10-Q 1 r10q-0930_01.txt FORM 10Q HEMISPHERX BIOPHARMA, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 2001 Commission File Number: 0-27072 HEMISPHERx BIOPHARMA, INC. ---------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-0845822 ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (215) 988-0080 ---------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /X/ Yes / / No 30,534,882 shares of common stock issued and outstanding as of September 30, 2001. 2 PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, September 30, 2000 2001 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $3,721 $2,859 Short Term investments 4,657 1,236 Accounts receivable 60 13 Prepaid expenses and other current assets 607 324 ----------- ---------- Total current assets 9,045 4,432 Property and equipment, net 373 274 Patent and trademark rights, net 1,204 986 Investments in unconsolidated affiliates 2,421 2,366 Other assets 24 54 ----------- ---------- Total assets $13,067 $ 8,112 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,341 $ 1,063 Accrued expenses 154 186 ----------- ---------- Total current liabilities 1,495 1,249 ----------- ---------- Commitments and contingencies Stockholders' equity: Common stock 30 31 Additional paid-in capital 97,984 100,779 Accumulated other comprehensive income 34 16 Treasury stock- at cost (3,910) (4,429) Accumulated deficit (82,566) (89,534) ----------- ---------- Total stockholders' equity 11,572 6,863 ----------- ---------- Total liabilities and stockholders' equity $13,067 $ 8,112 =========== ==========
See accompanying notes to condensed consolidated financial statements. 3 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
For the Three months ended September 30, -------------------------- (Unaudited) 2000 2001 ---------- ---------- Revenues: Cost recovery - clinical treatment programs $ 225 $ 76 ---------- ---------- Costs and expenses: Research and development 1,864 1,589 General and administrative 549 673 ---------- ---------- Total cost and expenses 2,413 2,262 Interest and other income 144 68 Equity in loss of unconsolidated affiliate (Note 4) (22) (27) ---------- ---------- Net loss $(2,066) $(2,145) ========== ========== Basic and diluted loss per share $ (.07) $ (.07) ========== ========== Basic and diluted weighted average common shares outstanding 29,523,470 30,528,322 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
For the Nine months ended September 30, -------------------------- (Unaudited) 2000 2001 ---------- ---------- Revenues: Cost recovery - clinical treatment programs $ 651 $ 304 ---------- ---------- Costs and expenses: Research and development 4,886 4,765 General and administrative 2,271 2,677 ---------- ---------- Total cost and expenses 7,157 7,442 Interest and other income 456 248 Equity in loss of unconsolidated affiliate (Note 4) (48) (78) ---------- ---------- Net loss $(6,098) $ (6,968) ========== ========== Basic and diluted loss per share $ (.21) $(.23) ========== ========== Basic and diluted weighted average common shares outstanding 29,043,784 30,202,583 ========== ==========
See accompanying notes to condensed consolidated financial statements. 5 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Nine months ended September 30, (Unaudited) 2000 2001 ---------- ---------- Cash flows from operating activities: Net loss $(6,098) $(6,968) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 96 99 Amortization of patents rights 227 290 Write-off of patent rights 32 29 Stock option and warrant compensation and service expense 322 673 Equity in loss of unconsolidated affiliate 48 77 Changes in assets and liabilities: Accounts receivable (7) 47 Prepaid expenses and other current assets (38) 259 Accounts payable (323) (278) Accrued expenses (265) 32 Other assets (374) 3 --------- --------- Net cash (used in) operating activities (6,380) (5,737) --------- --------- Cash flows from investing activities: Purchase of property and equipment (110) - Additions to patent rights (126) (100) Maturity of short term investments 2,153 4,613 Purchase of short term investments (2,282) (1,220) Investments in unconsolidated affiliates (411) (22) Other investments (34) - --------- -------- Net cash (used in) provided by investing activities (810) 3,271 --------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 2,250 73 Proceeds from exercise of warrants 8,549 2,050 Purchase of treasury stock (3,107) (519) -------- -------- Net cash provided by financing activities 7,692 1,604 -------- -------- Net increase (decrease) in cash and cash equivalents 502 (862) Cash and cash equivalents at beginning of period 6,396 3,721 -------- -------- Cash and cash equivalents at end of period $6,898 $2,859 ======== ========
See accompanying notes to condensed consolidated financial statements. 6 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2001 (in thousands, except share data)
Accumulated Common Stock Additional Other Treasury Treasury Total --------------- Paid-In Comprehensive Stock Stock Accumulated Stockholders' Shares Amount Capital Income shares deflict Equity ------- ------- ----------- ------------- --------- -------- ----------- ------------- Balance 12/31/2000 30,367,888 $30 $97,984 $34 395,646 $(3,910) $(82,566) $11,572 Common Stock Issued 672,300 1 2,122 2,123 Treasury Stock Purchased 109,660 (519) (519) Stock issued for R&D expenses 87 87 Stock warrant Compensation 586 586 Net Comprehensive loss (18) (6,968) (6,986) ------- ------- ----------- ------------- --------- -------- ----------- ------------- Balance 9/30/2001 31,040,188 $31 $100,779 $16 505,306 $(4,429) $(89,534) $ 6,863 ======= ======= =========== ============= ========= ======== =========== =============
See accompanying notes to condensed consolidated financial statements. 7 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Hemispherx BioPharma, Inc., a Delaware corporation and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim consolidated financial statements and notes thereto are presented as permitted by the Securities and Exchange Commission, and do not contain certain information which will be included in our annual consolidated financial statements and notes thereto. These consolidated financial statements should be read in conjunction with our year 2000 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2000, as amended on Form 10K/A, second amendment, filed with the SEC on June 19, 2001. Prior year amounts have been reclassified to conform to current period presentations. NOTE 2: STOCK COMPENSATION: Stock compensation expense for the three months ending September 30, 2001 was $78,000. This charge consists of the fair market value of warrants issued to outside parties for services rendered on behalf of the Company. On a year to date basis, stock compensation expense totals $673,000 including the calculated cost of extending the expiration date of certain non-public warrants and the granting of warrants to outside parties for services performed. Stock/Warrant compensation expense has no effect on shareholder equity as it is offset by an increase in additional paid in capital. In 2001 we retained a nationally based consultant group with expertise in executive compensation in the biotechnology sector to analyze the compensation of both the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer. In accordance with the review, the Company granted 376,650 warrants to purchase our common stock to William A. Carter for services performed and to be performed and 30,000 warrants to the Chief Financial Officer. The Chief Financial Officer's warrants are exercisable at $5.00 per share. The 376,650 warrants granted to the Chairman 8 of Board and CEO consist 188,325 that are exercisable at $6.00 per share and 188,325 that are exercisable at $9.00 per share. We applied APB Opinion No. 25 in accounting for stock-based compensation of our company employees and directors and, accordingly, no compensation expense has been recognized for stock warrants rights issued to employees and directors in the financial statements because the exercise prices of the warrants exceeded the quoted market price of our stock on the dates of grant. Note 3: INVESTMENTS: Investments in unconsolidated affiliates: In 1998, we invested $1,074,000 for a 3.3% equity interest in R.E.D. Laboratories ("R.E.D."). R.E.D. is a privately held biotechnology company for the development of diagnostic markers for Chronic Fatigue Syndrome and other chronic immune diseases. We have a research collaboration agreement with R.E.D. to assist in this development. R.E.D. is headquartered in Belgium. The investment has been recorded at cost. On May 11, 1999, we acquired a 15% interest in California Institute of Molecular Medicine ("CIMM") for $375,000. On May 16, 2000, we acquired an additional 15% interest in CIMM for an additional $375,000. The Company currently has a total interest of 30% in CIMM for a total of $750,000. CIMM is developing therapy for Hepatitis C virus. The investment has been recorded by the equity method. The balance at September 30, 2001 was $592,000. Other investments include an initial equity investment of $290,625 in Chronix Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for chronic diseases. This initial investment was made in May 31, 2000 by the issuance of 50,000 shares of Hemispherx Biopharma, Inc. common stock from the treasury. On October 12, 2000, we issued an additional 50,000 shares of Hemispherx Biopharma, Inc. common stock and on March 7, 2001 we issued 12,000 more shares of Hemispherx Biopharma, Inc. common stock from our the treasury to Chronix for an aggregate equity investment of $700,000. Pursuant to a strategic alliance agreement, we provided Chronix with $250,000 during 2000 to conduct research in an effort to develop intellectual property on potential new products for diagnosing and treating various chronic illnesses such as chronic fatigue syndrome. The strategic alliance agreement provides us certain royalty rights with respect to certain diagnostic technology developed from this research and a right of first refusal to license certain therapeutic technology developed form this research. 9 Note 4: LIQUIDITY: Our publicly traded class A Redeemable warrants were to expire as of November 2, 2001, however, due to the disruptive events of September 11, 2001 and related difficulties, the expiration date for exercising the warrants was extented to November 21, 2001. Trading for the warrants on the American Stock Exchange ceased on November 2, 2001. During the period of October 1, 2001 through November 6, 2001 we received proceeds of some $5.7 million from warrantholders exercising Class A Redeemable warrants. These proceeds plus our current cash, cash equivalents and current income stream should fund operations for the next 15 months or more. Most of our funding in the past few years has been provided by warrantholders exercising warrants. In the event that warrantholders do not, from time to time, exercise warrants at the level of funding needed to support future operations, we may seek access to the private or public equity market for operating capital needed. We may also raised additional capital from licensing agreements into territories not considered as part of own core business/market development model. Any additional equity funding obtained may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders. We may also need additional funding earlier than anticipated, and our cash requirements, in general, may vary materially from those now planned, for reasons including, but not limited to, changes in our research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of the our clinical trials for which cost recovery from participants has been approved. ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS ---------------------------------------------------- Certain statements in this Report on Form 10-Q ("Form 10-Q"), constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but not necessary all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to, the risk factors discussed below, which may cause the actual results, performance or achievements of Hemispherx Biopharma, Inc. and its subsidiaries (collectively, the "Company", "we" or "us") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and other factors referenced in this Form 10-Q. The Company does 10 not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Overview We are a multinational Biopharmaceutical company headquartered in Philadelphia, Pennsylvania that focuses on the development of nucleic acid compounds that enhance the natural immunological anti-viral defense systems of the human body. Our lead product, Ampligen, is an investigational drug and is part of a new class of specially configured ribonucleic acid compounds designed to treat diseases that have various immunological dysfunctions such as Myalgic Encephalonyelitis/Chronic Fatique Syndrome ("ME/CFS"), HIV, Hepatitis B, Hepatitis C and certain cancers such as renal cell carcinoma and melanoma. These disease have various immunological dysfunctions. Nucleic acid compounds represent a potential new class of pharmaceutical products that are designed to act at the molecular level in the treatment of human diseases. One of our double stranded RNA drug products, Ampligen, is administered intravenously and is in Phase II and Phase III human clinical development for various disease indications. Currently, we are focused on FDA authorized clinical trials designed to evaluate the efficacy of Ampligen in treating patients with ME/CFS and HIV. Based on the result of past clinical trials, we believe Ampligen may have broad-spectrum anti-viral and anti-cancer properties. We have two clinical trials in progress involving the use of Ampligen therapy to treat patients affected with ME/CFS: * An open-label study treating ME/CFS patients with Ampligen on a cost recovery basis. This study was authorized in the U.S. by the FDA in 1997. Patients treated under this protocol pay for the cost of the drug used. A similar program was implemented in Belgium in 1993 and has treated over 150 patients. * A multi-center, double-blind, randomized, placebo controlled Phase III clinical trial to evaluate the efficacy of Ampligen in the treatment of more than 200 patients afflicted with ME/CFS. Eleven clinical/medical centers located throughout the United States are currently participating in this study. The Food and Drug Administration recently authorized us to commence two phase IIb clinical trials designed to evaluate the use of Ampligen in augmenting immunologic gains in patients receiving intense antiviral therapy for HIV disease. We expect to enroll over 200 patients in these clinical trials, which may be partly conducted in Europe. Since the September 11, 2001 events in global terrorism, the company has initiated broad ranging experimental programs to determine the potential value of its platform technology in strengthening the body's "first line of defense" against threats associated with biological warfare and new pathogenic materials being introduced into the environment. 11 Our research and clinical efforts may continue for the next several years and we may continue to incur losses due to clinical costs incurred in the development of Ampligen for commercial application. Possible losses may fluctuate from quarter to quarter as a result of differences in the timing of significant expenses incurred and receipt of licensing fees and/or cost recovery treatment revenues in Europe, Canada and in the United States. Our research, development, clinical trials and the manufacturing and marketing of the Company's products are subject to extensive regulation by numerous governmental agencies in the United States and other countries. At this time, none of our products have been approved for commercial sale by the Food and Drug Administration or other foreign regulatory authorities. RISK FACTORS The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this report. Among the key factors that have a direct bearing on our results of operations are: Our drug and related technologies are investigational and subject to regulatory approval. All of our drugs and associate technologies are investigational and must receive prior regulatory approval by appropriate regulatory authorities for general use and are currently legally available only through clinical trials with specified disorders. Our principal development efforts are currently focused on Ampligen, which has not been approved for commercial use. Our products, including Ampligen are subject to extensive regulation by numerous governmental authorities in the U.S. and other countries, including, but not limited to, the Food and Drug Administration in the U.S., the Health Protection Branch of Canada, and the European Medical Evaluation Agency in Europe. Obtaining regulatory approvals is a rigorous and lengthy process and requires the expenditure of substantial resources. In order to obtain final regulatory approval of a new drug, we must demonstrate to the satisfaction of the regulatory agency that the product is safe and effective for its intended uses and that we are capable of manufacturing the product to the applicable regulatory standards. We cannot assure you that the drug will ultimately be 12 demonstrated to be safe or efficacious. In addition, while Ampligen is authorized for use in clinical trials in the United States and other countries, we cannot assure you that additional clinical trial approvals will be authorized in the United States or in other countries, in a timely fashion or at all, or that we will complete these clinical trials. If Ampligen or one of our other products does not receive regulatory approval in the U.S. or elsewhere, our operations will be materially adversely effected. We may continue to incur substantial losses and our future profitability is uncertain. We began operations in 1966 and last reported net profit from 1985 through 1987. Since 1987, we have incurred substantial operating losses. As of September 30, 2001 our accumulated deficit was approximately $89,534,000. We have not yet generated significant revenues from our products and may incur substantial and increased losses in the future. We cannot assure that we will ever achieve significant revenues from product sales or become profitable. We require, and will continue to require, the commitment of substantial resources to develop our products. We cannot assure that our product development efforts will be successfully completed or that required regulatory approvals will be obtained or that any products will be manufactured and marketed successfully, or profitability. Additional financing requirements. The development of our products will require the commitment of substantial resources to conduct the time-consuming research, preclinical development, and clinical trials that are necessary to bring pharmaceutical products to market. Based on our current operating plan, we anticipate receipt of revenues from the sales of Ampligen under the Cost Recovery Clinical Programs and additional capital infusions provided by investors exercising our Class A Redeemable and other Warrants. The Company may need to raise substantial additional funds through additional equity or debt financing or from other sources in order to complete the necessary clinical trials and the regulatory approval processes and begin commercializing its products. There can be no assurances that our Class A Redeemable Warrants will be exercised or that we will raise any proceeds from possible equity financing, which may have a material effect on our ability to develop our products. No regulatory agency has approved the full commercial sale of any of the our Gproducts. 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 United States and various other countries, we cannot assure you that additional clinical trial approvals will be authorized in the United States, or in other countries in a timely fashion or at all or that we will complete these clinical trials. If Ampligen or one of our other 13 products does not receive regulatory approval in the United States or elsewhere, our operations will be significantly affected. We may not be profitable unless we can protect our patents and/or receive approval for additional pending patents. We need to acquire enforceable patents covering the use of Ampligen for a particular disease in order to obtain exclusive rights for the commercial sale of Ampligen for such disease. Our success depends, in large part, on our ability to obtain patent protection for our products and to obtain and preserve our trade secrets and expertise. We have been issued certain patents on the use of Ampligen and Ampligen in combination with certain other drugs for the treatment of HIV. We have also been issued patents on the use of Ampligen in combination with certain other drugs for the treatment of chronic hepatitis B virus, chronic hepatitis C virus, and a patent which affords protection on the use of Ampligen in patients with chronic fatigue syndrome. We have not yet been issued any patents in the United States for the use of Ampligen as a sole treatment for any of the cancers which we have sought to target. However, we have obtained proprietary protection in certain instances from Orphan Drug designation as well as "mechanism of action" patents issued in the U.S. and elsewhere. If we cannot protect our patents covering the use of Ampligen for a particular disease, or obtain additional pending patents, we may not be able to successfully market Ampligen. The patent position of biotechnology and pharmaceutical firms is 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 newer patent applications relating to our products or technology will result in patents being issued or that, if issued, such patents will afford meaningful protection against competitors with similar technology. It is generally anticipated that there may be significant litigation in the industry regarding patent and intellectual property rights. Such litigation could require substantial resources from us. No assurance can be made that our patents will provide competitive advantages for our products or will not be successfully challenged by competitors. No assurance can be given that patents do not exist or could not be filed which would have a materially adverse effect on our ability to market our products or to obtain or maintain any competitive position the we may achieve with respect to our products. Our patents also may not prevent others from developing competitive products using related technology. There can be no assurance that we will have the financial resources necessary to enforce patent rights we may hold. If we cannot enforce the patent rights we currently hold we may be required to obtain licenses from others to develop, manufacture or market our 14 products. There can be no assurance that we would be able to obtain any such licenses on commercially reasonable terms, if at all. We currently license certain proprietary information from third parties, some of which may have been developed with government grants under circumstances where the government maintained certain rights with respect to the proprietary information developed. No assurances can be given that such third parties will adequately enforce any rights they may have or that the rights, if any, retained by the government will not adversely affect the value of our license. Certain of our know- how and technology is not patentable, particularly the procedures for the manufacture of our drug product which are carried out according to standard operating procedure manuals. We may not be profitable unless we can produce Ampligen or other products in commercial quantities at costs acceptable to us. Our lead product Ampligen is currently produced for use in clinical trials. Assuming that we choose to manufacturing and market by ourselves, 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. If our distributors do not market our product's successfully, we may not generate significant revenues or become profitable. We have limited marketing and sales capability. We need to enter into marketing agreements and third party distribution agreements for our products in order to generate significant revenues and become profitable. To the extent that we enter into co-marketing or other licensing arrangements, any revenues received by us will be dependent on the efforts of third parties, and there is no assurance that these efforts will be successful. Our treatment IND agreement with Gentiva Health Services offers the potential to provide significant marketing and distribution capacity in the United States while licensing and marketing agreements with certain foreign firms should provide an adequate sales force in South America, Africa, United Kingdom, Australia and New Zealand, Canada and Austria. Our partners may be able to deliver treatment and services to chronic disease patients including infusion services, home nursing and other medical services through a national network of more than 500 locations. We cannot assure that our domestic or our foreign marketing partners will be able to successfully distribute our products, or that we will be able to establish future marketing or third party distribution agreements on terms acceptable to us, or that the cost of establishing these arrangements will not exceed any product revenues. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a materially adverse 15 effect on us. If we cannot enter into future marketing and distribution agreements at terms acceptable to us, or if these distributors cannot effectively market and distribute our products, our operations will be negatively affected. No assurance of successful product development of Ampligen.,Oragen or other products The development of Ampligen and our other products is subject to a number of significant risks. Ampligen may be found to be ineffective or to have adverse side effects, fail to receive necessary regulatory clearances, be difficult to manufacture on a commercial scale, be uneconomical to market or be precluded from commercialization by proprietary rights of third parties. Our products are in various stages of clinical and pre-clinical development and, require further clinical studies and appropriate regulatory approval processes before any such products can be marketed. We do not know when, or if ever, Ampligen or the other products will be generally available for commercial sale for any indication for at least the next several years, if at all. Generally, only a small percentage of potential therapeutic products which enter Phase I clinical trials are eventually approved by the FDA for commercial sale. Ampligen safety profile and Scientific Literature. We believe that Ampligen has been generally well tolerated with a low incidence of clinical toxicity, particularly given the severely debilitating or life threatening diseases that have been treated. A mild flushing reaction has been observed in approximately 15% of patients treated in our various studies. This reaction is occasionally accompanied by erythema, a tightness of the chest, tachycardia, anxiety, shortness of breath, subjective reports of ''feeling hot,'' sweating and nausea. The reaction is usually infusion-rate related and can generally be controlled by slowing the infusion rate. Other adverse side effects include liver enzyme level elevations, diarrhea, itching, urticaria (swelling of the skin), bronchospasm, hypotension, photophobia, rash, bradycardia, transient visual disturbances, transient arrhythmias, decreased visual activity in platelets and white blood cell counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effects typically subside within several months. There is no assurance that successful manufacture of a drug on a limited scale basis for investigational use will lead to a successful transition to commercial, large-scale production. Small changes in methods of manufacturing may affect the chemical structure of Ampligen and other such RNA drugs, as well as their safety and efficacy. Changes in methods of manufacture, including commercial scale-up may affect the chemical structure of Ampligen 16 and, can, among other things, require new clinical studies and affect orphan drug status, particularly, market exclusivity rights, if any, under the Orphan Drug Act. The transition from limited production of pre-clinical and clinical research quantities to production of commercial quantities of our products will involve distinct management and technical challenges and will require additional management and technical personnel and capital to the extent such manufacturing is not handled by third parties. There can be no assurance that our efforts will be successful or that any given product will be determined to be safe and effective, capable of being manufactured economically in commercial quantities or successfully marketed. Rapid technological change. The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities than us, as well as substantial marketing, financial and managerial resources, and represent significant competition for us. There can be no assurance that developments by others will not render our products or technologies obsolete or noncompetitive or that we will be able to keep pace with technological developments. Substantial competition. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects to products being developed by us. These competing products may be more or less effective and less or more costly than our products. In addition, conventional drug therapy, surgery and other more familiar treatments will offer competition to our products. Furthermore, many of our competitors have significantly greater experience than us in pre-clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA, HPB and other regulatory approvals of products. Accordingly, our competitors may succeed in obtaining FDA and HPB product approvals more rapidly than us. If any of our products receive regulatory approvals and we commence commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have limited experience. Our competitors may possess or obtain patent protection or other intellectual property rights that prevent, limit or otherwise adversely affect our ability to develop or exploit our products. Limited manufacturing experience and capacity. Ampligen is currently produced only in limited quantities for use in our clinical trials and we are dependent upon certain third party suppliers for key 17 components of our products. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a material adverse affect on us. Also, to be successful, our products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. To the extent we are involved in the production process, our current facilities are not necessarily adequate for the production of our proposed products for large-scale commercialization, and we currently do not have adequate personnel in house to conduct commercial-scale manufacturing. We intend to utilize third-party facilities if and when the need arises or, if we are unable to do so, to build or acquire commercial-scale manufacturing facilities. We will need to comply with regulatory requirements for such facilities, including those of the FDA and HPB pertaining to Good Manufacturing Practices ("GMP") regulations. There can be no assurance that such facilities can be used, built, or acquired on commercially acceptable terms, that such facilities, if used, built, or acquired, will be adequate for our long-term needs. We may be subject to product liability claims from the use of Ampligen or other of our products which could negatively affect our future operations. We face an inherent business risk of exposure to product liability claims in the event that the use of Ampligen or other of our products results in adverse effects. This liability might result from claims made directly by patients, hospitals, clinics or other consumers, or by pharmaceutical companies or others manufacturing these products on our behalf. Our future operations may be negatively effected from the litigation costs, settlement expenses and lost product sales inherent to these claims. While we will continue to attempt to take appropriate precautions, we cannot assure that we will avoid significant product liability exposure. Although we currently maintain worldwide product liability insurance coverage, there can be no assurance that this insurance will provide adequate coverage against product liability claims. While no product liability claims are pending or threatened against us to date, a successful product liability claim against us in excess of our insurance coverage could have a negative effect on our business and financial condition. Members of our Scientific Advisory Board may have conflicting interests and may disclose data and technical know how to our competitors. All of our Scientific Advisory Board members are employed by other entities, which may include our competitors. Although we require each of our Scientific Advisory Board members to sign a non-disclosure and non-competition agreement with respect to the data and information that he or she receives from us, we cannot assure you that members will abide by them. If a member were to reveal this information to outside sources, accidentally or otherwise, our operations could be negatively effected. Since our business depends in large part on our ability to keep our technical expertise confidential, any revelation of this information to a competitor or 18 other source could have an adverse effect on our operations. There is no guarantee that our trade secrets will not be disclosed or known by our competitors. To protect our rights, we require certain employees and consultants to enter into confidentiality agreements with us. There can be no assurance that these agreements will not be breached, that we would have adequate and enforceable remedies for any breach, or that any trade secrets of ours will not otherwise become known or be independently developed by competitors. The loss of Dr. Carter's services could hurt our chances for success. Our success is dependent on the continued efforts of Dr. William A. Carter because of his position as a pioneer in the field of nucleic acid drugs, his being the co-inventor of Ampligen, and his knowledge of the company's overall activities, including patents, clinical trials, corporate relationships and relationships with governmental agencies which regulate our business. The loss of Dr. Carter's services could have a material adverse effect on our operations and chances for success. While we have an employment agreement with Dr. William A. Carter, and have secured key man life insurance in the amount of $2 million on the life of Dr. Carter, the loss of Dr. Carter or other personnel, or the failure to recruit additional personnel as needed could have a materially adverse effect on our ability to achieve our objectives. Uncertainty of health care reimbursement and potential legislation. Our ability to successfully commercialize our products will depend, in part, on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and from time to time legislation is proposed, which, if adopted, could further restrict the prices charged by and/or amounts reimbursable to manufacturers of pharmaceutical products. We cannot predict what, if any, legislation will ultimately be adopted or the impact of such legislation on us. There can be no assurance that third party insurance companies will allow us to charge and receive payments for products sufficient to realize an appropriate return on our investment in product development. Hazardous materials. Our business involves the controlled use of hazardous materials, carcinogenic chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by applicable regulations, the 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 19 applicable regulations, we could be held liable for any damages that result, and any such liability could be significant. The company does not maintain insurance coverage against such liabilities. Litigation involving us versus Manuel Asensio and Asensio & Company,Inc. In 1998, we filed a complaint against Manuel P. Asensio, and Asensio & Company, Inc., ("Asensio"). The action includes claims of defamation, disparagement, tortious interference with existing and prospective business relations and conspiracy, arising out of Asensio's false and defamatory statements in connection with a deceptive and unlawful short-selling scheme between August, 1998, and the present. In 1999, Asensio filed an answer and counterclaim alleging that in response to Asensio's strong sell recommendation and other press releases, the Company made defamatory statements about Asensio. We have denied the allegations and are vigorously defending against the counterclaim. In May 2001, Asensio moved for a summary judgement on all counts of our complaint. The motion was denied. A trial date has been set for January 2002 in the Pennsylvania State Court. In May 2000, we received notice of a claim by Asensio in the Supreme Court of the State of New York against us, our Chairman and Chief Executive Officer, William A. Carter, and our prior auditors in which they allege that we defamed them in oral and written communications made in March 2000 ("the first New York action"). In June 2000, we received notice of a second claim in New York ("the second New York action"). The allegations of Asensio in the New York actions were similar in substance to the alleged defamation which is the subject of the counterclaims filed by them in the action presently pending in Pennsylvania State Court. In March 2001, Dr. Carter's motion to dismiss him from the first New York action was granted. In July 2001, the company moved to dismiss the first New York action based on the prior pendency of the action of the Pennsylvania State Court, and in August 2001, Asensio cross-moved for summary judgment. Both motions are presently pending. In the meantime, in June 2001, Asensio voluntarily withdrew the second New York action. We intend to vigorously defend against the claims and/or counterclaims asserted in the remaining First New York action. We intend to vigorously defend against the claims asserted in the counterclaim in the Pennsylvania State Court action and the remaining First New York action. However, this litigation could subject us to significant liability for damages and, even if it does not subject us to liability for damage, it could be time-consuming and expensive to defend, and could result in the diversion of management time and attention. (Refer to Part II, item 1: Legal Proceedings of this report for more details.) 20 Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward- looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business of the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. RESULTS OF OPERATIONS Three months ended September 30, 2001 versus Three months ended September 30, 2000 Our net loss for the three months ended September 30, 2001 was $2,145,000 or approximately $79,000 more than recorded for the same period in 2000. While Overall costs and expenses were lower by some $151,000, income from our cost recovery treatment programs and interest income was also down by $225,000. Revenues from Cost Recovery Clinical Treatment programs ("cost recovery")in the U.S. and Europe were down $149,000. Lower revenues from the U.S. cost recovery program account for 74% of the total variance. U.S. cost recovery efforts have been reduced during the year 2001 due to our focus and efforts to recruit and enroll ME/CFS patients for the double blind, placebo controlled phase III ME/CFS clinical trial. The enrollment of patients in this trial is nearing completion. In addition, interest income was down $76,000 when compared to the same three months in 2000. This shortfall can be contributed to lower interest rates earned on short term money market securities and a lower amount of funds available to invest. Overall Research and Development costs in the three months ended September 30, 2001 were lower by $275,000 compared to the same period in 2000. These lower costs basically reflect the effect of four factors. First of all, the costs associated with the Cost Recovery clinical treatment program revenues were down by $114,000. Secondly, our ME/CFS Phase III clinical trial cost was lower as the clinical trial nears completion. The double blind segment is the most costly portion of the clinical trial. Thirdly, research and development costs were down $330,000 due to a reduction in scientific research preformed in conjunction with the ME/CFS and Hepatitis projects. The three month period ended September 30, 2000 includes a one-time funding in the amount of $250,000 to Chronix Biomedical for gene re-arrangement research. The fourth factor consist of an increase in manufacturing cost of $206,000 primarly due to the purchase of raw material (polymers) needed to produce Ampligen and build-up inventory. All materials and cost of producing Ampligen is expensed as incurred. 21 General and Administrative expenses were $673,000 in the three months ended September 30, 2001 compared to $549,000 for the same period in 2000. The net increase in expenses of $124,000 basically reflects $38,000 increase in insurance premiums and other administrative expenses and a $78,000 (non-cash) increase stock in compensation expense. There was no stock compensation expense in the same period in 2000. Stock Compensation expense is a non-cash expense that reflects the fair value of common stock or warrants granted to non- employees of the Company. Other noteable variances include an increase in public relations expenses of $84,000 which was basically offset by a decrease in legal and audit fees in the amount of $97,000. In the three months ended September 30, 2001 we engaged the services of a new public relations firm and revamped our public relations program. The decrease in legal and audit fees was due to lower legal costs primarily related to the Asensio Litigation. Nine months ended September 30, 2001 versus nine months ended September 30, 2000 Our net loss (including non-cash) was approximately $6,968,000 for the nine months ended September 30, 2001. This reflects an increase in losses in the amount of $870,000 compared to the same period in 2000. Elements contributing to the increase in losses include lower cost recovery treatment ("cost recovery") revenues totaling $347,000, lower interest income totaling $208,000 and, higher stock (non-cash) compensation (non-cash) expenses of $349,000. Lower Research & Development costs of $121,000 provided a degree of offset. ME/CFS Cost Recovery Treatment Revenues were $304,000 in the nine months ended September 30, 2001 compared to $651,000 in the same period in 2000. This decline in revenue is reflected in the U.S. as well in Europe. U.S. revenues were down primarily due to our focus on recruiting ME/CFS patients for the Phase III ME/CFS clinical trial. Efforts to accelerate the enrollment of ME/CFS patients in the phase III clinical trial decreased the enrollment of patients in the cost recovery treatment program. Enrollment in the Belgium program was reduced in order to permit the clinical investigator to compile and review the clinical data collected in the treatment of approximately 150 patients over the past several years. These data, when finalized, will be used to supplement the data collected from the ongoing Phase III ME/CFS and HIV clinical trials in the U.S. when we eventually submit an application for drug approval in the United States and Europe. Our European personnel are working to establish ME/CFS and HIV cost recovery treatment and HIV treatment programs in other European countries. Presently we also have patients enrolled in similar programs in the U.K. and Austria. Research & Development costs were $4,765,000 in the nine months ended September 30, 2001 versus $4,886,000 for the same period in 2000. This decrease of $121,000 consists of several factors. Costs related to Cost Recovery Clinical Treatment program revenues were down $245,000 due to lower revenues in 2001. Research, 22 clinical and manufacturing costs were up $124,000 on a year to date basis. This increase basically reflects $319,000 in additional raw materials purchased to build product inventory in 2001 somewhat offset by lower R&D costs. The nine months ended September 30, 2000 included a one time expense of $250,000 for R&D expense relating to our alliance with Chronic Biomedical. Clinical trial expenses were down on a year to date basis primarily due to lower costs associated with the Phase III ME/CFS clinical trials, as a greater proportion of patients complete the clinical trial. General and Administrative Expenses before charges for stock compensation, were $2,006,000 in the nine months ended September 30, 2001 compared to expense of $1,949,000 for the same period in 2000. While, these expenses basically remained flat compared to the nine month period ended September 30, 2000, there were variances in some expenses. Professional fees were up $89,000. Insurance premiums increased some $53,000 due to higher D&O insurance premiums. Other expenses including travel, telephone, transfer agent fees and temporary help costs were down by approximately $71,000. Stock Compensation (non-cash) expense of $673,000 in the nine months ended September 30, 2001 is $349,000 higher than recorded for the same period in 2000. The 2001 expense includes a cost of $262,000 due to the extension of the expiration dates of certain warrants granted to officers and directors. Interest income of $248,000 in the nine months end September 30, 2001 was down by $208,000 due to lower interest rates earned on money market instruments as well as lower funds available to invest over the nine month period. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and short term investments were $4,095,000 as of September 30, 2001 compared to $8,378,000 million at December 31, 2000 reflecting a net decrease of cash in the amount of $4,283,000 in the first nine months of 2001. Operating activities consumed $5,737,000 million reflecting major cash outlays in support of the ME/CFS phase III clinical trial as well as the Phase IIb HIV trials now underway. In addition we have heavily invested in expanding our capacity to manufacture liquid Ampligen doses through outside suppliers as well as expended funds to increase our supply of Ampligen. These expenditures were made to assure an adequate and stable supply of Ampligen to support the ongoing clinical trials as well as provide the capacity to manufacture Ampligen in commercial quantities. Some portion of these costs are expected to be recovered under the expanded access, cost- recovery, programs authorized by FDA and various regulatory bodies in other countries. Overall, clinical trial costs should decline somewhat over the next six months as the phase III ME/CFS clinical trial winds down. The costs of the Phase IIb HIV trials 23 should increase as patients are recruited. However the timing and costs of the HIV trials should produce lower overall clinical costs due to certain inherent effeciancies of running the two clinical trial in parallel. Other expenditure include $519,000 for the company's stock buy-back program and some $100,000 invested in new patent applications and renewals. In the first nine months of 2001, we acquired 109,660 shares of our common stock on the open market. These treasury shares will be used in connection with contract negotiations with certain suppliers and strategic alliances. Proceeds from the exercise of warrants totaled $2,050,000 in the first nine months of 2001 which is significantly lower than experienced in the first nine months of 2000. The decline in warrants being exercised is primarily due to the depressed market price of biotech stocks including ours. In the nine months ended September 30, 2001, our stock price traded in a range of $4.03 to $7.00. As of September 30, 2001, we had 3,915,708 outstanding publicly traded Class A Redeemable Warrants exercisable at $4.00 per share and 7,046,010 non-public warrants outstanding that are exercisable at an weighted average price of $4.57. The shares of common stock underlying 4,269,000 shares of the oustanding non-public warrants have been registered for sale under the Securities Act of 1933, as amended, by the holders thereof. For the past several years a major source of operating funds came from warrantholders exercising warrants. We expect warrantholders to continue exercising both the public and non-public warrants from time to time depending on the trading price of our common stock. Our publicly traded Class A Redeemable warrants were to expire as of November 2, 2001, however, due to the disruptive events of September 11, 2001 and related logistical and communications difficulties, the expiration date for exercising the warrants was extended to November 21, 2001. Trading for the warrants on the American Stock Exchange ceased on November 2, 2001. Between October 1, 2001 and November 9, 2001 we have received some $5.7 million from warrantholders exercising about 1,425,000 Class A Redeemable warrants. Our current cash (including the warrants exercised), cash equivalents and anticipated income should fund operations for the next 15 months or more. In the event that additional funding is needed to support our operations, we are confident that such funding will be made available by one or more of the following: 1) a private or public placement of equity, 2) funds derived from the granting of licensing agreements or 3) proceeds from warrantholders exercising warrants. Any additional equity funding may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders. We may also need additional funding earlier than anticipated, and our cash requirements, in general, may vary materially from those now planned, for reasons including, but not limited to, changes in our research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of our clinical trials for which cost recovery from participants has been approved. 24 New Accounting Pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and NO. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's investment in CIMM was accounted for using the equity method. As of September 30, 2001, the net carrying amount of goodwill included in the investment balance was $494,000. Other intangible assets are primarly patents which currently have a net value of $986,000. Amortization expense of goodwill and patents during the nine-month period ended 25 September 30, 2001 was $27,000 and $290,000 respectively. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. The Financial Accounting Standards Board has issued FASB 143, Accounting for Retirement Obligations, to account for asset retirement obligations and associated retirement costs of long-lived assets and FASB 144, Accounting for impairment or disposal of long-lived assets. The Company has not yet determined the future impact, if any, of FASB 143 and 144. ITEM 3: Quantitative and Qualitative Disclosures About Market Risk We had $4,095,000 in cash, cash equivalents and short term investments at September 30, 2001. Since September 30, 2001 we have received some $5.7 million from the exercise of warrants. To the extent that our cash and cash equivalents exceed our near term funding needs, we invest the excess cash in three to six month high quality financial instruments. The Company employs established policies and procedures to manage any risks with respect to investment exposure. Part II - OTHER INFORMATION ITEM 1: Legal Proceedings In September, 1998, we filed a multi-count complaint against Manuel P. Asensio, Asensio & Company, Inc., ("ACI") and others in the United States District Court for the Eastern District of Pennsylvania. In October 1998 and August 1999, we amended the complaint to add additional counts and to add Asensio.com, Inc. (formerly known as Asensio Holding, Inc.), the holding company of the defendant, Asensio & Company Inc., and to add a conspiracy charge against the remaining defendants and certain unnamed John Does. As amended, our complaint seeks recovery on common law theories of intentional interference with existing and prospective business relations, defamation, commercial disparagement, and conspiracy on account of defendants' short selling of our stock and the publication, by defendants Asensio and ACI, of defamatory statements regarding the Company. In April 1999, defendants Asensio and ACI answered the complaint and asserted defamation and disparagement counterclaims against us seeking damages in an unspecified amount. Defendants' counterclaims allege that we, through our officers, defamed Asensio in oral and written communications accusing Asensio and ACI of having engaged in possibly criminal behavior with respect to the short selling of our stock and the subsequent publication of various defamatory statements regarding us . In May 1999, we filed an answer, including affirmative defenses, to these counterclaims. 26 In June 2000, the United States District Court dismissed the Company's complaint and the defendants' counterclaims for lack of federal subject matter jurisdiction over the action. In July 2000, we transferred the action to the Pennsylvania State Court. In May 2001, the defendants moved for summary judgement on all counts. The motion was denied. A full trial of the action is scheduled for January, 2002. In May 2000, Asensio and ACI filed a separate action in the Supreme Court of the State of New York against our company, our Chairman and Chief Executive Officer, William A. Carter and our prior auditors ("the first New York action"). The action was commenced by Summons. In July 2000, Asensio and ACI filed a Complaint in which they alleged that the defendants defamed them in oral and written communications made in March 2000. In June 2000, Asensio, ACI and Asensio.Com, Inc. filed a second action in the Supreme Court of the State of New York ("the second New York action")seeking Declaratory Judgment that they were insulated against claims for defamation under the First Amendment. Asensio and ACI's allegations in the first New York actions are similar in substance to the alleged defamations which are the subject of the counterclaim filed by them in the action presently pending in Pennsylvania State Court. In August 2000, we filed an answer, including affirmative defenses to the first New York action, and Dr. Carter moved to dismiss the claims. In March 2001, Dr. Carter motion to dismiss was granted. In July 2001, the Company moved to dismiss the action based on the prior pendency of the Pennsylvania State Court. Plaintiffs have responded with a cross-motion for summary judgment. Both motions are presently pending. Asensio voluntarily withdrew the second New York in June 2001. We intend to vigorously defend against the counterclaim in the Pennsylvania State court action and the remaining First New York action. ITEM 2: Changes in Securities On October 2, 2001, we announced that we had advised the American Stock Exchange, the Securities and Exchange Commission and our transfer agent that the company's outstanding Class A Redeemable warrants would expire and not be exercisable after the close of business on November 2, 2001. This expiration date was originally announced in August, 2000 and re-confirmed on October 2, 2001. Subsequently, because of the disruptive events of September 11, 2001, the expiration date for exercising the warrants was extended to November 21, 2002. ITEM 3: Defaults in Senior Securities None 27 ITEM 4: Submission of Matters to a Vote of Security Holders On August 24, 2001, we held an annual meeting to adopt several resolutions by consent of the majority of our shareholder, acting pursuant to the General Corporation Law of the State of Delaware. Pursuant to the resolutions we: i) elected the following four members to our Board of Directors to serve until their respective successors are elected and qualified: William A. Carter, M.D. Richard Piani Ransom W. Etheridge William M.Mitchell All four directors term of office continued after the meeting. ii) ratified the selection by us of BDO Seidman, LLP, independent public accountants, to audit our financial statements for the year ending, December 31, 2001 The board of directors solicited proxies in connection with the adoption of these resolutions and proxies were requested from our stockholders. ITEM 5: Other Information In July 2001 we entered into an oral agreement with a health services management company to facilitate further enrollment in our HIV trials and to examine certain patients coinfected with other viruses including hepatitis C. Prior to formalization of a written agreement additionally obtained information indicated that it would not be in the Company's best interest to have these functions performed by others. Accordingly we discontinued further relationships with the health services entity and entered into relationships to have these functions performed with others in the states of Pennsylvania and Florida. 28 ITEM 6: Exhibits and Reports on Form 8K (a)Exhibits 3.1* Amended and Restated Certificate of Incorporation of the Company, as amended, along with Certificates of Designations 3.1.1** Series E Preferred Stock 3.2 By-laws of Registrant, as amended and restated 4.1* Specimen certificate representing our common stock 4.2* Form of Class A Redeemable Warrant Certificate 4.3* Form of Underwriter's Unit Option Purchase Agreement 4.4* Form of Class a Redeemable Warrant Agreement with Continental Stock and Transfer and Trust Company 10.1 Amended and Restated Employment Agreement by and between the Company and Dr. William A. Carter, dated as of December 3, 1998 10.2 Amended and Restated Engagement Agreement by and between the Company and Robert E. Peterson, dated April 1, 2001. * These exhibits were filed with the Securities and Exchange Commission ("SEC") as exhibits to the Company's Form S-1 Registration Statement (No. 33-93314) or amendments thereto and are hereby incorporated by reference. **This exhibit was filed with the SEC as Exhibit 3.1.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is hereby incorporated by reference. (b) Reports on Form 8-K None 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEMISPHERx BIOPHARMA, INC. /S/ William A. Carter --------------------------- Date: November 14, 2001 William A. Carter, M.D. Chief Executive Officer & President /S/ Robert E. Peterson -------------------------- Date: November 14, 2001 Robert E. Peterson Chief Financial Officer