In this regard, the FDA communicated concern regarding
the extended storage of Alferon® LDO drug product clinical lots which had been
manufactured from an active pharmaceutical ingredient (“API”) of Alferon N
Injection® manufactured in year 2001. While the biological (antiviral) potency
of the product had remained intact, we learned through newly conducted
physico-chemical tests (the “new tests” of temperature, pH, oxidation and light
on the chemical stability of the active API), that certain changes in the drug
over approximately nine storage years (combined storage of Alferon N Injection®
plus storage of certain LDO sachets) had introduced changes in the drug which
might adversely influence the human safety profile. These “new tests” are part
of recent FDA requirements for biological products, such as interferon, which
did not exist at the time of the original FDA approval of Alferon N Injection®
for commercialization and at the time of FDA approval of the ”Product License”
and “Establishment License” for the Alferon N Injection® product. Based on the
recent FDA request, we have now established and implemented the “new test”
procedures. As a result, we have found that certain Alferon N Injection® lots
with extended storage (i.e., approximately eight to nine years) do appear to
demonstrate some altered physico-chemical properties. However we have also
observed that more recent lots, including those manufactured beginning in the
year 2006, are superior with respect to the enhanced scrutiny of these tests
and, in our view, could be considered appropriate for clinical trials in the
Alferon® LDO sachet format. Upon their review, the FDA has been responsive to
these new findings and requested additional stability data on the lots proposed
for use in this clinical study utilizing the new test methods. The proposed
clinical lots were manufactured on June 24, 2010
and placed on stability on June 28, 2010. The FDA has requested three months of
stability data on the proposed clinical lots. The three months of product
stability data has been compiled and continues to be analyzed with the
expectation of submission to the FDA by the end of December 2010. Once the FDA
has received and reviewed the additional data, we believe that the Full Clinical
Hold could be thereafter lifted assuming that the FDA concurs that the stability
data addresses the outstanding CMC issues cited in the January 2010 FDA
recommendations.
401(k)
Plan
In December 1995, we
established a defined contribution plan, entitled the Hemispherx
Biopharma Employees 401(k) Plan and Trust Agreement (the “401(k) Plan”). Full
time employees of the Company are eligible to participate in the 401(K) Plan
following one year of employment. Subject to certain limitations imposed by
federal tax laws, participants are eligible to contribute up to 15% of their
salary (including bonuses and/or commissions) per annum. Participants'
contributions to the 401(K) Plan may be matched by the Company at a rate
determined annually by the Board of Directors.
Each
participant immediately vests in his or her deferred salary contributions, while
Company contributions will vest over one year. The 6% Company matching
contribution was terminated as of March 15, 2008 and was reinstated effective
January 1, 2010. The Company provided matching contributions to each employee
for up to 6% of annual pay aggregating $95,881 for the nine months ended
September 30, 2010.
21
New Accounting
Pronouncements
Refer to
“Note 12: Recent Accounting Pronouncements” under Notes To Unaudited Condensed
Consolidated Financial Statements.
Disclosure About Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
There
have been no material changes in our critical accounting policies and estimates
from those disclosed in Note 2 of our
Annual Report on Form 10-K for the year ended December 31,
2009.
RESULTS
OF OPERATIONS
Three months ended September
30, 2010 versus three months ended September 30, 2009
Net Loss
Our net
loss was approximately $3,254,000 for the three months ended September 30, 2010,
which was an increase of $819,000 or 34% when compared to the same period in
2009. This increase in loss for these three months was primarily due to the
following changes in expense elements:
1)
|
an
increase in Research and Development costs of approximately $635,000 or
54%;
|
2)
|
an
increase in General and Administrative expenses of approximately $574,000
or 49%; offset by
|
3)
|
an
increase in interest income of $420,000 from funds invested in marketable
securities.
|
Net loss
per share was $0.02 for the current period versus $0.02 for the same period in
2009.
Revenues
Revenues
from our Ampligen® Cost Recovery Program increased $10,000 or 40% for the third
quarter in 2010 as compared to the same time period of 2009 due to a 67%
increase in the number of patients participating in the program. As previously
stated, we have no Alferon N Injection® product to commercially sell at this
time and all revenue was generated from the Ampligen® cost recovery clinical
treatment programs.
Production/Cost
of Goods Sold
Production/Cost
of Goods Sold was approximately $181,000 and $146,000, respectively, for the
three months ended September 30, 2010 and 2009. This increase of $35,000 or 24%
was primarily due to the cost to maintain existing Alferon N Injection® and
Ampligen® inventory including storage, stability testing, transport and
reporting costs along with our efforts to prepare for production of Alferon N
Injection® for potential future commercial sales.
22
Research and Development
Costs
Overall
Research and Development (“R&D”) costs for the three months ended September
30, 2010 were approximately $1,808,000 as compared to $1,173,000 for the same
period a year ago reflecting an increase of $635,000 or 54%. The primary factors
for the increase in expenses were the clinical costs,
research and development costs of Alferon® LDO along the initial costs of the
Alferon N Injection® Phase IIb clinical trial underway in
India.
General and Administrative
Expenses
General
and Administrative (“G&A”) expenses for the three months ended September 30,
2010 and 2009 were approximately $1,738,000 and $1,164,000, respectively,
reflecting an increase of $574,000 or 49%. The higher G&A expenses in 2010
consisted primarily of 1) an increase of $293,000 that resulted from the 2009
stock compensation expense reduction using the Black-Scholes valuation method
prior to dispensation; and 2) an increase in 2010 of $188,000 in legal fees due
to various legal proceedings.
Interest and Other
Income
Interest
and other income for the three months ended September 30, 2010 and 2009 was
approximately $443,000 and $23,000, respectively, representing an increase of
$420,000. The primary cause for the increase of interest income in 2010 was the
purchase of a diverse portfolio of short and long term investments. The interest
income from these investments is recognized as the investments
mature.
Nine months ended September
30, 2010 versus nine months ended September 30, 2009
Net Loss
Our net
loss was approximately $10,974,000 for the nine months ended September 30, 2010,
which was an increase of $1,582,000 or 17% when compared to the same period in
2009. This increase in loss was primarily due to the following expense
elements:
1)
|
an
increase in Production/Cost of Goods Sold of approximately $230,000 or
55%;
|
2)
|
an
increase in Research and Development costs of approximately $748,000 or
16%; and
|
3)
|
an
increase in General and Administrative expenses of approximately
$1,303,000 or 31%; offset by
|
4)
|
a
decrease in finance costs of $241,000, or 100% from a Standby Finance
Agreement executed in February 2009;
and
|
5)
|
an
increase in interest income of $426,000 from invested
funds.
|
Net loss
per share was $0.08 for the current period $0.09 for the same period in
2009.
23
Revenues
Revenues
for the nine months ended September 30, 2010 were $108,000 compared to revenues
of $71,000 for the same period in 2009. These revenues were from our Ampligen®
Cost Recovery Program which increased $37,000 or 52% due to a 46% increase in
the number of patients participating in the Program. There were no revenues
related to the sale of Alferon N Injection® for the nine month period ended 2010
or 2009.
Production/Cost
of Goods Sold
Production/Cost
of Goods Sold was approximately $649,000 and $419,000, respectively, for the
nine months ended September 30, 2010 and 2009. This is an increase of $230,000
or 55%. This increase in expenses was primarily due to the cost of maintaining
existing Alferon N Injection® and Ampligen® inventory including storage,
stability testing, transport and reporting costs along with our efforts to
prepare for production of Alferon N Injection® for potential future commercial
sales.
Research and Development
Costs
Overall
Research and Development (“R&D”) costs for the nine months ended September
30, 2010 were approximately $5,498,000 as compared to $4,750,000 for the same
period a year ago, reflecting an increase of $748,000 or 16%. This increase was
primarily due to R&D costs associated with preparations related to our
effort to launch Alferon N Injection® and Alferon® LDO clinical tests along with
our R&D staff’s continued efforts to develop a response to the CRL from the
FDA.
General and Administrative
Expenses
General
and Administrative (“G&A”) expenses for the nine months ended September 30,
2010 and 2009 were approximately $5,495,000 and $4,192,000, respectively,
reflecting an increase of $1,303,000 or 31%. The primary reasons for this
increase in expense were an additional $1,137,000 in legal fees associated with
our successful Judgment against Johannesburg Consolidated Investments along with
our defense efforts in other legal proceedings (See “Part II – OTHER
INFORMATION, ITEM 1. Legal Proceedings”) and an additional $340,000 in stock
compensation to consultants that were offset by a decrease in fees of $213,000
paid to consultants to acquire and maintain an At-The-Market Equity
Program.
Interest and Other
Income
Interest
and other income for the nine months ended September 30, 2010 and 2009 was
$565,000 and $139,000, respectively, representing an increase of $426,000 or
306%. The primary cause for the increase of interest income in 2010 was the
purchase of a diverse portfolio of short and long term investments. The interest
income from these investments is recognized as the investments
mature.
Interest Expense and
Financing Costs
We had
interest expense of $5,000 and $-0- from capital leases for the nine months
ended September 30, 2010 or 2009, respectively. On February 1, 2009, we entered
into a Standby Financing Agreement that produced finance costs of $241,000 in
Common Stock Commitment Warrants for the nine months ended September 30, 2009,
for which no agreement nor related expenses of this type existed during the
first nine months ended in 2010. For detailed information on this agreement,
refer to “Standby Financing Agreement” as disclosed in our annual report on Form
10-K/A for the year ended December 31, 2009, filed April 30, 2010.
24
Liquidity and Capital
Resources
Cash used
in operating activities for the nine months ended September 30, 2010 was
$10,070,000 compared to $6,665,000 for the same period in 2009, an increase of
$3,405,000 or 51%. This utilization of cash reflects the increased expenses in
operations as explained above in the “Production/Cost of Goods Sold” disclosure
in conjunction with the impact of our effort in 2009 to conserve
cash through the Employee Wage Or Hours Reduction Program (the “Program”)
implemented January 1 through May 31, 2009 in which all active full-time
employees reduced their base salary from 10% to 50% in return for “Incentive
Rights” to our common stock. As of September 30, 2010, we had
approximately $48,261,000 in Cash, Cash Equivalents and Marketable Securities,
or a decrease of approximately $9,811,000 from December 31, 2009.
We have
been using the proceeds from 2009’s equity financings with the assistance of
Rodman &
Renshaw, LLC (“Rodman”) as placement agent and from Fusion Capital Fund II,
LLC (“Fusion Capital”) equity financing to fund operating expenses and
infrastructure growth including preparation for manufacturing, regulatory
compliance and market development costs related to the FDA approval process for
Ampligen®, Alferon N Injection® and Alferon® LDO development.
Pursuant
to our May 28, 2010 Equity Distribution Agreement (the “Agreement”) with Maxim
Group LLC (“Maxim”) we established an At-The-Market (“ATM”) Equity Program
pursuant to which we may sell up to 32,000,000 shares of our Common
Stock from time to time through Maxim as our sales agent (the
“Agent”). Under the Agreement, the Agent is entitled to a commission at a
fixed commission rate of 4.0% of the gross sales price per Share sold, up to
aggregate gross proceeds of $10,000,000, and, thereafter, at a fixed commission
rate of 3.0% of the gross sales price per Share sold. We have no obligation
to sell any shares under this program, and may at any time terminate the
Agreement. During the quarter ended September 30, 2010, we sold no
shares through this program and received no net cash proceeds. For the nine
months ended September 30, 2010, we sold 520,000 shares that resulted in net
cash proceeds of $292,785 and commissions paid to Maxim of $12,199.
Because
of our long-term capital requirements, we may seek to access the public equity
market through the above ATM equity program or otherwise whenever conditions are
favorable, even if we do not have an immediate need for additional capital at
that time. We are unable to estimate the amount, timing or nature of future
sales of outstanding common stock or instruments convertible into or exercisable
for our common stock. Any additional funding may result in significant dilution
and could involve the issuance of securities with rights, which are senior to
those of existing stockholders. We may also need additional funding earlier than
anticipated, and our cash requirements, in general, may vary materially from
those now planned, for reasons including, but not limited to, changes in our
research and development programs, clinical trials, competitive and
technological advances, the regulatory processes, including the commercializing
of Ampligen® and new utilization of Alferon® products. Our ability to raise
funds from the sale of equity is limited due to the limited number of shares of
common stock authorized but not issued or reserved (please see “Part II – OTHER
INFORMATION, ITEM 1A. Risk Factors; We may require additional
financing which may not be available; The limited number of shares of common
stock available for financing or other purposes may hinder our ability to raise
additional funding or utilize equity securities for other corporate
purposes”).
There can
be no assurances that, if needed, we will raise adequate funds from these or
other sources, which may have a material adverse effect on our ability to
develop our products. Also, we have the ability to curtail discretionary
spending, including some research and development activities, if required to
conserve cash.
25
ITEM
3: Quantitative and Qualitative Disclosures About Market Risk
We had
approximately $48,261,000 in Cash, Cash Equivalents and Marketable Securities at
September 30, 2010. In the past, we had invested the excess cash in
minimal risk exposure, three to twelve month interest bearing financial
instruments. However with the current state of the market and our
funds well in excess of our short-term operational needs, our Board has
reassessed our cash investment strategy consistent with the following objectives
to:
1.
|
preserve,
secure and control capital;
|
2.
|
maintain
liquidity to meet our operating cash flow requirements;
and
|
3.
|
maximize
return subject to policies and procedures that manage risks with respect
to a conservative to moderate investment exposure at high credit quality
institutions.
|
To
accomplish these goals, we entrusted our investible funds through an external
investment manager at Wells Fargo Advisors with detailed investment and trading
guidelines that are analyzed for compliance on an on-going basis. We
have not entered into, and do not expect to enter into, financial instruments
for trading or hedging purposes.
Our Cash,
Cash Equivalents and Marketable Securities are invested in what Management
believes to be high credit quality institutions that primarily consist
of:
1.
|
U.S.
Treasury and Government
Obligations;
|
2.
|
Federal
Agency securities sponsored by enterprises and
instrumentalities;
|
3.
|
Certificates
of Deposit;
|
4.
|
Money
market funds with assets of greater than $1
Billion;
|
5.
|
PIMCO
Total Return Fund A;
|
6.
|
Corporate
debt obligations or commercial paper issued by corporations, commercial
banks, investment banks and bank holding companies, rated A2/A or better
by Moody’s or Standard & Poor’s or P-1 by Moody’s or A-1 or better by
Standard & Poor’s; and
|
7.
|
Asset-backed
securities rated AAA/Aaa, P-1 or A-1+ by Moody’s or Standard &
Poor’s.
|
While
Management strives to invest our Cash and Cash Equivalents in high credit
quality institutions and securities, our financial instruments are exposed to
concentrations of credit risk or market change. Additionally, at
times our investments may be in excess of the Federal Deposit Insurance
Corporation insurance limit or not qualified for such coverage.
ITEM
4: Controls and Procedures
Our Chairman of the Board
(serving as the principal executive officer) and the Chief Financial Officer
performed an evaluation of the effectiveness of our disclosure controls and
procedures, which have been designed to permit us to effectively identify
and timely disclose important information. In designing and
evaluating the disclosure controls and procedures, Management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and Management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the controls and procedures were effective as of September 30, 2010 to
ensure that material information was accumulated and communicated to our
Management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
26
During
the quarter ended September 30, 2010,
we have made no change in our internal controls over financial reporting that
has materially affected, or is reasonably likely to materially
affect, our internal controls over financial reporting.
Part
II – OTHER INFORMATION
ITEM
1. Legal Proceedings
(a)
|
Hemispherx
Biopharma, Inc. v. Johannesburg Consolidated Investments, et al.,U.S.
District Court for the Southern District of Florida, Case No.
04-10129-CIV.
|
On August
11, 2010, Hemispherx won a $188 million judgment in U.S. Federal Court (Southern
District of Florida) ending a six-year litigation battle against JCI and former
JCI officers R.B. Kebble and H.C. Buitendag. Kebble and Buitendag
were found to have engaged in fraud that included an illegal attempt to devalue,
take over and pillage Hemispherx. We intend to pursue collection of
the judgment in Florida and South Africa.
(b)
|
Hemispherx
Biopharma, Inc. v. MidSouth Capital, Inc., Adam Cabibi, And Robert L.
Rosenstein v. Hemispherx Biopharma, Inc. and The Sage Group,
Inc., Civil
Action No. 1:09-CV-03110-CAP.
|
On June
4, 2009, we filed suit in the United States District Court for the Southern
District of Florida against MidSouth Capital, Inc. (“MidSouth”) and its
principals seeking monetary and injunctive relief against MidSouth's tortuous
interference with certain financing transactions in which we were
engaged. The case was transferred to the Northern District of
Georgia, and we engaged Holland & Knight LLP on November 13, 2009 to serve
as trial counsel. On November 19, 2009, MidSouth answered our
Complaint and filed a Counterclaim against us and The Sage Group, Inc., seeking
to recover between $3,900,000 and $4,800,000 for fees allegedly owed to it as a
result of the same financing transactions, plus attorneys' fees and punitive
damages.
On
January 12, 2010, we filed a Motion for Judgment on the Pleadings with the
Court. By Order dated March 31, 2010, the Court granted that Motion
in part and denied it in part. The Court held that MidSouth's claim
based upon an alleged breach of contract could not be sustained. The
case proceeded on our claims against the Defendants and MidSouth's claims based
upon promissory estoppel, quantum meruit, unjust enrichment, fraud, and
MidSouth's request for attorney's fees and punitive
damages. Discovery closed in mid-May. The Defendants have
filed a Motion for Summary Judgment on our claims against them, and we have
filed a Motion for Summary Judgment on all the remaining
counterclaims. The Briefing has been completed and Motions have been
submitted to the Court to await a decision. We will vigorously defend
any of the counterclaims which survive our Motion for Summary Judgment, and will
continue to prosecute our claims against the Defendants if we prevail on their
Motion. We have no projection as to the likely outcome of the
case.
27
(c)
|
Cato
Capital, LLC v. Hemispherx Biopharma, Inc., U.S. District Court for the
District of Delaware, Case No.
09-549-GMS.
|
On July
31, 2009, Cato Capital LLC (“Cato”) filed suit asserting that under a November
2008 agreement, we owe Cato a placement fee for certain investment
transactions. The Complaint seeks damages in the amount of $5,000,000
plus attorneys fees. We filed our Answer on August 20,
2009. On October 13, 2009, Cato filed a Motion seeking leave to file
an Amended Complaint which proposed that Cato be permitted to add The Sage Group
as an additional defendant and to bring additional causes of action against us
arising from the defenses contained in our Answer, and increase the total amount
sought to $9,830,000, plus attorneys’ fees and punitive damages. We
filed a response objecting to the Motion, and also filed a Motion to Disqualify
Cato’s Delaware attorneys on basis of a conflict of interest. On
September 14, 2010, the Court granted our Motion to Disqualify Cato’s Delaware
attorneys. Also on September 14, 2010, the Court granted Cato’s
Motion for Leave to file an Amended Complaint, but specifically indicated that
we could file a Motion to Dismiss, raising the arguments we had previously made
in response to Cato’s Motion for Leave to file an Amended
Complaint. On September 16, 2010, Cato filed its Amended Complaint,
and on September 30, 2010, we filed a Motion to dismiss all the counts of the
Amended Complaint against us other than the breach of contract
count. Cato’s response to the Motion to Dismiss is due on November
30, 2010. The timeframe for the Court's disposition of our Motion to
Dismiss cannot be ascertained.
We
believe we have meritorious defenses and are vigorously defending against this
claim.
(d)
|
In
re Hemispherx Biopharma, Inc. Litigation, U. S. District Court for the
Eastern District of Pennsylvania, Civil Action No.
09-5262.
|
Between
November 10, 2009 and December 29, 2009, five putative class actions were filed
against us and our Chief Executive Officer generally asserting that Defendants
misrepresented the status of our New Drug Application (“NDA”) for
Ampligen®. Each action was purportedly brought on behalf of investors
who purchased our publicly traded securities. On February 12, 2010,
the Court consolidated the five actions (“Securities Class Action Lawsuit”) and
on February 26, 2010, a consolidated amended complaint was filed, adding our
Medical Director as a Defendant. On March 12, 2010, we filed a motion
to dismiss the amended complaint, which the Court denied on April 20,
2010. On April 27, 2010, the Court entered a Case Management Order
directing the parties to undertake the Discovery process.
On August
24, 2010, we announced that, as result of court mediation proceedings, we had
entered into a written agreement in principle with the Court-appointed lead
plaintiffs to settle all of the currently pending securities class actions
consolidated in the U.S. District Court for the Eastern District of
Pennsylvania. On October 20, 2010, an “Order Preliminarily Approving
The Settlement, Directing The Issuance Of Notice, And Scheduling A Settlement
Fairness Hearing” (“Order”) was entered by the U.S. District Court overseeing
the Securities Class Action Lawsuit. As described in the Order, we
entered into a Stipulation and Agreement of Settlement dated September 24, 2010
in full and final settlement of each and every Released Claim against
Hemispherx. If it receives final approval by the Court, the
settlement will be paid from our insurance coverage and will not result in the
payment of any funds by us. Furthermore, the settlement expressly is
not an admission of any culpability by Hemispherx nor its
Officers.
28
The
related Settlement Fairness Hearing is scheduled to be held on January 20, 2011
at the United States District Court for the Eastern District of Pennsylvania to
determine whether:
|
·
|
the
Action should be finally certified as a class action
suit;
|
|
·
|
the
proposed Settlement is fair, reasonable, adequate and should be
approved;
|
|
·
|
the
Released Claims against Hemispherx should be
dismissed;
|
|
·
|
the
proposed Plan of Allocation for the proceeds of the Settlement should be
approved by the Court;
|
|
·
|
the
application of the Lead Counsel for an award of attorney fess and
reimbursement of litigation expenses should be
approved;
|
|
·
|
to
determine the amount of reimbursement of cost and expenses for
representation of the suit;
|
|
·
|
any
other matters as the Court deem
appropriate.
|
The
Claims Administrator for the litigation is Heffler, Radetich & Saitta LLP,
P.O. Box 58578, Philadelphia, PA 19102-8578.
In
December 2009 and January 2010, three Shareholder Derivative Complaints were
filed against us and some of our Officers and Directors (“Shareholder Derivative
Lawsuits”). These suits also allege that the named Defendants caused
us to misrepresent the status of our NDA for
Ampligen®. On February 12, 2010, the Court consolidated the
Securities Class Action Lawsuit with the Shareholder Derivative Lawsuits for
purposes of Discovery and transferred the Shareholder Derivative Lawsuits to the
civil suspense docket.
We
continue to vigorously defend the Shareholder Derivative
Complaints. Due to the preliminary state of the proceedings, the
potential impact of these actions, which seek unspecified damages, attorneys’
fees and expenses, are uncertain.
(e)
|
Jeffrey
Bastedo v. Hemispherx Biopharma, Inc., Delaware Chancery Court, Case No.
5748-VCP.
|
On August
24, 2010, Jeffrey Bastedo filed a complaint to gain access to our books and
records for the purpose of inspection pursuant to Section 220 if the Delaware
General Corporate Law. This suit asserts that its purpose is to
investigate Hemispherx regarding alleged efforts of Hemispherx to mislead the
investing public regarding its New Drug Application for Ampligen® and concealed
carcinogenicity studies.
We
believe that this claim is without merit and is duplicative of Derivative
Litigation pending in the United States District Court for the Eastern District
of Pennsylvania described above in (d). We have moved timely to
dismiss the Complaint asserting that it was filed for no proper purpose,
violates the First Filed Legal Doctrine, and is not in our best interests to
comply. We subsequently filed our Opening Brief in support of our
Motion to Dismiss. The Opening Brief of Plaintiff in opposition to
the Motion to Dismiss has not yet been filed. The date of final
disposition of this Motion cannot yet be determined.
We plan
on vigorously defending against this Complaint. Due to the
preliminary state of this Complaint and our Motion to Dismiss the Complaint, the
potential impact of this action, which seeks access to information, unspecified
attorneys’ fees and expenses, is uncertain.
29
(f)
|
Summation.
|
In
reference to Contingencies identified above, there can be no assurance that an
adverse result in these proceedings would not have a potentially material
adverse effect on our business, results of operations, and financial
condition. With regards to Contingency (d), we maintain a Directors
and Officers Insurance Policy that provides coverage for claims and retention of
legal counsel. Given the anticipated settlement of the Securities
Class Action Lawsuit, it is uncertain if sufficient amounts of coverage will
remain from the November 2009-2010 policy to cover the Shareholder Derivative
Lawsuits fees and potential liability.
We have
not recorded any loss contingencies as a result of the above matters for the
year ended December 31, 2009 or nine months ended September 30,
2010.
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 Form 10-Q. Among the key factors that have a
direct bearing on our results of operations are:
Risks
Associated With Our Business
No
assurance of successful product development.
Ampligen®
and related products. The development of Ampligen® and
our other related 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 right of third parties. Our investigational products are
in various stages of clinical and pre-clinical development and require further
clinical studies and appropriate regulatory approval processes before any such
products can be marketed. We do not know when, if ever,
Ampligen® 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. Please see the next risk factor.
Alferon N
Injection®. Although Alferon N Injection® is approved for marketing
in the United States for the intra-lesional treatment of refractory or recurring
external genital warts in patients 18 years of age or older, to date it has not
been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments.
Our
drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our
operations will be significantly adversely affected.
All of
our drugs and associated technologies, other than Alferon N Injection®, are
investigational and must receive prior regulatory approval by appropriate
regulatory authorities for commercial distribution and sale and are currently
legally available only through clinical trials with specified
disorders. At present, Alferon N Injection® is only approved for the
intra-lesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older. Use of Alferon N Injection® for
other indications will require regulatory approval.
30
Our
products, including Ampligen®, are subject to extensive regulation by numerous
governmental authorities in the United States (“U.S.”) and other countries,
including, but not limited to, the FDA in the U.S., the Health Protection Branch
(“HPB”) of Canada, and the Agency for the Evaluation of Medicinal Products
(“EMEA”) in Europe. Obtaining regulatory approvals is a rigorous and
lengthy process and requires the expenditure of substantial
resources. In order to obtain final regulatory approval of a new
drug, we must demonstrate to the satisfaction of the regulatory agency that the
product is safe and effective for its intended uses and that we are capable of
manufacturing the product to the applicable regulatory standards. We
require regulatory approval in order to market Ampligen® or any other proposed
product and receive product revenues or royalties. We cannot assure
you that Ampligen® will ultimately be demonstrated to be safe or
efficacious. While Ampligen® is authorized for use in clinical trials
in the U.S. and Europe, 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. In addition, although Ampligen® has been authorized by the
FDA for treatment use under certain conditions, including provision for cost
recovery, there can be no assurance that such authorization will continue in
effect.
On July
7, 2008, the FDA accepted for review our New Drug Application (“NDA”) for
Ampligen® to treat CFS, originally submitted in October 2007.
On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA. In accordance with its 2008 Complete Response procedure, the FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues. We have carefully reviewed the CRL and will seek a meeting
with the FDA to discuss its recommendations. We intend to take the
appropriate steps to seek approval and commercialization of
Ampligen®. Most notably, the FDA stated that the two primary clinical
studies submitted with the NDA did not provide credible evidence of efficacy of
Ampligen® and recommended at least one additional clinical study which shows
convincing effect and confirms safety in the target population. The
FDA indicated that the additional study should be of sufficient size and
sufficient duration (6 months) and include appropriate monitoring to rule out
the generation of autoimmune disease. In addition, patients in the
study should be on more than one dose regimen, including at least 300 patients
on dose regimens intended for marketing. Finally, additional data
including a well-controlled QT interval study of the heart’s electrical cycle
and pharmacokinetic evaluations of dual dosage regiments was
requested. Other items required by the FDA include certain aspects of
Non-Clinical safety assessment and product Quality. In the
Non-Clinical area, the FDA recommended among other things that we complete
rodent carcinogenicity studies in two species. As part of the NDA
submission, we had requested that these studies be waived, but the waiver has
not been granted.
If we are
unable to generate the additional data required by the FDA or if, for that or
any other reason, Ampligen® or one of our other products does not receive
regulatory approval in the U.S. or elsewhere, our operations most likely will be
materially adversely affected.
The Alferon® LDO clinical
study for possible prophylaxis and treatment against influenza is currently
suspended due the FDA Clinical Hold. While the studies to date have
been encouraging, preliminary testing in the laboratory and in animal models is
not necessarily predictive of successful results in clinical testing or human
treatment. No assurance can be given that similar results will be
observed in clinical trials. Use of Alferon® as a possible treatment
of any flu requires prior regulatory approval. In October 2009, we
submitted a protocol to the FDA proposing to conduct a Phase II,
well-controlled, clinical study using Alferon® LDO for the prophylaxis and
treatment of seasonal and pandemic influenza of more than 200
subjects. Following a teleconference with the FDA in November 2009,
the FDA placed the proposed study on “Clinical Hold” because the protocol was
deemed by the FDA to be deficient in design and because additional information
was required to be submitted in the area of chemistry, manufacturing and
controls (“CMC”). Thereafter in December 2009, we submitted
additional information by Amendment with respect to both the clinical protocol
design issues and the CMC items. While the FDA has acknowledged that
our responses to the clinical issues were acceptable, in January 2010 they
requested additional stability data on the lots proposed for use in clinical
studies utilizing new test methods and the Clinical Hold remains in effect
because the FDA believed that certain CMC issues had not yet been satisfactorily
resolved. In this regard, new clinical lots were manufactured on June
24, 2010
and placed on stability on June 28, 2010. Only the FDA can determine
whether a drug is safe, effective or appropriate for clinical testing or
treating a specific application. Therefore, no assurance can be given
that the use of our existing inventory will be permitted in future clinical
trials. The three
months of product stability data has been compiled and continues to be analyzed
with the expectation of submission to the FDA by the end of December
2010. Only the FDA can determine
whether a drug is safe, effective or appropriate for clinical testing or
treating a specific application. Therefore, no assurance can be given
that the use of our existing inventory will be permitted in future clinical
trials.
31
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 to get our experimental drug, Ampligen®,
approved. As of September 30, 2010, our accumulated deficit was approximately
$(221,821,000). We have not yet generated significant revenues from
our products and may incur substantial and increased losses in the
future. We cannot assure that we will ever achieve significant
revenues from product sales or become profitable. We require, and
will continue to require, the commitment of substantial resources to develop our
products. We cannot assure that our product development efforts will
be successfully completed or that required regulatory approvals will be obtained
or that any products will be manufactured and marketed successfully, or be
profitable.
We
may require additional financing which may not be available; the limited number
of shares of common stock available for financing or other purposes may hinder
our ability to raise additional funding or utilize equity securities for other
corporate purposes.
The
development of our products will require the commitment of substantial resources
to conduct the time consuming research, preclinical development, and clinical
trials that are necessary to bring pharmaceutical products to
market. As of September 30, 2010, we had approximately $48,261,000 in
Cash, Cash Equivalents and Marketable Securities. Given the harsh
economic conditions, we continue to review every aspect of our operations for
cost and spending reductions to assure our long-term financial stability while
maintaining the resources necessary to achieve our primary objectives of
obtaining NDA approval of Ampligen® and securing a strategic
partner.
If we are
unable to commercialize and sell Ampligen® or Alferon® LDO and/or recommence and
increase sales of Alferon N Injection® or our other products, we eventually may
need to secure other sources of funding through additional equity or debt
financing or other sources in order to satisfy our working capital needs and/or
complete the necessary clinical trials and the regulatory approval processes on
which the commercialization of our products depends.
Our
ability to raise additional funds from the sale of equity securities is
limited. In this regard, we only have approximately 32,000,000 shares
authorized but unissued and unreserved for any purpose, other than for sale
under the ATM Equity Program. At our 2009 annual stockholders’
meeting, we sought, but did not receive, approval of an amendment to our
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 200,000,000 to 350,000,000. The limited number of
shares of common stock available for financing or other purposes may hinder our
ability to raise additional funding or utilize equity securities for other
corporate purposes including, but not limited to, acquisitions or joint ventures
with potential strategic partners.
32
There can
be no assurances that we will raise adequate funds which may have a material
adverse effect on our ability to develop our products or continue our
operations.
Our Alferon N Injection® Commercial
Sales were halted due to lack of finished goods inventory.
Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired in March 2008. As a
result, we have no product to sell at this time. We continue to
undertake a major capital improvement program to enhance our manufacturing
capability to produce the purified drug concentrate used in the formulation of
Alferon N Injection® at our New Brunswick facility. As a result,
Alferon N Injection® could be available for commercial sales in mid to late
2011. However our agreement with a third party to formulate, package
and label Alferon N Injection® has expired and we are seeking new vendors to
supply this service. Also, each production lot of Alferon N
Injection® is subject to FDA review and approval prior to releasing the lots to
be sold. In light of these contingencies, there can be no assurances
that the approved Alferon N Injection® product will be returned to production on
a timely basis, if at all, or that if and when it is again made commercially
available, it will return to prior sales levels.
Although preliminary testing
indicates that Ampligen® enhances the effectiveness of different drug
combinations on avian influenza, preliminary testing in the laboratory is not
necessarily predictive of successful results in clinical testing or human
treatment.
A three year Japanese
government funded program to develop and test on non-human primates a nasally
delivered H5N1 (Avian Flu) vaccine coupled with Ampligen® has been completed
(see “PART I; ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations; Overview; Ampligen®“). No
assurance can be given that similar results will be observed in clinical
trials. Use of Ampligen® in the treatment of flu requires prior
regulatory approval. Only the FDA or other corresponding regulatory
agencies world-wide can determine whether a drug is safe, effective and
appropriate for treating a specific application. As discussed above,
obtaining regulatory approvals is a rigorous and lengthy process (see “Our drugs
and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our
operations will be significantly adversely affected” above).
We
may not be profitable unless we can protect our patents and/or receive approval
for additional pending patents.
We need
to preserve and acquire enforceable patents covering the use of Ampligen® for a
particular disease in order to obtain exclusive rights for the commercial sale
of Ampligen® for such disease. We obtained all rights to Alferon N
Injection®, and we plan to preserve and acquire enforceable patents covering its
use for existing and potentially new diseases. Our success depends,
in large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and
expertise. Certain of our know-how and technology is not patentable,
particularly the procedures for the manufacture of our experimental drug,
Ampligen®. We also have 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 yet been issued any patents in the United States for the use of
AmpligenÒ as a sole
treatment for any of the cancers which we have sought to target. With
regard to Alferon N Injection®, we have acquired from ISI its patents for
natural alpha interferon produced from human peripheral blood leukocytes and its
production process and we have filed a patent application for the use of
Alferon® LDO in treating viral diseases including avian influenza. We
cannot assure that our competitors will not seek and obtain patents regarding
the use of similar products in combination with various other agents, for a
particular target indication prior to our doing so. If we cannot
protect our patents covering the use of our products for a particular disease,
or obtain additional patents, we may not be able to successfully market our
products.
33
The
patent position of biotechnology and pharmaceutical firms is highly uncertain
and involves complex legal and factual questions.
To date,
no consistent policy has emerged regarding the breadth of protection afforded by
pharmaceutical and biotechnology patents. There can be no assurance
that new patent applications relating to our products or technology will result
in patents being issued or that, if issued, such patents will afford meaningful
protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation
could require substantial resources from us and we may not have the financial
resources necessary to enforce the patent rights that we hold. No
assurance can be made that our patents will provide competitive advantages for
our products or will not be successfully challenged by
competitors. No assurance can be given that patents do not exist or
could not be filed which would have a materially adverse effect on our ability
to develop or market our products or to obtain or maintain any competitive
position that we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
The
failure of third parties from whom we currently license certain proprietary
information or from whom we may be required to obtain such licenses in the
future, to adequately enforce their rights to such proprietary information,
could adversely affect the value of such licenses to us.
We
currently license certain proprietary information from third parties, some of
which may have been developed with government grants under circumstances where
the government maintained certain rights with respect to the proprietary
information developed. No assurances can be given that such third
parties will adequately enforce any rights they may have or that the rights, if
any, retained by the government will not adversely affect the value of our
license.
There
is no guarantee that our trade secrets will not be disclosed or known by our
competitors.
To
protect our rights, we require certain employees and consultants to enter into
confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will not
otherwise become known or be independently developed by
competitors.
We
have limited marketing and sales capability. If we are unable to
obtain additional distributors and our current and future distributors do not
market our products successfully, we may not generate significant revenues or
become profitable.
We have
limited marketing and sales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, any revenues received by us will be
dependent in large part on the efforts of third parties, and there is no
assurance that these efforts will be successful.
Our
commercialization strategy for Ampligen® for ME/CFS may include
licensing/co-marketing agreements utilizing the resources and capacities of a
strategic partner(s). We continue to seek world-wide marketing
partner(s), with the goal of having a relationship in place before approval is
obtained. In parallel to partnering discussions, appropriate
premarketing activities will be undertaken. We intend to control
manufacturing of Ampligen® on a world-wide basis.
34
We cannot
assure that our U.S. or foreign marketing strategy will be successful 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. Our inability to
establish viable marketing and sales capabilities would most likely have a
materially adverse effect on us.
There
are no long-term agreements with suppliers of required materials and
services. If we are unable to obtain the required raw materials
and/or services, we may not be able to manufacture Alferon N Injection® and/or
Ampligen®.
A number
of essential materials are used in the production of Alferon N
Injection®. We do not have, but are working towards having long-term
agreements for the supply of such materials. There can be no
assurance we can enter into long-term supply agreements covering essential
materials on commercially reasonable terms, if at all.
There are
a limited number of manufacturers in the United States available to provide the
polymers for use in manufacturing Ampligen®. At present, we do not
have any agreements with third parties for the supply of any of these
polymers. We have established relevant manufacturing operations
within our New Brunswick, New Jersey facility for the production of Ampligen®
polymers from raw materials in order to obtain polymers on a more consistent
manufacturing basis in the quantities necessary for clinical
testing.
If we are
unable to obtain or manufacture the required raw materials, we may be unable to
manufacture Alferon N
Injection® and/or Ampligen®. The costs and availability of products
and materials we need for the production of Ampligen® and the commercial
production of Alferon N Injection® and other products which we may commercially
produce are subject to fluctuation depending on a variety of factors beyond our
control, including competitive factors, changes in technology, and FDA and other
governmental regulations and there can be no assurance that we will be able to
obtain such products and materials on terms acceptable to us or at
all.
There
is no assurance that successful manufacture of a drug on a limited scale basis
for investigational use will lead to a successful transition to commercial,
large-scale production.
Changes
in methods of manufacturing, including commercial scale-up, may affect the
chemical structure of Ampligen®, Alferon® and other RNA drugs, as well as their
safety and efficacy. The transition from limited production of
pre-clinical and clinical research quantities to production of commercial
quantities of our products will involve distinct management and technical
challenges and will require additional management and technical personnel and
capital to the extent such manufacturing is not handled by third
parties. There can be no assurance that our manufacturing will be
successful or that any given product will be determined to be safe and
effective, or capable of being manufactured under applicable quality standards,
economically, and in commercial quantities, or successfully
marketed.
We
have limited manufacturing experience.
Ampligen®
has been produced to date in limited quantities for use in our clinical trials,
and we are dependent upon a qualified third party supplier for certain aspects
of the manufacturing and packaging process. The failure to continue
these arrangements or to achieve other such arrangements on satisfactory terms
could have a material adverse affect on us. Also, to be successful,
our products must be manufactured in commercial quantities in compliance with
regulatory requirements and at acceptable costs. To the extent we are
involved in the production process, our current facilities may not be adequate
for the production of our proposed products for large-scale
commercialization. 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
pertaining to current Good Manufacturing Practice (“cGMP”)
requirements. There can be no assurance that such facilities can be
used, built, or acquired on commercially acceptable terms, or that such
facilities, if used, built, or acquired, will be adequate for our long-term
needs.
35
We
may not be profitable unless we can produce Ampligen®, Alferon® or other
products in commercial quantities at costs acceptable to us.
We have
never produced Ampligen®, Alferon® or any other products in large commercial
quantities. We must manufacture our products in compliance with
regulatory requirements in large commercial quantities and at acceptable costs
in order for us to be profitable. We intend to utilize third-party
manufacturers and/or facilities if and when the need arises or, if we are unable
to do so, to build or acquire commercial-scale manufacturing
facilities. If we cannot manufacture commercial quantities of
Ampligen® or enter into third party agreements for its manufacture at costs
acceptable to us, our operations will be significantly
affected. Also, each production lot of Alferon N Injection® is
subject to FDA review and approval prior to releasing the lots to be
sold. This review and approval process could take considerable time,
which would delay our having product in inventory to sell.
Rapid
technological change may render our products obsolete or
non-competitive.
The
pharmaceutical and biotechnology industries are subject to rapid and substantial
technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to
increase. Most of these entities have significantly greater research
and development capabilities than us, as well as substantial marketing,
financial and managerial resources, and represent significant competition for
us. There can be no assurance that developments by others will not
render our products or technologies obsolete or noncompetitive or that we will
be able to keep pace with technological developments.
Our
products may be subject to substantial competition.
Ampligen®. Competitors
may be developing technologies that are, or in the future may be, the basis for
competitive products. Some of these potential products may have an
entirely different approach or means of accomplishing similar therapeutic
effects to products being developed by us. These competing products
may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors
have significantly greater experience than us in preclinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, our competitors may
succeed in obtaining FDA, HPB or other regulatory product approvals more rapidly
than us. There are no drugs approved for commercial sale with respect
to treating ME/CFS in the United States. The dominant competitors
with drugs to treat disease indications in which we plan to address include
Gilead Sciences, Pfizer, Bristol-Myers Squibb, Abbott Laboratories,
GlaxoSmithKline and Merck & Co. These potential competitors are
among the largest pharmaceutical companies in the world, are well known to the
public and the medical community, and have substantially greater financial
resources, product development, and manufacturing and marketing capabilities
than we have. Although we believe our principal advantage is the
unique mechanism of action of Ampligen® on the immune system, we cannot assure
that we will be able to compete.
36
Alferon N
Injection®. Our competitors are among the largest pharmaceutical
companies in the world, are well known to the public and the medical community,
and have substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have. Alferon N
Injection® currently competes with Schering’s injectable recombinant alpha
interferon product (INTRON® A) for the treatment of genital
warts. Graceway Pharmaceuticals also offer competition from its
immune-response modifier, Aldara®, a self-administered topical cream, for the
treatment of external genital and perianal warts. In addition,
Medigene AG has FDA approval for a self-administered ointment, Veregen®, which
is indicated for the topical treatment of external genital and perianal
warts. Alferon N Injection® also competes with surgical, chemical,
and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of Alferon
N Injection®. If and when we obtain additional approvals of uses of
this product, we expect to compete primarily on the basis of product
performance. Our competitors have developed or may develop products
(containing either alpha or beta interferon or other therapeutic compounds) or
other treatment modalities for those uses. There can be no assurance
that, if we are able to obtain regulatory approval of Alferon N Injection® for
the treatment of new indications, we will be able to achieve any significant
penetration into those markets. In addition, because certain
competitive products are not dependent on a source of human blood cells, such
products may be able to be produced in greater volume and at a lower cost than
Alferon N Injection®. Currently, our wholesale price on a per unit
basis of Alferon N Injection® is higher than that of the competitive recombinant
alpha and beta interferon products.
General. Other
companies may succeed in developing products earlier than we do, obtaining
approvals for such products from the FDA more rapidly than we do, or developing
products that are more effective than those we may develop. While we
will attempt to expand our technological capabilities in order to remain
competitive, there can be no assurance that research and development by others
or other medical advances will not render our technology or products obsolete or
non-competitive or result in treatments or cures superior to any therapy we
develop.
Possible
side effects from the use of Ampligen® or Alferon N Injection® could adversely
affect potential revenues and physician/patient acceptability of our
product.
Ampligen®. 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 15-20% of patients treated in our various
studies. This reaction is occasionally accompanied by a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of “feeling hot”, sweating and
nausea. The reaction is usually infusion-rate related and can
generally be controlled by reducing the rate of infusion. Other
adverse side effects include liver enzyme level elevations, diarrhea, itching,
asthma, low blood pressure, photophobia, rash, transient visual disturbances,
slow or irregular heart rate, decreases in platelets and white blood cell
counts, anemia, dizziness, confusion, elevation of kidney function tests,
occasional temporary hair loss and various flu-like symptoms, including fever,
chills, fatigue, muscular aches, joint pains, headaches, nausea and
vomiting. These flu-like side effects typically subside within
several months. One or more of the potential side effects might deter
usage of Ampligen® in certain clinical situations and therefore, could adversely
affect potential revenues and physician/patient acceptability of our
product.
Alferon N
Injection®. At present, Alferon N Injection® is only approved for the
intra-lesional (within the lesion) treatment of refractory or recurring external
genital warts in adults. In clinical trials conducted for the
treatment of genital warts with Alferon N Injection®, patients did not
experience serious side effects; however, there can be no assurance that
unexpected or unacceptable side effects will not be found in the future for this
use or other potential uses of Alferon N Injection® which could threaten or
limit such product’s usefulness.
37
We
may be subject to product liability claims from the use of Ampligen®, Alferon N
Injection®, 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 affected from the litigation costs, settlement
expenses and lost product sales inherent to these claims. While we
will continue to attempt to take appropriate precautions, we cannot assure that
we will avoid significant product liability exposure.
On
November 28, 2008, we suspended product liability insurance for Alferon N
Injection® and Ampligen®. We concluded that years of successfully
addressing the limited number of product liability claims filed against
Ampligen® and Alferon® LDO, combined with the informed consent and other
safeguards employed as an element of clinical trials and the lack of any
commercial sales since April 2008, that temporarily discontinuing the liability
insurance was an acceptable risk as a measure of cash
conservation. As of September 17, 2010, we reinstated our Products
Liability and Clinical Trial insurance coverage for Ampligen® and
Alferon®. However even with maintaining product liability and
clinical trial insurance coverage for Ampligen®, Alferon N Injection® and
Alferon® LDO, a claim against the products could have a materially adverse
effect on our business and financial condition.
The
loss of services of key personnel including Dr. William A. Carter could hurt our
chances for success.
Our
success is dependent on the continued efforts of our staff, especially certain
doctors and researchers along with the continued efforts of Dr. William A.
Carter because of his position as a pioneer in the field of nucleic acid drugs,
his being the co-inventor of Ampligen®, and his knowledge of our overall
activities, including patents and clinical trials. The loss of the
services of Dr. Carter or other personnel key to our operations, could have a
material adverse effect on our operations and chances for success. As
a cash conservation measure, we have elected to discontinue the Key Man life
insurance on the life of Dr. Carter. An employment agreement
continues to exist with Dr. Carter that, as amended, runs until December 31,
2015. However, Dr. Carter has the right to terminate his employment
upon not less than 30 days prior written notice. The loss of Dr.
Carter or other key personnel or the failure to recruit additional personnel as
needed could have a materially adverse effect on our ability to achieve our
objectives.
Uncertainty
of health care reimbursement for our products.
Our
ability to successfully commercialize our products will depend, in part, on the
extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health coverage insurers and other organizations. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and from time to time legislation is proposed, which, if adopted,
could further restrict the prices charged by and/or amounts reimbursable to
manufacturers of pharmaceutical products. We cannot predict what, if
any, legislation will ultimately be adopted or the impact of such legislation on
us. There can be no assurance that third party insurance companies
will allow us to charge and receive payments for products sufficient to realize
an appropriate return on our investment in product development.
38
There
are risks of liabilities associated with handling and disposing of hazardous
materials.
Our
business involves the controlled use of hazardous materials, carcinogenic
chemicals, flammable solvents and various radioactive
compounds. Although we believe that our safety procedures for
handling and disposing of such materials comply in all material respects with
the standards prescribed by applicable regulations, the risk of accidental
contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident or the failure to comply
with applicable regulations, we could be held liable for any damages that
result, and any such liability could be significant. We do not
maintain insurance coverage against such liabilities.
A
Number of Lawsuits Have Been Filed Against Us and We May Be Subject to Civil
Liabilities.
A number
of lawsuits have been filed against us, some alleging securities fraud (see “Part II – Other
Information; Item 1. Legal Proceedings”). The complaints seek
monetary damages, costs, attorneys’ fees, and other equitable and injunctive
relief. Securities class action suits and derivative suits are often
brought against companies following periods of volatility in the market price of
their securities. Defending against these suits, even if meritless,
can result in substantial costs to us and could divert the attention of our
management. Given the anticipated
settlement of the Securities Class Action Lawsuit, it is uncertain if sufficient
amounts of coverage will remain from the November 2009-2010 policy to cover the
Shareholder Derivative Lawsuits fees and potential
liability.
The
existence of these proceedings could have a material adverse effect on our
ability to access the capital markets to raise additional
funds. While Management believes that the lawsuits are without merit,
we cannot predict or determine the timing or final outcomes of the lawsuits and
are unable to estimate the amount or range of loss that could result from
unfavorable outcomes. Adverse results in some or all of these legal
proceedings could be material to our results of operations, financial condition
or cash flows.
Risks
Associated With an Investment in Our Common Stock
The
market price of our stock may be adversely affected by market
volatility.
The
market price of our common stock has been and is likely to be
volatile. This is especially true given the current significant
instability in the financial markets. In addition to general
economic, political and market conditions, the price and trading volume of our
stock could fluctuate widely in response to many factors,
including:
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·
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announcements
of the results of clinical trials by us or our
competitors;
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·
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announcement
of legal actions against us and/or settlements or verdicts adverse to
us;
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·
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adverse
reactions to products;
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·
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governmental
approvals, delays in expected governmental approvals or withdrawals
of any prior governmental approvals or public or regulatory
agency comments regarding the safety or effectiveness of our products, or
the adequacy of the procedures, facilities or controls employed in the
manufacture of our products;
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·
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changes
in U.S. or foreign regulatory policy during the period of product
development;
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·
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developments
in patent or other proprietary rights, including any third party
challenges of our intellectual property
rights;
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·
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announcements
of technological innovations by us or our
competitors;
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·
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announcements
of new products or new contracts by us or our
competitors;
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·
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actual
or anticipated variations in our operating results due to the level of
development expenses and other
factors;
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·
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changes
in financial estimates by securities analysts and whether our earnings
meet or exceed the
estimates;
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·
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conditions
and trends in the pharmaceutical and other
industries;
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·
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new
accounting standards;
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39
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·
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overall
investment market fluctuation; and
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·
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occurrence
of any of the risks described in these "Risk
Factors".
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Our
common stock is listed for quotation on the NYSE Amex. For the 12
month period ended September 30, 2010, the closing price of our common stock has
ranged from $0.44 to $1.95 per share. We expect the price of our
common stock to remain volatile. The average daily trading volume of
our common stock varies significantly.
In the
past, following periods of volatility in the market price of the securities of
companies in our industry, securities class action and derivative litigation
have often been instituted against companies. In this regard, please
see “A Number of Lawsuits Have
Been Filed Against Us and We May Be Subject to Civil Liabilities”
above.
Our
stock price may be adversely affected if a significant amount of shares are sold
in the public market.
In May
2009 we issued an aggregate of 25,543,339 shares and warrants to purchase an
additional 14,708,687 shares under a universal shelf registration
statement. 4,895,000 of these warrants have been exercised as of
September 30, 2010. Depending upon market conditions, we anticipate
selling 9,813,687 shares pursuant to the conversion of remaining
warrants.
Additionally,
we registered with the SEC on September 29, 2009, 1,038,527 shares issuable upon
exercise of certain other warrants. To the extent the exercise price
of our outstanding warrants is less than the market price of the common stock,
the holders of the warrants are likely to exercise them and sell the underlying
shares of common stock and to the extent that the exercise price of certain of
these warrants are adjusted pursuant to anti-dilution protection, the warrants
could be exercisable or convertible for even more shares of common
stock. We also may issue shares to be used to meet our capital
requirements or use shares to compensate employees, consultants and/or
directors. In this regard we have registered $150,000,000 of
securities for public sale pursuant to a universal shelf
registration. We have allocated 32,000,000 shares under this
registration statement to an At-The-Market equity offering and, as of September
30, 2010, we have sold 520,000 shares pursuant to this offering.
We are
unable to estimate the amount, timing or nature of future sales of outstanding
common stock or instruments convertible into or exercisable for our common
stock. Sales of substantial amounts of our common stock in the public
market, including additional sale of securities pursuant to the universal shelf
registration statement, could cause the market price for our common stock to
decrease. Furthermore, a decline in the price of our common stock
would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
Provisions
of our Certificate of Incorporation and Delaware law could defer a change of our
management which could discourage or delay offers to acquire
us.
Provisions
of our Certificate of Incorporation and Delaware law may make it more difficult
for someone to acquire control of us or for our stockholders to remove existing
management, and might discourage a third party from offering to acquire us, even
if a change in control or in Management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us
to issue shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and
determine the relative rights and preferences of preferred stock. Our
Board of Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that would grant to
holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common
stock and the right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In this regard, in
November 2002, we adopted a Stockholder Rights Plan (“Rights Plan”) and, under
the Rights Plan, our Board of Directors declared a dividend distribution of one
Right for each outstanding share of Common Stock to stockholders of record at
the close of business on November 29, 2002. Each Right initially
entitles holders to buy one-hundredth unit of preferred stock for
$30.00. The Rights generally are not transferable apart from the
common stock and will not be exercisable unless and until a person or group
acquires or commences a tender or exchange offer to acquire, beneficial
ownership of 15% or more of our common stock. However, for Dr.
Carter, our Chief Executive Officer, who already beneficially owns 5.0% of our
common stock, the Rights Plan’s threshold will be 20%, instead of
15%. The Rights Plan will expire on November 19, 2012, and may be
redeemed prior thereto at $.01 per Right under certain
circumstances.
40
Special
Note Regarding Forward Looking Statements
Because
the risk factors referred to above could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
us, you should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of
the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is
not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements. Our research in clinical efforts may continue for the
next several years and we may continue to incur losses due to clinical costs
incurred in the development of Ampligen® 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 revenue.
ITEM 2: Unregistered
Sales of Equity Securities and Use of Proceeds
During the quarter ended September 30,
2010, we issued an aggregate of 52,106 shares to consultants and vendors for
services performed.
All of
the foregoing transactions were conducted pursuant to the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 or pursuant
to our Registration Statement on Form S-8.
We did
not repurchase any of our securities during the quarter ended September 30,
2010.
ITEM
3: Defaults upon Senior Securities
None.
ITEM
4: Removed and Reserved
ITEM
5: Other Information
None.
41
ITEM
6: Exhibits
(a)
Exhibits
31.1
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Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer.
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31.2
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Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial Officer.
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32.1
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Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Executive Officer.
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32.2
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Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the
Company's Chief Financial
Officer.
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42
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.
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/s/ William A. Carter
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William
A. Carter, M.D.
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Chief
Executive Officer
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&
President
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/s/
Charles T.
Bernhardt
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Charles
T. Bernhardt, CPA
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Chief
Financial Officer
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Date:
November 8, 2010
43