AIM ImmunoTech Inc. (then Hemispherx Biopharma, Inc.) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing was submitted November 9, 2011 under the Hemispherx Biopharma name. Financial amounts below are U.S. dollars.
Business context
The company was a clinical-stage specialty pharmaceutical business focused on Ampligen, an investigational drug, and Alferon N Injection, an FDA-approved product for a limited genital-warts indication. It reported only cost-recovery revenue from Ampligen treatment programs; Alferon commercial sales had been halted since 2008 because the company lacked saleable finished inventory.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2011: $45,000; 2010: $35,000 | 2011: $123,000; 2010: $108,000 |
| Operating loss | 2011: $3.557 million; 2010: $3.692 million | 2011: $10.395 million; 2010: $11.534 million |
| Net loss | 2011: $2.740 million; 2010: $3.838 million | 2011: $5.900 million; 2010: $10.633 million |
| Net loss per share | 2011 and 2010: $0.02 | 2011: $0.04; 2010: $0.08 |
| Net cash used in operating activities | Not presented quarterly | 2011: $7.074 million; 2010: $10.070 million |
At September 30, cash and cash equivalents were $4.022 million, unrestricted marketable securities were $30.159 million, and restricted securities were $3.142 million, for total cash and marketable securities of approximately $37.323 million. Restricted securities collateralized the margin loan. Current assets were $34.219 million and current liabilities $3.603 million. The company had a $1.156 million margin-account loan and $169,000 of capital lease obligations; total liabilities were $4.962 million. Stockholders’ equity was $40.573 million.
Operating cash use improved year over year, but the 2011 period included $2.272 million received from selling New Jersey tax-loss carryforwards. Excluding that receipt, the reduction in operating cash use versus 2010 was approximately $724,000. Total cash and marketable securities declined approximately $7.064 million from December 31, 2010. Revenue was very small relative to production costs and operating expenses; the filing does not provide a meaningful positive gross margin.
Material changes and unusual items
- Nine-month net loss improved by $4.733 million, reflecting lower R&D and G&A costs, the $2.272 million tax-loss sale, and a larger noncash gain from remeasuring redeemable warrants. Third-quarter loss improvement also benefited from a warrant remeasurement gain.
- The warrant fair-value adjustment produced a $1.558 million noncash gain for the nine months of 2011, versus a $341,000 gain in 2010. The company reported a $614,000 gain for Q3 2011 versus a $584,000 loss for Q3 2010. Such valuation movements do not represent operating cash generation.
- Unrealized investment losses were $529,000 in Q3 2011; the nine-month period had a $107,000 unrealized gain. The company also recorded $258,000 of other-than-temporary impairment losses on unrestricted securities for the nine months.
- In September, management identified inaccurate prior disclosure about a $123,200 payment in 2010 to Retreat House, LLC. The filing clarified that the CEO personally owned the property through April 28, 2010, and that the entity had family and trust ownership links. Management said disclosure controls were effective at September 30 and reported no material change in internal controls during the quarter.
- The company received an $188 million judgment, plus interest, in its South African-related litigation but recorded no gain because collection prospects were uncertain. A separate placement-fee lawsuit sought up to $9.83 million plus fees and punitive damages; no loss contingency was recorded. The filing states that litigation outcomes could not be projected.
Outlook, management commentary and principal risks
- Ampligen: The FDA’s 2009 Complete Response Letter required additional clinical evidence, including a further study. The company was seeking another extension to respond and gave no assurance the FDA would grant it. It estimated an additional study could take approximately 18 months to three years and cost $7.2 million to $11.1 million for 600 patients; timing, design and cost remained uncertain.
- Alferon N Injection: The designated fill-and-finish contractor had reported FDA-identified production issues. The company was evaluating alternative contractors and estimated commercial sales would not resume until the latter part of 2012, subject to contractor qualification and FDA approval of the contractor and finished lots.
- Other programs: The Alferon LDO Phase II study was delayed while the company sought a vendor for confirmatory work. A Japanese partner, Biken, ended its Ampligen evaluation agreement after raising safety concerns; the company disputed its interpretation. The company also described early clinical and vaccine-adjuvant work, which remained investigational.
- Funding: Management warned that additional financing might be required and might not be available. Only about 31.8 million common shares were then authorized but unissued and unreserved. A proposal to increase authorized shares had not obtained the required vote at the October 2011 meeting, which was adjourned on that item.
- Other risks include continuing losses, uncertain product efficacy and regulatory approval, manufacturing and supply constraints, reliance on third parties, competition, potential dilution, and unresolved legal claims. The filing provided no profitability or revenue guidance.
Investor verification points
- Check subsequent FDA correspondence on the Ampligen CRL extension, required studies, and funding plans.
- Verify selection and qualification of an Alferon fill-and-finish contractor, FDA lot approvals, and whether the projected 2012 relaunch occurred.
- Assess cash burn excluding one-time tax-loss proceeds, the accessibility of restricted investments, and the outcome of the authorized-share vote and any financing.
- Review corrected related-party disclosures and any later control or governance findings.
- Track the South African judgment’s enforceability and collection prospects, and the outcomes and potential exposure in the Cato and MidSouth matters.
- Separate recurring operating performance from noncash warrant remeasurement gains and investment valuation changes.