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1 FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to ________
Commission File No. 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 Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
Common Stock, $.001 par value
Class A Common Stock Redeemable
Purchase Warrant
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
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.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the
best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to
this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates
at December 31, 1999 was $378,349,400. For purposes of this
calculation, it was assumed that all Common Stock is valued at the
closing price of the stock as of March 5, 2000.
The number of shares of the registrant's Common Stock outstanding
as of December 31, 1999 was 27,806,572.
DOCUMENTS INCORPORATED BY REFERENC
Registrant's definitive Proxy Statement which will be filed on or
before July 12, 2000 with the Securities and Exchange Commission in
connection with Registrant's 1999 annual meeting of stockholders is
incorporated by reference into Part III of this Report as well as
certain exhibits filed with the Registrant's Registration Statement
on Form S-1 (No. 33-93314).
2 PART I
ITEM 1. Business
General
In the course of almost three decades Hemsipherx Biopharma, Inc.
(the Company) has established a strong platform of laboratory, pre-clinical
and clinical data for the purpose of successfully
commercializing its portfolio of nucleic acid drugs for the
treatment of viral diseases, immune system dysfunction and certain
cancers. The Company's proprietary drug technology utilizes
specifically configured ribonucleic acid (RNA). The Company's lead
double-stranded RNA drug product, trademarked Ampligen , which is
administered intravenously, is in human clinical development for
various therapeutic indications. Ampligen is presently undergoing
Phase III clinical trials in the United States and Europe for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome
("ME/CFS"). Based on the results of pre-clinical studies and
clinical trials, Hemispherx believes that Ampligen may have broad-spectrum
anti-viral and anti-cancer activities. Hemispherx business
strategy is designed around seeking the required regulatory
approvals which will allow the progressive introduction of Ampligen
and other compounds based on similar mechanisms of action.
The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc., and originally served as a supplier of research
support products. The Company's business was redirected in the
early 1980's to the development of nucleic acid pharmaceutical
technology and the commercialization of RNA drugs. The Company was
reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp., in 1991 and to Hemispherx, BioPharma, Inc.,
in June 1995. The Company has three domestic subsidiaries BioPro
Corp., BioAegean Corp., and Core BioTech Corp., all of which are
incorporated in Delaware. Our foreign subsidiary, Hemispherx
BioPharm-Europe, was established in Belgium in 1998. The Company's
principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103, and its telephone
number is (215) 988-0080.
The Company holds more than 300 patents worldwide, with over 80
additional patent applications pending to provide further
proprietary protection in various international markets. The U.S.
FDA has granted the Company "Orphan Drug Status" for its nucleic
acid-derived therapeutics for CFS/ME, HIV and renal cell carcinoma
and malignant melanoma. Orphan Drug Status grants protection
against competition for a period of seven years following FDA
approval, as well as certain tax incentives. While the Company's
clinical advancements to date exceed the vast majority of
biotechnology companies (in a universe of approximately 1,300
companies) no assurance can be given that any of these
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programs will lead inevitably to major commercial success and/or
further regulatory advances.
The Company outsources significant components of its research and
development, manufacturing, marketing and distribution while
maintaining tight control over the entire process through 'system
management'. A portion of the Company's research and development
is provided under contract with scientists and technicians who are
not employed by the Company but who are employed by academic
institutions. The Company also draws upon the expertise of outside,
part-time consultants from time to time.
The efficacy and safety of Ampligen is currently being examined for
the treatment of ME/CFS in a confirmatory Phase III multicenter,
placebo-controlled, randomized, double-blind clinical trial in the
United States. The Company plans to enroll up to 230 ME/CFS
patients in this clinical trial. Other ME/CFS clinical efforts
include the Cost Recovery Treatment Programs underway in the United
States, Canada, Belgium and Austria. In late 1999, the Company
announced the roll-out of a new pan-European, expanded access cost
recovery treatment program for severely ill ME/CFS patients. This
program was implemented in response to growing requests from
physicians and patients. The Company will work with certain
physicians and medical centers seeking regulatory approval to
administer Ampligen to severely ill patients.
In addition to the ME/CFS clinical effort, the Company is ramping
up its focus on HIV and the complications of AIDS. A potential
effect of Ampligen may lie in treating HIV patients, especially
those with a multidrug resistant virus. The Company is developing
clinical programs with Anderson Clinical Research designed to
address the growing problem of multi-drug resistance found in
battling the AIDS epidemic in the United States and the rest of the
world. Anderson Clinical Research is based in Pittsburgh and is a
renowned clinical research organization that specializes in
sponsoring clinical trials in AIDS and related immunological
disorders. The clinical programs being developed are a direct
outgrowth of data obtained in comprehensive ex vivo testing
sponsored by the Company through a non-restricted research grant at
the University of California at Irvine as well as a research
contract at the California Institute of Molecular Medicine, based
on leadership provided by an expert in HIV from Vanderbilt
University School of Medicine in Nashville. The focus of this
effort is to evaluate the potential of RNA technology to be used in
conjunction with approved antiviral "cocktails" to overcome the
emergence of multi-drug resistant HIV strains. Because of the
complexity of existing multiday regimens for treating HIV, the
Company may elect initially to treat individual patients brought to
its attention (on an emergency basis) by specific physicians rather
than to implement a standard protocol
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involving a group of patients authorized by regulatory authorities.
Other programs will be established to determine the potential of RNA
technology in treating other chronic viruses including hepatitis
B and C.
The development of the Company's products has required and will
continue to require the commitment of substantial resources to
complete the time-consuming research, preclinical development, and
clinical trials necessary to bring pharmaceutical products to market
and establish commercial production and marketing capabilities.
Accordingly, the Company may need to raise additional funds through
additional equity or debt financing, collaborative arrangements with
corporate partners, off balance sheet 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 the Company will be
successful in obtaining regulatory approval.
ME/CFS
Chronic Fatigue Syndrome (ME/CFS), also known as Chronic Fatigue and
Immune Dysfunctional Syndrome (CFIDS) or, in Europe, Myalgic
Encephalomyelitis (ME) is a debilitating disease that has been
difficult to diagnose and for which, at present, there is no cure.
People suffering from this illness experience amongst other, a
constant tiredness, recurring dull headaches, joint and muscle
aches, a feeling of feverishness and chills without fever,
depression, difficulty in concentrating on tasks, and tender lymph
glands. Central nervous symptoms include memory loss and dementia.
In October, 1998, the Company initiated, with the U.S. Food and Drug
Administration ("FDA") authorization, a confirmatory, double-blind,
placebo-controlled clinical study with Poly I:Poly C12U (Ampligen )
in patients with severely debilitating Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS). The objective
of this confirmatory Phase III clinical study is to evaluate the
safety and efficacy of Ampligen as a treatment for ME/CFS.
As of February 29, 2000, ten clinical investigators, at various
medical facilities throughout the U.S., were recruiting patients for
this clinical study. These clinical investigators have recruited
and enrolled more than 60 per cent of the required 230 patients
needed to complete this clinical study. The Company expects to
engage the services of several additional clinical investigators
to assist in the recruitment of the additional patients needed to
participate in this study.
In March, 1999 the U.S. Food and Drug Administration authorized the
Company to expand it's ME/CFS Cost Recovery Treatment Program to
provide therapy to 100
5
active patients. Under this clinical
program, the enrolled patients may pay the Company for the cost of
the Ampligen doses infused. This usually totals approximately
$7,200 for a 24 week treatment program. Approximately 82 per cent
of the patients who enter the program opt to extend their therapy
by an additional 24 weeks with the consent of their health care
providers. In the twelve months ending December 31, 1999, the
Company has received $391,681 in reimbursement for Ampligen used
under this plan from the U.S. component of ME/CFS treatment
protocols. Overall income from these programs was $678,248 for the
twelve month period, which includes Europe and Canada.
The Company has established strategic relationships with three other
companies to provide clinical/pharmacy support services and to
facilitate the conduct of its clinical studies according to Good
Clinical Practice ("GCP") standards. Two entities, Gentiva Health
Services (formerly Olsten Health Services) and Clinical Studies
Management Group provide clinical monitors who verify the accuracy
of the data collected by the clinical investigators for ultimate
analysis by the Company. Additionally, a third entity consisting
primarily of exercise physiologists, WorkWell, a company comprised
of professional exercise physiologists, provides exercise
physiologists to conduct standardized exercise tolerance and oxygen
consumption tests at the various clinical facilities across the
United States. The Company believes that it has in place various
corporate relationships and programs to insure the quality of data
collection to a high international regulatory standard.
The ME/CFS Cost Recovery Treatment Program in Belgium was started
in 1994 with the approval of the Belgium Regulatory authorities.
Since its inception, over 120 patients have enrolled in this
program. Clinical data being collected in the treatment of these
ME/CFS patients will be of support within the European Medical
Evaluation Agency ("EMEA") Drug Approval Application and in other
regulatory jurisdictions. This program is being expanded to several
other affiliated hospitals in the Brussels area and clinical experts
in this disease category have been identified in other European
countries to establish similar clinical research/treatment centers
for ME/CFS. A similar program in Austria is undergoing expansion.
Recently, the physicians involved in this program were brought
together for a three day conference to share clinical results and
to plan further clinical collaborations in the U.S., Canada and
Europe.
ME/CFS was also given official recognition by the U.S. Social
Security Administration, rendering ME/CFS patient potentially
eligible for disability benefits and heightening awareness of this
debilitating disease in the medical community. A scientific article
by independent academicians on the accurate laboratory diagnosis of
CFS was published in February, 2000 in a peer-reviewed
6
journal. The U.S. Centers for Disease Control (Atlanta, GA)
reconfirmed its research commitment to CFS following an audit
by the U.S. Government Accounting Office (GAO) which was announced
approximately July 28, 1999.
The Company has entered into a research collaboration with RED
Laboratories, N.V. (`RED'), a Belgium company dedicated to the
development and commercialization of ME/CFS diagnostics. RED
reported significant progress in developing a diagnostic test
(designated REDD) for ME/CFS. The testing platform is based on the
measurement of an abnormal form of protein RNase L, an antiviral
enzyme found in the white blood cells of CFS/ME patients. This
abnormal enzyme was first discovered in 1996 by researchers at
Temple University who have been actively collaborated with The
Company's scientists for a number of years. It is believed that the
new RED diagnostic test may identify up to 80-90 per cent of CFS/ME
patients by recognizing a defect caused by the disease. The test
may enable doctors to more quickly identify CFS/ME patients and
start immediate treatment to help facilitate a positive medical
outcome for the patient as well as a cost-effective solution for the
health-care provider. Hemispherx has independently filed patents
on certain aspects of the diagnostic technology in the U.S. and
abroad.
Also, preclinical collaborative studies are being conducted on Gulf
War Syndrome. Patients with this illness appear to have certain
symptoms similar to patients with ME/CFS.
HIV
While the Company is currently concentrating on the use of Ampligen
as a treatment for ME/CFS, recent developments in the healthcare
community with respect to future care and treatment of HIV patients
is now prompting the Company to reexamine and consider the
acceleration of developing RNA technologies for the treatment of
patients with HIV.
Today, patients infected with HIV receive a number of different
combinations of anti-retroviral compounds (so called "Cocktails")
that target the essential viral enzymes, including reverse
transcriptase and protease. However, it appears that after some
period of time, the HIV virus may become resistant to these
antiviral drugs and that drug resistance profile is a critical
obstacle to the long-term efficacy of present 'cocktail' therapies
for HIV.
Most recently, HIV strains which are resistant to essentially all
of the currently available anti-retroviral drugs are now being
increasingly reported in patients in the U.S. who have received
highly active anti-retroviral therapy,
7
termed "HAART." Many HIV patients who receive HAART (including
a protease inhibitor) may encounter virologic failure within one year.
According to independent sources, of an estimated 100,000 new patients
in the U.S.A. initiating HAART last year, there were approximately
150,000 "treatment switches," evidencing significant problems with the
regimens. Moreover, the presence of latently infected, resting
immune cells termed CD4+ T cells carrying replication-competent HIV
has been demonstrated in patients receiving HAART.
Ampligen may have certain potential, as an adjunct to HAART to
restore certain functional components of the immune process which
becomes deficient in HIV disease. Second, Ampligen may have
potential to mitigate the deterioration in CD4 count when patients
are failing HAART therapy. Third, Ampligen may have potential to
assist HAART therapy because of its apparent synergistic activity
with AZT and possibly other cocktail components (these studies are
underway). These presumptive benefits are being evaluated by the
Company in either ongoing ex vivo or in proposed in vivo clinical
programs. The molecular basis of the putative drug synergism has
not yet been established at the clinical level and will require
clinical studies which have not been initiated.
In conjunction with AZT, Ampligen infusion therapy was historically
well tolerated in the initial clinical tests, some of which has been
published in peer reviewed journals. Thus, overall safety
assessments supported a reasonable safety profile of this drug
combination consisting of an antiretroviral agent (AZT) utilized in
conjunction with a specific dsRNA (Ampligen ). Studies are now
being considered to combine Ampligen with other reverse
transcriptase inhibitors of HIV as well as protease inhibitors of
HIV. Ex vivo tests are presently being conducted at various
academic and industrial laboratories around the U.S.A. via research
agreements and corporate partnerships recently initiated by the
Company.
The Company is working with Anderson Clinical Research to develop
immunologically based Clinical Programs that are designed to address
this growing problem of multi-drug resistance found in battling
AIDS. These clinical programs are an outgrowth of comprehensive ex
vivo testing recently sponsored by the Company which examined the
relative antiviral strengths of fourteen FDA approved antivirals.
The results of these tests were presented in part at the IBT AIDS
meetings in Boston, MA (December, 1999) and will be presented in
full at the upcoming 13th Annual International Antiviral Conference
in Baltimore, MD in April 2000. These studies were funded in part
by unrestricted grants from the Company.
Anderson Clinical Research is a recognized clinical research
organization that specializes in sponsoring clinical trials in AIDS
and related immunological disorders. This experimental approach may
represent one of the first times that
8
immunomodulatory drugs are being overlaid in a systematic manner on
the approved antiviral "Cocktails" in an effort to overcome the growth
of emerging drug resistant HIV strains. No assurance can be given that
the outcome of these clinical studies will be similar to the ex vivo
studies or dates upon which these studies will receive regulatory
authorization to commence.
Manufacturing
The Company outsources the manufacturing of Ampligen to certain
contractor facilities in the United States and South Africa while
maintaining full quality control and supervision of the process.
Nucleic Acid polymers constitute the raw materials used in the
production of Ampligen. The Company acquires its raw materials from
Ribotech, Ltd., a subsidiary of Bioclones Proprietary, Ltd., and
Pharmacia Biotech, a former division of Pharmacia Upjohn which holds
a minority equity interest in the Company. Bioclones Proprietary,
Ltd. is a strategic partner with the Company that operates Ribotech,
Ltd. in South Africa. Two manufacturers in the United States are
utilized to process the raw materials and produce clinical grade
Ampligen.
Until recently, the Company has distributed Ampligen in the form of
a freeze-dried powder to be formulated by pharmacists at the site
of use. The Company has perfected a production process to produce
ready to use liquid Ampligen in a dosage form which will mainly be
used upon commercial approval of Ampligen. The Company has engaged
the services of Schering-Plough Products to mass produce ready-to-use
Ampligen doses. Schering-Plough has completed several pilot
runs which meets all required product specifications. Progressively
larger manufacturing runs are planned in the first half of 2000.
After appropriate quality assurance testing, the product from these
runs will be used for clinical purposes.
Bioclones (PTY) Ltd. has also successfully completed a series of
production runs for liquid Ampligen doses. This was done at
Ribotech's facility in South Africa that has inspection approval by
both the Food and Drug Administration of the United States and the
Medicine Control Authority of the United Kingdom. Bioclones (PTY)
Ltd. headquartered in South Africa and is the majority owner in
Ribotech, Ltd. (the Company owns 24.9%) which produces most of the
polymers used in manufacturing Ampligen. The licensing agreement
with Bioclones presently includes South Africa, South America,
Ireland, New Zealand and the United Kingdom. Bioclones has recently
initiated limited clinical testing in Great Britain.
9
European Operations
In 1998, the Company formed a wholly-owned European subsidiary
domiciled in Belgium under the name of Hemispherx Biopharma Europe.
This entity was created to facilitate the European ME/CFS Cost
Recovery Treatment programs as well as conduct ME/CFS clinical
trials in connection with eventually obtaining European approval by
the European Medical Evaluation Agency ("EMEA").
In response to growing requests from physicians and ME/CFS patients
in Europe, the Company is increasing its European Operations to
expand its cost recovery treatment programs into additional European
countries. Presently, Ampligen is available to certain ME/CFS
patients in Belgium and Austria.
The Company plans to establish a network of clinical centers with
experience in evaluating ME/CFS patients. These centers, termed
Fatigue Approved Clinical Treatment Centers (FACT), will be
developed as centers of medical excellence combining the state of
art diagnostic techniques, as well as, well-developed treatment
expertise in treating ME/CFS. The Company believes that
establishment of FACT may assist in obtaining regulatory approval
for the Cost Recovery Treatment Program in the other European
countries.
In December, 1998, the Company filed an initial application with the
(EMEA) for authorization to use Ampligen in the treatment of ME/CFS
in the European Union. The Company submitted extensive data and
analysis in support of the application. The review process by EMEA
has produced ongoing dialogue. The Company has sought an
acceleration of the overall process by requesting certain "special
circumstances" provisions which are being developed by the European
Parliament to accelerate drug availability for certain classes of
severe diseases without adequate treatment. There are no assurances
that the EMEA will accept the "special circumstances" provision to
accelerate their review and approval and no assurances that
commercial approval will be granted.
Hemispherx Biopharma Europe is developing an organization and
infrastructure to expand access to Ampligen while under clinical
development. Initial efforts include recruiting staff to establish
distribution and marketing processes with the immediate focus on
setting up Expanded Access Cost Recovery Treatment Programs of
ME/CFS patients in France, Italy, Spain and Germany. If successful,
this program will allow ME/CFS patients in those countries to have
access to Ampligen prior to the completion of the full commercial
registration process. During this time, the Company would also
realize enhanced revenues from its expanded access programs. Also
this program will allow the Company to have a basic marketing and
distribution system in place.
10
The Company recently acquired 3 per cent ownership in a Belgium
company, R.E.D. Laboratories, which developed a diagnostic test
designed to detect ME/CFS in patients. The R.E.D. diagnostic test
is in the process of being evaluated in the clinical setting. The
significance of this development is that the test may facilitate the
identification of a subset of ME/CFS sufferers who may be treated
with Ampligen. It is believed that introduction of such a test
might facilitate the regulatory approval process for the use of
Ampligen in treating ME/CFS, as well as identify suitable candidates
for therapy earlier in the disease process. R.E.D. has indicated
it may publish the results of its testing as early as July 2000.
The Company recently presented a comprehensive clinical overview of
its ME/CFS treatment program at "Fatigue 2000", an international
research conference held in London. The Company and its
collaborators have developed a report on the potential
pharmacoeconomics of using Ampligen to treat ME/CFS patients. This
data will eventually be submitted to various regulatory and drug
reimbursement authorities in certain countries making up the
European Union.
In addition, progress was made towards the development of inventory
control and to expand quality assurance facilities in the European
Union. The Company is seeking to identify and/or implement certain
quality control processes, packaging and storage capacity as well
as identifying new distribution channels in Europe.
Pharmacoeconomics
EPI-Q, an independent company based in Indianapolis, IN, conducts
in depth pharmacoeconomic studies, released the results of their
evaluation of the potential economic benefits of Ampligen therapy
versus existing conventional treatment. Their analysis found a
decrease in the number of doses of other medications used and
inpatient hospital treatment days when Ampligen was used in the
treatment of severe ME/CFS patients. Their results were presented
at the Second World Congress on CFS/ME held in Brussels on September
9-12, 1999.
The results of this analysis suggests a significant decrease in the
number of doses of so called concomitant medications (required to
alleviate ME/CFS symptoms) between the treatment and control groups.
The patients receiving Ampligen, the Company's lead compound, also
demonstrated the need for fewer inpatient hospital treatment days
during the 24 weeks study period. According to EPI-Q this effect
would translate into an approximate annualized decrease in hospital
charges alone of $5,806. According to the EPI-Q study, the mean
annualized healthcare charges for the treatment group were $2,097
versus $8,606 for the placebo group. No assurances can be given
that the results of this
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pharmacoeconomic study, or any corollary results will result in
reimbursement by healthcare insurance
carriers.
An object of this study was to document the potential
pharmacoeconomic impact of using Ampligen in the treatment of
ME/CFS. This disease frequently leads to persistent disability and
requires frequent intervention by healthcare groups, as well as long
term outpatient treatment of pain and central nervous system
symptoms. Currently, the care of these patients leads to a
significant financial burden to both patients and payers as well as
society in general. Studies by various other health authorities
have placed the potential overall burden of untreated ME/CFS on
society to be in the billions of dollars.
Financing
The development of the Company's products has required and will
continue to 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 and to establish commercial-sale production and marketing
capabilities. During the Company's last three fiscal years, the
Company has spent approximately $12,475,031 in research and
development, of which $4,737,058 was expended in the year ended
December 31, 1999.
At the present time, the Company is funding its European subsidiary
from the Company's cash flows. The funding needs of the European
subsidiary could be substantial over the next few years. To address
the funds needed, the Company has engaged an investment banking firm
in Europe to evaluate the prospect of privately placing 20% of the
European subsidiary's equity with outside investors to fund European
operations. This method of acquiring additional funds may not be
needed as investors holding the Class A Redeemable Warrants
(AMEX:HEBws) are exercising their holdings thereby improving the
Company's cash flow and cash position.
Hemispherx Biopharma Europe has an exclusive license on all the
technology and support from the Company concerning Ampligen for the
use of ME/CFS and other applications for all countries of the
European Union (excluding the UK wherein Bioclones has a marketing
license) and Norway, Switzerland, Hungry, Poland, Czechoslovakia,
Russia, Ukraine, Romania, Bulgaria, Slovakia, Turkey, Iceland and
Liechtenstein. There is also an agreement between Hemispherx U.S.
and Hemispherx Europe to ensure that the commercialization of future
technologies can take place under conditions which would properly
incentivize Hemispherx Europe.
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As of December 31, 1999, the Company had $8,549,389 in cash and
short term investments. Based on its current operating plan, the
Company expects that anticipated receipt of revenues from the cost
recovery treatment protocols and interest income on unused funds
will be sufficient to meet the Company's operating requirements well
into 2001. In addition, the Company may receive proceeds in the
form of equity from the exercise of shareholder warrants. In 1999,
the Company received $1,923,473 in equity from shareholders
exercising warrants. The amount of additional funding required, if
any, will depend on the timing of regulatory approval and
commercialization of Ampligen.
Accordingly, the Company may raise substantial additional funds
through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing
or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin
commercializing its products. If adequate funds are not available
from operations and if the Company is not able to secure additional
sources of financing on acceptable terms, the Company's business
would be materially adversely affected.
Research and Development/Collaborative Agreements
The Company has formed a strategic alliance with Bioclones
Proprietary for manufacturing and international market development
in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen and
Oragen . Bioclones is to pursue regulatory approval in the areas
of its franchise and is required to conduct Hepatitis clinical
trials, based on international GMP and GLP standards.
Bioclones has been given the first right to refusal, subject to
pricing, to manufacture at least one-third of the worldwide sales
requirement of Ampligen and other nucleic acid-derived drugs.
Pursuant to this arrangement, the Company received access to
worldwide markets and commercial-scale manufacturing resources, as
well as a $3 million cash payment from Bioclones, a 24.9% ownership
in a company set up by Bioclones to develop and manufacture RNA
drugs, and royalties of 8% on Bioclones nucleic acid-derived drug
sales in the licensed territories. The Company regularly conducts
quality control audits of the facility.
In the United States, the Company has entered into a strategic
alliance with Gentiva Health Services (formerly known as Olsten
Health Care Services) to develop certain marketing and distribution
capacity for Ampligen to patients suffering from ME/CFS, both in the
cost recovery treatment program as well as the
13
home infusion market upon commercialization. Gentiva is one of the
nation's largest home health care companies with over 600 offices and
several hundred thousand employees nationwide. Pursuant to the
agreement, Gentiva will be responsible for marketing, distribution,
billing and collecting. Through this arrangement, Hemispherx mitigates
the necessity of incurring significant up-front marketing and
distribution costs. There can be no assurances that this alliance
will develop a significant commercial position in any of its
targeted chronic disease markets.
The Company acquired a series of patents on Oragen , potentially an
oral broad spectrum antiviral, through a licensing agreement with
Temple University. The Company was granted an exclusive worldwide
license from Temple for the Oragen products. Pursuant to the
arrangement, the Company is obligated to pay royalties of 2% to 4%
on sales of Oragen , depending on how much technological assistance
is required of Temple. The Company currently pays minimum royalties
of $30,000 per year to Temple. These compounds have been evaluated
in various academic and government laboratories.
In December, 1999, the Company entered into an agreement with
Biovail Corporation International ("Biovail"). Biovail is an
international full service pharmaceutical company engaged in the
formulation, clinical testing, registration and manufacture of drug
products utilizing advanced drug delivery systems. Biovail is
headquartered in Toronto, Canada. The agreement grants Biovail the
exclusive distributorship of the Company's product in the Canadian
territories subject to certain terms and conditions. In return,
Biovail agrees to conduct certain pre-marketing clinical studies and
market development programs, including without limitation, expansion
of the Emergency Drug Release Program in Canada with respect to the
Company's products. In addition, Biovail agrees to work with the
Company in preparing and filing of a New Drug Submission with
Canadian Regulatory Authorities. Biovail invested several million
dollars in Hemispherx equity at prices above the then current market
price and agreed to make further payments based on reaching certain
regulatory milestones. The Agreement requires Biovail to penetrate
certain market segments at specific rates in order to maintain
market exclusivity.
Competition
There are several publicly held companies that place emphasis on
nucleic acid technology. Some are outlined below from publicly
available documents filed with the Securities and Exchange
Commission.
Gilead Sciences, Inc. (Foster City, California; GILD/NASDAQ). Gilead is
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developing nucleotide as well as other innovative antiviral
technologies and is pursuing pre-clinical and clinical development
of a number of therapeutic product candidates for treating certain
viral diseases including, without limitation, cytomegalovirus
retinitis, HIV and Hepatitis B. Gilead reports that they have
investigational drug products in Phase II clinical trials for
treating Hepatitis B and Phase III for treating HIV. The FDA
recently granted a Fast Track designation to a Gilead product, but
marketing approval of this product was subsequently withdrawn.
ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIS/NASDAQ). This
company, founded in 1989, has devoted substantially all of its
resources to research, drug discovery and development programs.
Isis currently has one product, Vitravene, a treatment for CMV
Retinitis in AIDS patients, which has achieved limited market
acceptance in a small commercial market with significant
competition. Isis reports that most of their resources are being
dedicated to applying molecular biology and medicinal chemistry to
discovery and development of drug candidates based upon antisense
technology.
The Company anticipates that it may face increased competition in
the future as new products enter the market and advanced
technologies become available. There can be no assurance that
existing products or new products developed by the Company's
competitors will not be more effective than any that may be
developed by the Company. Competitive products may render the
Company's technology and products obsolete or noncompetitive prior
to the Company's recovering research, development or
commercialization expenses incurred with respect to any such
products.
Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than
the Company. In addition, many of these competitors may have
significantly greater experience than the Company in undertaking
certain aspects of research, preclinical studies and human clinical
trials of new pharmaceutical products, obtaining FDA and other
regulatory approvals, and manufacturing and marketing such products.
Accordingly, the Company's competitors may succeed in
commercializing the products more rapidly or more effectively than
the Company.
Government Regulation
Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and
marketing of the Company's proposed products and in its ongoing
research and
15
product development activities. The Company's existing
product and the products of its ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, human new drug products are
subject to rigorous preclinical and clinical testing as a condition
of clearances by the FDA and by similar authorities in foreign
countries. The lengthy process of seeking these approvals, and the
ongoing process of compliance with applicable statutes and
regulations, has required and will continue to require the
expenditure of substantial resources. Any failure by the Company or
its collaborators or licensees to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect the marketing
of any products developed by the Company and its ability to receive
product or royalty revenue. The Company has received orphan drug
designation for certain therapeutic indications which might, under
certain conditions, accelerate the process of drug
commercialization.
The Company has not received a "Fast-Track" designation for any
of its potential therapeutic indications. A Fast-Track
designation by the FDA, while not affecting any clinical
development time per se, has the potential effect of reducing the
regulatory review time by 50 percent (50%) from the time that a
commercial drug application is actually submitted for final
regulatory review. The Company will continue to present data in
support of obtaining a fast-track designation; the Company has
not yet submitted any New Drug Application (NDA) to a North
American regulatory authority. There are no assurances that such
designation will be granted, or if granted, there are no
assurances that such designation will materially increase the
prospect of a successful commercial application. The Company
submitted an emergency treatment protocol for clinically-resistant
HIV patients which was withdrawn by the Company during
the statutory approximately 30 day regulatory review period in
favor of a set of individual physician-generated applications
which are under review. There are no assurances that
authorizations to commence such emergency treatments will be
granted by any regulatory authority or that the resultant
treatments, if any, will support drug efficacy and safety. The
Company also has a Phase II HIV treatment protocol in which the
Company's drug was combined with certain presently available
antiretroviral agents; this application was deemed deficient
because: a) important adverse reactions known to be associated
with these agents [14 approved antivirals] were not adequately
addressed in the protocol and no clinical rationale was provided
for specific choice of antiretroviral drugs included in the
treatment regimen. The Company intends to address these issues
but no assurances can be given that such answers will materially
increase the prospect of a successful study or of a successful
commercial application, if submitted thereafter.
The Company is also subject to various federal, state and local
laws, regulations and recommendations relating to such matters as
safe working conditions,
16
laboratory and manufacturing practices,
the experimental use of animals and the use of and disposal of
hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in
connection with the Company's research work. The Company believes
that its Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all
material regulations applicable to these activities. However,
the Company cannot give assurances that facilities owned and
operated by third parties, that are utilized in the manufacture
of the Company's products, are in substantial compliance, or if
presently in substantial compliance, will remain so. These
facilities include manufacturing operations in San Juan, Puerto
Rico, Capetown, South Africa, and Columbia, Maryland, and
Melbourne, Australia.
Human Resources
The Company had 48 employees as of February 29, 2000 of which 20 are
full time
and 28 are utilized on a part-time basis. Such parties
are paid on a per diem or monthly basis. Thirty-one of our
employees are engaged in the Company's research, development,
clinical, manufacturing effort, including 2 individuals in Europe.
Twenty of our employees perform regulatory, general administration,
data processing, including biostatistics, financial and investor
relations functions. The Company believes that this arrangement
provides the most efficient approach to drug development at this
point in time. While the Company has been successful in attracting
skilled and experienced scientific personnel, there can be no
assurance that the Company will be able to attract or retain the
necessary qualified employees and/or consultants in the future.
Year 2000 Project
Since mid-1998, the Company has replaced and upgraded all computers
and software programs deemed to be non Y2K compliant. The new
hardware/software used in Administration, Finance and Research &
Development has been tested and proven to be Y2K compliant. The
critical databases have been converted to the new system and are
operating. As a back-up for the first few months, the computer
network was being run in parallel with the new system. The Company
discontinued the parallel operation on December 31, 1999.
As of December 31, 1999, the Company had received assurances from
all critical suppliers/vendors that they were Y2K compliant and that
the Y2K issue would not affect their ability to supply goods and/or
services after December 31, 1999.
The Company has incurred over $200,000 for hardware and software
needed to become Y2K compliant since mid-1998.
The Company has not, and does not expect to experience any
operational or financial problems relating to the Y2K matter.
17
Executive Officers
The executive officers of the Company, whose terms will expire
at such time as their successors are elected, are as follows:
Name Age Position Background
- ----------------- --- ------------- -----------------
William A. Carter, M.D., 62 Chairman, Chief HEM Pharmaceuticals Corp.
FACP Executive Officer, (the predecessor company)
President since 1978. Co-inventor of
record on more than 200
patents. A leading
innovator in the
development of human
interferon for a variety of
treatment indications.
Research Development
Awardee of NIH
Robert E. Peterson 63 Chief Financial Vice President of Omni
Officer Group, Inc. (business
consulting). Formerly VP
and CFO of several major
Pepsico Divisions.
David R. Strayer, M.D. 54 Medical Director, Formerly Professor of
Regulatory Affairs Medicine at Allegheny
University of the Health
Sciences. Formerly
Research Associate at NIH.
Carol A. Smith, Ph.D. 48 Director, Virotech International,
Manufacturing Inc., '89-91,
and Process Scientist/Quality Assurance
Development Officer.
Josephine M. Dolhancryk 37 Treasurer, Medical/Business
Assistant Enterprises, '89-90,
Secretary President
Richard Piani 72 Director Principal Delegate for
Industry to the City of
Science and Industry,
Paris, France, a scientific
and educational complex
since 1995. Chairman of
Industrielle du Batiment-
Morin,a building materials
corporation, from 1986-1993.
Professor of
International Strategy at
Paris Dauphine University
from 1984-1994. Law degree
from Faculte de Droit,
Paris Sorbonne. Business
Administration degree from
Ecols des Hautes Etudes
Commerciales, Paris
18
William Mitchell, M.D., 64 Director Professor of Pathology at
Vanderbilt University
School of Medicine. MD
from Vanderbilt University.
Ph.D. from Johns Hopkins
University, and Fellowships
at Johns Hopkins University
and the University of
Lausanne as an Eleanor
Roosevelt International
Cancer Scholar. Published
over 200 papers dealing
with viruses and anti-viral
drugs. Consultant to the
National Institutes of
Health including service on
the AIDS and Related
Research Review Group.
Served as a director of the
Company from 1987 to 1989.
Ph.D.
Harris Freedman 65 Vice President Business consultant for
for Strategic emerging technology
Alliances companies and private
venture capitalist.
Ransom Etheridge 59 Director Attorney specializing in
commercial and
transactional law. A
Judicial Remedies Award
Scholar. Served as
President of the Tidewater
Arthritis Foundation.
Graduate of Duke
University, the Wharton
School of Business Real
Estate Investment Analysis
Seminar, and the University
of Richmond School of Law.
19
ITEM 2. Properties
The Company leases and occupies a total of approximately 18,850
square feet of laboratory and office space in two states. The
corporate headquarters in Philadelphia, Pennsylvania are located in
a suite of offices of approximately 15,000 square feet. The
pharmacy, packaging, quality assurance and quality control
laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850
square feet, approximately 2,000 of which are dedicated to the
packaging and quality control product release functions. The Company
believes that its Rockville facilities will meet its production
requirements, including sufficient quantities of Ampligen for
planned clinical trials and treatment protocols, through 2000, after
which time it may need to increase its manufacturing capacity either
through third parties or by building or acquiring commercial-scale
facilities.
In addition, the Company has entered into the Bioclones Agreement,
which provided the Company with 24.9 % of the capital stock of
Ribotech, Ltd to develop and operate a new manufacturing facility
which is financed by Bioclones. Manufacturing at the pilot facility
commenced in 1996. The Company expects that Ribotech will start
construction on a new commercial production facility in 2001,
although no assurance can be given that this will occur. The Company
has no obligation to fund this construction.
ITEM 3. Legal Proceedings
Ell & Co., and the Northern Trust Company, as Trustee of the AT&T
Master Pension Trust filed a complaint against the Company in the
Court of Chancery of the State of Delaware in and for New Castle
County on September 23, 1998. This complaint alleges that the
Company breached its contractual obligations as set forth in the
Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock. The Plaintiff seeks to enforce its
rights to convert 1,500 shares of Series E Preferred Stock into
750,000 shares of freely traded common stock and to recover damages
for its inability to convert the preferred stock when it requested
to do so. Although the Company maintains that the 1,500 shares of
Series E Preferred Stock had been properly redeemed and, therefore,
the plaintiff was not contractually able to effect a proper
conversion into common shares, the Company agreed in December, 1998
to convert the plaintiffs preferred stock to common stock. In
February 2000, the plaintiffs dropped the lawsuit.
On September 30, 1998, the Company filed a multi-count complaint
against Manuel P. Asensio, Asensio & Company, Inc., and others in
the United States District Court for the Eastern District of
Pennsylvania. On October 22, 1998, the Company
20
amended the complaint to add additional counts and to conform the
complaint to agreed upon dismissals without prejudice as to certain
of the defendants. On August 13, 1999, the Company amended and
supplemented the complaint for a second time to conform the
complaint to court ordered dismissals of certain counts of the
complaint and parties, to add Asensio.com, Inc. (formerly known as
Asensio Holdings, Inc.), the holding company of defendant Asensio
Company Inc., and to add a conspiracy charge against the remaining
defendants and certain unnamed John Does.
The complaint presently contains claims of defamation,
disparagement, tortious interference with existing and prospective
business relations and conspiracy, arising out of the current
defendants' false and defamatory statements. (The complaint further
alleges that defendants defamed and disparaged the Company in
furtherance of a manipulative, deceptive and unlawful short-selling
scheme between August, 1998, and the present.
On April 19, 1999, defendants Asensio and Asensio & Company, Inc.,
filed an answer and counterclaim against the Company. The
counterclaim alleges that on or about September, 1998, and in
response to defendants' strong sell recommendation and other press
releases about Hemispherx and its officers and directors, the
Company made defamatory statements about defendants, including that
defendants' attacks and manipulative short-selling scheme may have
constituted criminal wrongdoing on the part of defendants. The
Company has denied the material allegations of the counterclaim and
is vigorously defending against the counterclaim. In August, 1999,
several of the short sellers in Hemispherx were indicted by the U.S.
Attorney in New York for money laundering and manipulation in
another non-Hemispherx matter. The parties are presently engaged in
discovery with a trial date of May 1, 2000.
In October, 1998, the Company contacted the SEC regarding what it
believed may have been illegal short selling and unlawful market
manipulation in furtherance of the short selling of Manuel P.
Asensio and others. Thereafter, in April, 1999, the Company was
advised by the Securities and Exchange Commission ("SEC") of a
private investigation into various allegations of misrepresentations
by the Company and its officers. Specifically, the SEC sought
information relating to allegations about the Company's
investigational drug application for treatment of various diseases,
results of clinical research, incidence of ME/CFS in the United
States, the Company's patents, and Ampligen's safety and efficacy.
These allegations had also been included by Asensio & Co. in its
various "research reports." The SEC has declined to be more
specific about the nature or substance of the investigation. The
Company is cooperating fully with the investigation.
21
The Company has also been advised that the NASD has initiated an
investigation into the short selling of Hemispherx Securities (Enf-303).
Asensio has admitted, in deposition testimony in the
Company's litigation against him, that he and his company was the
subject of such an investigation. Hemispherx is also cooperating
with the NASD in its investigation of the short selling of its
stock.
On March 6, 2000, Cook Imaging Corp, et al filed a complaint against
the Company in the United States District Court for the Eastern
District of Pennsylvania. Cook Imaging Corp., asserts that the
Company refuses to pay for certain Ampligen manufacturing efforts by
Cook. The Company maintains that Cook Imaging Corp., did not
perform as required by the contract. The Company plans to respond
to the complaint and defend against the charges.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters
In October, 1997, the Company's Common Stock and Class A Warrants
commenced trading on the American Stock Exchange under the symbols
HEB and HEB/ws, respectively. Simultaneously these securities were
delisted from NASDAQ. The securities had traded on NASDAQ since the
IPO in November, 1995.
In February, 1998, the Company filed a Registration Statement with
the Securities and Exchange Commission (SEC) to register the common
stock placed in the September 1997 private placements. The
statement included common stock underlying certain stock purchase
warrants with registration rights.
In July, 1998, the Company's Common Stock and Class A Warrants were
listed on the Berlin Stock Exchange. The shares and warrants will
trade under the symbols HXB and HXBA respectively. The listing on
the Berlin Stock Exchange has been facilitated by Berliner
Freiverkehr, a major German investment banking and brokerage firm,
with assistance from Value Management & Research, GmbH, a European
based Research and Investment Firm.
In April, 1999, the company filed a Registration Statement with the
Securities and Exchange Commission (SEC) to register the common
stock privately placed in July, 1998. In addition, certain warrants
and underlying common stock was included in the Registration.
22
In June 1999, the Company filed a registration statement on Form S-3
with the SEC registering certain warrants and the shares of Common
Stock underlying those warrants on behalf of certain warrantholders.
The Company has entered into agreements with certain of the
warrantholders providing for, among other things, (a) an escrow and
conditional lockup of one year from the effective date of the
registration statement; and (b) the sale of such warrantholders'
warrants during such one year lockup through an agent or by the
Company at prices set by the warrantholders. On September 29, 1999,
the Registration Statement was amended. This amended document
became effective on October 1, 1999.
In 1999, the Company acquired 290,811 shares of Common Stock on the
open market at an average cost of $6.76 per share. This acquisition
is part of the share buy back program authorized by the Board of
Directors. These shares may be retired in part thereby reducing the
number of shares outstanding. Certain shares of the Company's
Treasury Stock may be utilized to fund acquisitions, strategic
alliances, or to obtain equity positions in other companies in order
to potentially increase the breadth and depth of the Company's drug
technology portfolio including the Company's potential position in
the emerging area of human genomics.
The foregoing private offerings were private transactions and exempt
from registration under section 4(2) of the Securities Act pursuant
to regulation D of the Act. All investors in these transactions are
accredited.
23
The following table sets forth the high and low list prices for the
Common Stock and the Warrant for the periods indicated as reported
by the American Stock Exchange. Such prices reflect inter-dealer
prices, without retail markup, mark downs or commissions and may not
necessarily represent actual transactions.
COMMON STOCK High Low
Time Period:
January 1, 1998
through
March 31, 1998 4 5/16 3 1/8
April 1, 1998 through
June 30, 1998 4 9/16 2 5/8
July 1, 1998 through
September 30, 1998 13 3/16 4 1/16
October 1, 1998
through
December 31, 1998 9 1/4 5 5/8
January 1, 1999
through
March 31, 1999 7 3/8 4 11/16
April 1, 1999 through
June 30, 1999 10 1/16 5 9/16
July 1, 1999 through
September 30, 1999 8 1/8 5 7/8
October 1, 1999
through
December 31, 1999 10 1/2 6
WARRANTS
Time Period:
January 1, 1998
through
March 31, 1998 1 13/16 1 1/8
April 1, 1998 through
June 30, 1998 1 5/8 1 5/16
July 1, 1998 through
September 30, 1998 8 1/4 1 1/2
October 1, 1998
through
December 31, 1998 5 7/8 2 1/4
January 1, 1999
through
March 31, 1999 3 3/4 1 3/4
April 1, 1999 through
June 30, 1999 6 3/16 2 1/4
July 1, 1999 through
September 30, 1999 4 1/8 2 1/4
October 1, 1999
through
December 31, 1999 6 1/2 4 1/16
24
As of December 31, 1999 there were approximately 311 holders of
record of the Company's Common Stock. This number was determined
from records maintained by the Company's transfer agent and does not
include beneficial owners of the Company's securities whose
securities are held in the names of various dealers and/or clearing
agencies.
As of December 31, 1999, the Company had approximately 5,480,310
Class A Redeemable Warrants registered and outstanding at an
exercise price of $4.00 per share.
The Company has not recently paid any dividends on its Common Stock.
It is management's intention not to declare or pay dividends on the
Common Stock, but to retain earnings, if any, for the operation and
expansion of the Company's business.
25
ITEM 6. Selected Financial Data
Year Ended
December 31 1995 1996 1997 1998 1999
Statement of
Operations Data
Net revenues $2,965,910 $32,044 $258,715 $400,708 $678,248
Net loss (1,839,849) (4,554,489) (6,106,860) (7,324,093) (9,201,227)
Cash used in
operating
activities (1,939,219) (6,097,906) (4,641,611) (5,751,108) (6,989,791)
Capital
expenditures (3,625) (86,480) (15,477) (150,520) (251,022)
Balance Sheet
Total Assets 12,699,518 6,999,384 11,542,633 16,327,212 14,167,740
Total Debt 4,920,000 - - - -
Redeemable
Preferred
Stock - - - - -
Common
Stockholders
Equity
(Deficit) 4,420,785 5,852,994 10,745,422 15,185,300 12,656,864
Net loss per share:
Basic (0.18) (0.29) (0.35) (0.32) (0.35)
Diluted (0.18) (0.29) (0.35) (0.32) (0.35)
Shares used in
computing net loss per
share:
Basic 10,341,163 15,718,136 17,275,994 22,724,913 26,380,351
Diluted 10,341,163 15,718,136 17,275,994 22,724,913 26,380,351
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto, which are
included herein.
26
Background
Since 1980, the Company has raised funds of some $150,000,000 from equity
and debt financing which has been used in research and development of its
Nucleic Acid Technologies. Nucleic Acid compounds represent a new class
of pharmaceutical products designed to act at the molecular and genetic
level for the definitive treatment of certain devastating human diseases.
The Company's platform technology utilizes specifically configured
ribonucleic acids ("RNA") which are broadly protected by a patent estate
consisting of more than 300 patents. One of the Company's double-stranded
RNA drug products, trademarked "Ampligen", is in advanced human clinical
development for various therapeutic indications. Based on the results of
pre-clinical and clinical trials, the Company believes that Ampligen may
have broad spectrum anti-viral and anti-cancer potential. Over 400
patients have participated in clinical trials authorized by the Food and
Drug Administration ("FDA") at some twenty clinical sites across the
United States, representing the administration of more than 40,000 doses.
In October, 1998, the Company initiated a Phase III trial for the
treatment of 230 patients afflicted with Myalgic Encephalomyelitis/Chronic
Fatigue Syndrome ("ME/CFS") at various medical centers in the United
States. In parallel, the Company is conducting cost recovery treatment
programs for ME/CFS patients in the United States, Canada, Belgium and
Austria. The treatment program in the U.S. was expanded by FDA
authorization in early 1999. In December, 1998, the Company completed and
filed a full marketing application for approval to treat ME/CFS patients
in the European Union.
The Company is actively engaged in various market development strategies
in the United States and European Union, as well as other countries
including Canada, Australia and South Africa. Disease categories under
active development include ME/CFS, hepatitis and HIV. The Company
maintains offices and clinical operations in both the United States and
European Union, as well as ownership interests in a related European based
diagnostic company and in a South African manufacturing entity which
produces its raw drug materials.
The Company has reported net income only from 1985 through 1987. Since
1987, the Company has incurred substantial operating losses. Prior to
completing an Initial Public Offering ("IPO") in November 1995, the
Company financed operations primarily through the private placement of
equity and debt securities, equipment lease financing, interest income and
revenues from licensing and royalty agreements.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its four wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp., Core BioTech Corp. and Hemispherx Biopharma-Europe
NV/SA. The U.S. subsidiaries were incorporated in September 1994 for the
purpose of developing technology for ultimate sale into certain
nonpharmaceutical specialty consumer markets. The European subsidiary was
27
formed for the purpose of serving the Company's needs with respect to
pursuing clinical trials and regulatory approval in the European Union.
All significant intercompany balances and transactions have been
eliminated in consolidation.
The Company expects to continue its research and clinical efforts for the
next several years with some benefit of certain revenues from cost
recovery treatment programs, notably in Belgium, Canada and the U.S..
Beginning in 1994, limited revenues were initiated in Belgium from sales
under the cost recovery provision for conducting treatment clinical tests
in ME/CFS; including the United States these sales were $678,248 in 1999.
The Company may continue to incur losses over the next several years due
to clinical costs which may be partially offset by expanded access cost
recovery revenues and potential licensing fees. Such 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
revenues. Acquisition of full or conditional marketing approval in any
major market would significantly affect the Company's cash flow. There
are no assurances that such approvals will ever happen in any major
pharmaceutical market.
28
RESULTS OF OPERATIONS
Years Ended December 31, 1999 vs. 1998
The Company reported a net loss of $9,201,227 (including a non-cash loss
of $1,520,650 for stock compensation expense) for the year ended December
31, 1999 versus a net loss of $7,324,093 for the same period in 1998.
Several factors contributed to the $1,877,134 increase in net losses in
1999. In general, non-operating stock compensation expense, increased
clinical costs and legal fees account for the increase in net losses.
Revenues from the Company's Cost Recovery Treatment Program in the United
States and Europe were up by $277,540 in 1999 versus 1998. The Company
expects these programs may expand in the year 2000, especially in Europe
where efforts are being organized to increase the expanded access program
to other European countries. At present, these programs are operational
in Belgium and Austria.
In 1999, clinical trial costs increased $917,913 primarily due to
increased activity in the AMP 516 ME/CFS clinical trial initiated by the
Company in October, 1998. Manufacturing and related costs were $1,503,455
in 1999 versus $1,923,001 in 1998. The 1998 costs reflects the build-up
of drug inventories needed to support clinical trial and other research
and development efforts. At present, the Company expenses all raw
material and related production costs as incurred.
General and administrative expenses were up $1,146,039 in 1999 versus
1998. Legal expenses for attorneys increased $602,531 primarily due to
litigation associated with the Asensio & Company lawsuit, the ELL & Co.
lawsuit, settlement of the VMW lawsuit and other legal matters. Expenses
associated with stock transactions, registration statements and financing
were up $156,277. The cost of funding the European Operation was up by
$187,005 in 1999 due to establishing and some staffing of the Company's
European Subsidiary. The cost of evaluating the feasibility of the spin-off of
the Company's wholly owned subsidiary was $116,028 more than
expensed in 1998.
Stock compensation expense was $1,520,650 for 1999 versus $794,747
recorded for 1998. Stock compensation expenses reflect the fair value of
the common stock including the warrants granted to non-employees of the
Company. The increase in 1999 reflects warrants granted to consultants
for various types of assistance and professional services provided to the
Company.
29
Years Ended December 31, 1998 vs. 1997
The Company reported a loss of $7,324,093 in 1998 versus a loss of
$6,106,860 in 1997. Several factors contributed to the increased loss of
$1,217,233 in 1998.
Revenues increased by $141,993 in 1998 due to the increased enrollment of
patients
in the cost recovery treatment programs being conducted in Belgium, Canada
and the United States.
Research and development costs increased $1,386,860 in 1998 due primarily
to increased spending to start up the Phase III ME/CFS clinical trial in
the United States. In addition, the Company built up the inventory of
Ampligen raw materials and finished goods in anticipation of the drug
needs to support the Phase III clinical trial. All costs incurred were
part of the Company's plan to enhance the clinical data required to
support the eventual full marketing application in the United States and
European Union.
General and administration expenses totaling $2,957,831 in 1998 increased
$762,886 over the prior year. Litigation issues that arose in 1998 caused
an increase in legal fees by approximately $300,000. Preparation and
Filing of the European Union new drug application resulted in consultant
and related expenses to increase a total of $109,784, public
relations/shareholder communications expense increased by some $200,000 as
the Company responded to various charges brought by short sellers (see
Asensio Litigation) and administrative expenses supporting clinical trials
increased $69,000.
Consulting Stock Compensation Expense of $794,797 in 1998 relates to the
stock value of warrants granted to consultants engaged to assist the
Company on various financial, stock market and other matters.
Preferred stock conversion expense of $1,200,000 in 1997 primarily
resulted from the inducement to effect the early redemption of the Series
D Preferred Stock. The Company gave the Preferred Stockholder 200,000
shares of common stock with a guaranteed sales price of $6 per share.
Interest income was $590,085 in 1998 versus $267,291 in 1997. While
overall short-term interest rates were lower than those experienced in
1997, the amount of unused funds available for short-term investing was
greater causing the increase in interest income.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments at December 31, 1999 was
$8,549,389 reflecting a net use of cash totaling $5,628,650 in 1999.
Operating activities used $6,989,791. Non-operating expenditures totaled
$1,871,734. Cash proceeds include $1,969,272 from private placements of
the Company stock and $1,923,473 from
30
warrantholders exercising warrants.
Cash used for non-operating items include $1,966,548 used to acquire
290,811 of the Company's common stock pursuant to a share buy-back program
approved by the Company's Board of Directors. The Company privately
placed 150,000 of these shares producing proceeds of $1,329,495.
In addition, the Company spent $375,000 to acquire an interest in an
unconsolidated affiliate. $478,022 was spent on equipment (primarily
computers and software) and patents.
The Company's operating cash burn rate for the last six months of 1999 was
approximately $589,000 per month. All clinical trial drug products were
fully expensed although some are expected to be sold under the expanded
access,-recovery, pre-marketing programs authorized by FDA and various
regulatory bodies in other countries. As the clinical testing effort in
the United States accelerates and the European market development activity
increases, the operating burn rate may increase periodically. However,
certain of the operating, as well as the non-operating cash outlays are of
a one time nature and are expected to decline significantly. Also
revenues from expanded access product sales is expected to continue to
increase in the coming year.
The Company expects warrant holders to continue exercising the Class A
redeemable warrants and private warrants from time to time depending on
the trading price of the Company common stock. As of December 31, 1999,
the Company has 5,480,310 Class A redeemable warrants outstanding. These
warrants can be exercised at $4.00 per share. In addition, there are
462,000 Class A redeemable warrants outstanding at an exercise price of
$6.60 per share. Non-public warrants outstanding total 8,065,700 with a
weighted average exercise price of $3.67.
Because of the Company's long-term capital requirements, it may seek to
access the public equity market whenever conditions are favorable, even if
it does not have an immediate need for additional capital at that time.
Any additional funding may result in significant dilution and could
involve the issuance of securities with rights which are senior to those
of existing stockholders. The Company may also need additional funding
earlier than anticipated, and the Company's cash requirements in general
may vary materially from those now planned, for reasons including, but not
limited to, changes in the Company's research and development programs,
clinical trials, competitive and technological advances, the regulatory
process, and higher than anticipated expenses and lower than anticipated
revenues from certain of the Company's clinical trials for which cost
recovery from participants has been approved.
31
New Accounting Pronouncements
On December 31, 1999, the Securities and Exchange Commission, or SEC,
issues Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," or SAB No 101. SAB No. 101 provides the SEC
staff's views on the recognition of revenue including nonrefundable
technology access fees received by biotechnology companies in connection
with research collaborations with third parties. SAB No. 101 states that
in certain circumstances the SEC staff believes that up-front fees, even
if nonrefundable, should be deferred and recognized systematically over
the term of the research agreement. SAB No. 101 requires registrants to
adopt the accounting guidance contained therein by no later than the second
fiscal quarter of the fiscal year beginning after December 15, 1999. The
adoption of this standard should not have a material impact on the
Company's financial position of results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("Statement 133"). Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Statement 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
the instrument at fair value. The accounting changes in the fair value of
a derivative depend on the intended use of the derivative and the
resulting designation. This Statement, as amended, is effective for the
first fiscal quarter beginning after December 31, 2000. The adoption of
this standard will not have a material impact on the Company's earnings or
financial position.
ITEM 7a. Quantitative and Qualitative Market Risk
Market Risk
The Company had $8.5 million in cash and cash equivalents at December 31,
1999. To the extent that the Company's cash and cash equivalents exceed
its near term funding requirement, the Company invests the excess cash on
3 to 6 months high quality financial instruments. The company employs
established policies and procedures to manage any risks with respect to
any investment exposure.
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1998 and
1999, consolidated statements of operations, changes in stockholder's
equity (deficit) and comprehensive loss and cash flows for each of the
years in the three year period ended December 31, 1999, together with the
report of KPMG LLP, independent public accountants are included elsewhere
herein. Reference is made to the "Index to Financial Statements and
Financial Statement Schedule" on page F-1 which follows page 35.
32
ITEM 9. Changes in the Disagreements with Accountants on Accounting and
Financial Disclosures
None
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this item is incorporated by reference from
the information under the caption "Management" contained in the Company's
definitive Proxy Statement which will be filed with the Securities and
Exchange Commission on or before July 12, 2000 in connection with the
solicitation of proxies for the Company's 2000 Annual Meeting of
Stockholders scheduled to be held on or about July 12, 2000 (the "Proxy
Statement").
ITEM 11. Executive Compensation
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the
Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Beneficial
Owners and Management" contained in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the
Proxy Statement.
33 PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)(2)Financial Statements and Schedules - See index to financial
statements on page F-1 which follows page 35 of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) The Company has not filed any reports on Form 8K during the year
ended December 31, 1999.
(c) The following exhibits were filed with the Securities and Exchange
Commission as exhibits to the Company's Form S-1 Registration
Statement (No. 33-93314) or amendments thereto and are hereby
incorporated by reference. Exhibits marked with a star are filed
herewith:
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Registrant,
as amended, along with Certificates of Designations
* 3.1.1 Series E Preferred Stock
3.2 By-laws of Registrant, as amended
4.1 Specimen certificate representing Registrant's 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 Transfer and Trust Company
10.1 1990 Stock Option Plan
10.2 1992 Stock Option Plan
10.3 1993 Employee Stock Purchase Plan
10.4 Form of Confidentiality, Invention and Non-Compete Agreement
10.5 Form of Clinical Research Agreement
10.6 Form of Collaboration Agreement
10.7 Amended and Restated Employment Agreement by and between the
Registrant and Dr. William A. Carter, dated as of July 1, 1993
10.8 Employment Agreement by and between the Registrant and Harris
Freedman, dated August 1, 1994
10.9 Employment Agreement by and between the Registrant and Sharon
Will, dated August 1, 1994
10.10 License Agreement by and between the Registrant and The Johns
Hopkins University, dated December 31, 1980
10.11 Technology Transfer, Patent License and Supply Agreement by and
between the Registrant, Pharmacia LKB Biotechnology Inc.,
Pharmacia P-L Biochemicals Inc. and E.I. du Pont de Nemours and
Company, dated November 24, 1987
34
10.12 Pharmaceutical Use Agreement, by and between the Registrant and
Temple University, dated August 3, 1988
10.13 Assignment and Research Support Agreement by and between the
Registrant, Hahnemann University and Dr. David Strayer, Dr.
lsadore Brodsky and Dr. David Gillespie, dated June 30, 1989
10.14 Lease Agreement between the Registrant and Red Gate Limited
Partnership, dated November 1, 1989, relating to the
Registrant's Rockville, Maryland facility
10.15 Agreement between the Registrant and Bioclones (Proprietary)
Limited
10.16 Amendment, dated August 3, 1995, to Agreement between the
Registrant and Bioclones (Proprietary) Limited (contained
in Exhibit 10.46)
21 Subsidiaries of the Registrant
23.1 Consent of KPMG, LLP
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/William A. Carter, M.D.
William A. Carter, M.D.
Chief Executive Officer
March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ William A. Carter William A. Carter, M.D. March 27, 2000
- ----------------------- Chairman of the Board,
Chief Executive Officer
and Director
/S/ Richard Piani Richard Piani March 24, 2000
- ----------------------- Director
/S/ Robert E. Peterson Robert E. Peterson March 23, 2000
- ------------------------ Chief Financial Officer
/S/ Ransom Etheridge Ransom Etheridge March 27, 2000
- ------------------------ Secretary And Director
/S/ William Mitchell William Mitchell, M.D., March 24, 2000
- ------------------------ Ph.D.
Director
/S/ Josephine Dolhancryk Josephine Dolhancryk March 24, 2000
- ------------------------ Assistant Secretary and
Treasurer
36
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report. . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 . . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999. . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Loss for each of the years
in the three-year period ended December 31, 1999 . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999 . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . .. . . . F-8
37
Independent Auditors' Report
The Board of Directors and Stockholders
Hemispherx Biopharma, Inc.:
We have audited the accompanying consolidated balance
sheets of Hemispherx Biopharma, Inc. and subsidiaries as of December
31, 1998 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity and comprehensive loss
and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Hemispherx Biopharma, Inc. and subsidiaries
as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
February 19, 2000, except as to note 16 which is as of March 6,
2000.
Philadelphia, Pennsylvania
38
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
December 31,
-------------------------
1998 1999
------- -------
ASSETS
Current assets:
Cash and cash equivalents. . . . . $12,025,073 $6,396,423
Short term investments (Note 3). . 1,591,378 2,152,966
Accounts receivable 56,500 75,350
Stock subscription receivable (Note 1L) 2,250,000
Prepaid expenses and
other current assets . . . . . . 56,214 142,950
----------- ----------
Total current assets . . . . . . 13,729,165 11,017,689
Property and equipment, net . . . . 181,724 333,360
Patent and trademarks rights, net . 1,356,139 1,362,709
Investments in unconsolidated affiliates 1,038,000 1,413,000
Security deposits . . . . . . . . . 22,184 40,982
----------- ----------
Total assets. . . . . . . . . . $16,327,212 $14,167,740
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . $ 802,538 $1,091,023
Accrued expenses (Note 5). . . . . 339,374 419,853
----------- ----------
Total current liabilities . . . 1,141,912 1,510,876
Commitments and contingencies
(Notes 6, 9, 11 and 12)
Stockholders' equity
(Notes 6 and 7):
Common stock. . . . . . . . . . . 26,162 27,975
Additional paid-in capital. . . . 78,059,650 84,875,289
Treasury stock (167,935 shares) -- (1,018,712)
Deferred compensation . . . . . . (1,184,830) (310,455)
Accumulated other comprehensive
gain (Note 2j). . . . . . . . . 324 --
Accumulated deficit . . . . . . . (61,716,006) (70,917,233)
------------ -----------
Total stockholders' equity. . . 15,185,300 12,656,864
------------ -----------
Total liabilities and
stockholders' equity . . . . . $16,327,212 $14,167,740
============ ===========
See accompanying notes to consolidated financial statements.
39 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1999
December 31,
---------------------------------
1997 1998 1999
------- ------- ------
Revenues:
Research and development . . . . $ 258,715 $ 400,708 $ 678,248
-------- --------- ----------
Total revenues. . . . . . . . 258,715 400,708 678,248
Costs and expenses:
Research and development . . . . 3,175,398 4,562,258 4,737,058
General and
administrative . . . . . . . 2,194,945 2,957,831 4,103,870
Preferred stock conversion expense 1,200,000 - -
Consulting stock compensation expense 62,523 794,797 1,520,650
--------- --------- ----------
Total cost and expenses . . . 6,632,866 8,314,886 10,361,578
Interest and other income . . . . 267,291 590,085 482,103
--------- --------- ---------
Net loss. . . . . . . . . . . $(6,106,860) $(7,324,093)$(9,201,227)
========= ========= =========
Basic loss per share. . . . . . . $ (.35) (.32) (.35)
========== ========== ==========
Weighted average shares
outstanding. . . . . . . . . . 17,275,994 22,724,913 26,380,351
========== ========== ==========
Diluted loss per share. . . . . . $ (.35) (.32) (.35)
========== ========== ==========
Weighted average common and dilutive
equivalent shares outstanding. 17,275,994 22,724,913 26,380,351
========== ========== ==========
See accompanying notes to consolidated financial statements.
40 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity(Deficit)
and Comprehensive Loss
For each of the years in the three-year period ended December 31, 1999
Preferred Common Preferred Common Additional Deferred Accumulated other Accumulated Treasury Total
stock stock stock stock paid-in compensation Comprehensive deficit Stock stockholders
shares shares-value .001 Par capital Income equity
-------- -------- -------- ------- ---------- ----------- --------------- ----------- ------- ----------
Balance at
December 31,1996 5,000 16,160,205 $50 $16,160 $54,080,171 $ - $ - $(48,243,387) $ - $5,852,994
Stock conversion
costs - 200,000 - 200 1,199,800 - - - - 1,200,000
Payout of stock
guarantees - - - - (109,712) - - - - (109,712)
Stock
compensation, net - - - - 199,655 (137,132) - - - 62,523
Debt conversion - - - - 55,000 - - - - 55,000
Preferred stock
redeemed (5,000) - (50) - (4,999,950) - - - - (5,000,000)
Issuance of
preferred stock
certificates 5,000 - 50 - 4,834,873 - - - - 4,834,923
Preferred
dividends
forgiven - - - - 171,775 - - - - 171,775
Preferred stock
converted (1,350) 675,000 (13) 675 (662) - - - - -
Warrants and
options exercised - 199,067 - 199 424,916 - - - - 425,115
Issuance of
common stock,
net of issuance
cost - 3,808,334 - 3,808 9,399,705 - - - - 9,403,513
Total
Comprehensive
loss - - - - - - (2,183) (6,106,860) - (6,109,043)
Preferred
Dividends - - - - - - - (41,666) - (41,666)
-------- -------- -------- ------- ---------- ----------- -------------- ----------- ------- ----------
Balance at
December 31,1997 3,650 21,042,606 37 21,042 65,255,571 (137,132) (2,183) (54,391,913) - 10,745,422
Common stock
issued - 3,294,434 - 3,295 11,058,959 - - - - 11,062,254
Preferred stock
converted (3,650) 1,825,000 (37) 1,825 (1,788) - - - - -
Total
Comprehensive
loss - - - - - - 2,507 (7,324,093) - (7,321,586)
Payout of stock
guarantees - - - - (79,587) - - - - (79,587)
Stock issue costs - - - - (16,000) - - - - (16,000)
Stock
compensation - - - - 1,842,495 (1,047,698) - - - 794,797
-------- -------- -------- ------- ---------- ----------- ------------- ----------- ------- ----------
Balance at
December 31, 1998 - 26,162,040 - 26,162 78,059,650 (1,184,830) 324 (61,716,006) - 15,185,300
Common stock
issued - 1,812,467 - 1,813 6,267,322 - - - 947,836 7,216,971
Purchase of
treasury stock - - - - - - - - (1,966,548)(1,966,548)
Purchase of
public warrants - - - - (97,958) - - - - (97,958)
Stock
compensation - - - - 646,275 874,375 - - - 1,520,650
Total
comprehensive
loss - - - - - - (324) (9,201,227) - (9,201,227)
-------- -------- -------- ------- ---------- ----------- ------------- ----------- ------- ----------
Balance at
December 31, 1999 - 27,974,507 - $27,975 $84,875,289 $(310,455) - $(70,917,233)$(1,018,712)$12,656,864
======== ======== ======== ======= ========== =========== ============= =========== ======= ==========
41
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 1999
Increase (Decrease) in Cash and Cash Equivalents
December 31,
-----------------------------
1997 1998 1999
------ ------ ------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . $(6,106,860) $(7,324,093) $(9,201,227)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . 28,315 39,433 99,386
Amortization of patent rights . . . 424,065 309,704 220,430
Stock conversion costs. . . . . . . 1,200,000 - -
Stock option compensation expense . 62,523 794,797 1,520,650
Stock issued in settlement of debt. - - 126,390
Changes in assets and liabilities:
Accounts receivable. . . . . . . . (32,408) (24,092) (18,850)
Prepaid expenses
and other current assets. . . 38,723 10,404 (86,736)
Accounts payable . . . . . . . . . (77,912) (337,372) 288,485
Accrued expenses . . . . . . . . . (78,345) 7,329 80,479
Security deposits. . . . . . . . . 10,000 (3,861) (18,798)
---------- ---------- ----------
Net cash used in
operating activities. . . . . . (4,531,899) (5,853,007) (6,989,791)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment . (15,477) (150,520) (251,022)
Additions to patent rights . . . . . (308,772) (278,320) (227,000)
Maturity of short term investments . - 1,003,593 1,591,054
Purchase of short term investments . 1,003,593 (1,591,054) (2,152,966)
Investment in unconsolidated affiliates - (1,038,000) (375,000)
---------- ---------- ----------
Net cash used in investing
activities . . $(1,327,842) $(2,054,301) $(1,414,934)
---------- ---------- ----------
(CONTINUED)
See accompanying notes to consolidated financial statements.
42
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
December 31,
---------------------------------
1997 1998 1999
----- ----- -----
Cash flows from financing activities:
Proceeds from issuance of
preferred stock. . . . . $4,834,923 $ - $ -
Preferred stock redeemed.. . . . . . (5,000,000) - -
Proceeds from issuance of
common stock, net. . . . 9,395,699 2,234,000 1,969,272
Repayment of stock guarantee . . . . (109,712) (79,587) -
Proceeds from exercise of
stock warrants . . . . . 425,116 8,812,254 1,923,473
Purchase of treasury stock . . . . . - - (1,966,548)
Sale of treasury stock . . . . . . . - - 947,836
Purchase of public warrants. . . . . - - (97,958)
---------- ---------- ---------
Net cash provided by
financing activities. . . . . . 9,546,026 10,966,667 2,776,075
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . 3,686,285 3,059,359 (5,628,650)
Cash and cash equivalents at
beginning of year. . . . 5,279,429 8,965,714 12,025,073
---------- ---------- -----------
Cash and cash equivalents
at end of year . . $8,965,714 $12,025,073 $6,396,423
========== =========== ===========
Supplemental disclosures of
cash flow information:
Cash paid during the year
for interest. . . $ 6,700 $ - $ -
========= ============ ===========
Issuance of common stock
for accrued expense $ - $ - $ 126,330
========== ============ ===========
See accompanying notes to consolidated financial statements.
43 HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) Business
Hemispherx BioPharma, Inc. and subsidiaries (the Company) is a
pharmaceutical company using nucleic acid technologies to develop
therapeutic products for the treatment of viral diseases and
certain cancers. The Company's drug technology uses
specially-configured ribonucleic acid (RNA). The Company's
double-stranded RNA drug product, trademarked Ampligen, is in human
clinical development for various therapeutic indications. The
potential efficacy and safety of Ampligen is being evaluated
clinically for three anti-viral indications: myalgic
encephalomyelitis, also known as chronic fatigue syndrome (ME/CFS),
human immunodeficiency virus associated disorders, and chronic
hepatitis B virus infection. The Company also has clinical
experience with Ampligen in patients with certain cancers including
renal cell carcinoma (kidney cancer) and metastatic malignant
melanoma. The Company has other compounds to be evaluated.
The consolidated financial statements include the financial
statements of Hemispherx BioPharma, Inc. and its wholly-owned
subsidiaries BioPro Corp., BioAegean Corp. and Core BioTech Corp.
which were incorporated in September 1994, and Hemispherx
Biopharma-Europe which was incorporated in August 1998. All
significant intercompany balances and transactions have been
eliminated in consolidation.
On November 7, 1995, the Company completed an initial public
offering (IPO) of 5,312,900 units of Hemispherx BioPharma, Inc.
resulting in net proceeds of approximately $15.8 million. Each
unit consists of one share of the Company's Common Stock and one
Class A Redeemable Warrant, exercisable for one share of Common
Stock at $4.00 per share. These Class A Redeemable Warrants are
subject to redemption by the Company beginning November 2, 1997 at
$.05 per warrant in the event that the closing bid price of the
Company's Common Stock exceeds $9.00 for a specified time period.
In connection with the IPO, the underwriter was granted an option
to purchase 462,000 units at $5.775 per unit.
On May 1, 1997, the Company received permission from the U.S. Food
and Drug Administration (FDA) to recover costs from Chronic Fatigue
Syndrome (CFS) patients in the Company's AMP-511 open-label
treatment protocol. The cost of Ampligen to the patient is $2,100
for the first eight weeks of treatment and $2,400 for each
additional eight-week period thereafter. Approximately 70 ME/CFS
patients were enrolled under this treatment protocol at various
clinical centers in the U.S as of February, 2000.
In the second quarter of 1998, the Company initiated the
recruitment of clinical investigator and ME/CFS patients to
participate in the confirmatory Phase III placebo-controlled
clinical study of Ampligen in the treatment of persons suffering
from ME/CFS. The Company has a target of eventually enrolling 230
patients with the severely debilitating form of ME/CFS. In August,
1998, the Company started enrollment of patients into the pre-clinical or
baseline phase of the study.
In December 1998, the Board of Directors explored the aspects of
spinning off Core Biotech, Inc., a wholly owned subsidiary to its
shareholders in a tax free transaction. Core Biotech Corp. intends
to use genetic technologies to develop therapeutic products for the
treatment of viral hepatitis diseases. The purpose of the spin-off
would be to allow shareholders to realize value for an asset that
the Company believes is not currently being appropriately valued.
No final determination has been made with respect to
capitalization, pro forma financial information, management or
intercompany transactions. The timetable for the planned spin-off
would depend on financing, staffing market conditions and progress
in developing the Company's other technologies. At this time, the
Company has put this project on hold and expects to re-open the
matter in early summer, 2000.
44
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market certificates and overnight
repurchase agreements collateralized by money market securities
with original maturities of less than three months, with both a
cost and fair value of $12,025,073 and $6,396,423 at December 31,
1998 and 1999, respectively.
(b) Investments
The Company classifies investments with original maturities of
three months or less as cash equivalents. Investments with original
maturities of more than three months are considered available for
sale. The investments classified as available for sale are payable
notes and are carried at estimated fair value with unrealized gains
and losses recorded as a component of shareholders' equity.
In 1998, the Company acquired 3.3% of the issued and outstanding
common stock of R.E.D. Laboratories at a cost of $1,038,000.
R.E.D. Laboratories is developing a diagnostic test for the ME/CFS
disease. In 1999, the Company acquired 15% of the equity stock of
the California Institute of Molecular Medicine (CIMM) for $375,000.
CIMM is developing therapy for Hepatitis C virus. Such investments
are accounted for on the cost basis of accounting.
(c) Property and Equipment
1998 1999
---- ----
Furniture, fixtures, and equipment $767,271 $1,018,293
Leasehold improvements 85,115 85,115
------- ----------
Total property and equipment 852,386 1,103,408
Less accumulated depreciation 670,662 770,048
------- ----------
Property and equipment, net $181,724 $ 333,360
======= ==========
Property and equipment consist of furniture, fixtures, office
equipment, and leasehold improvements recorded at cost.
Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the respective assets,
ranging from five to seven years.
Recoverability of assets is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
(d) Patent Rights
Patents are stated at cost (primarily legal fees) and are amortized
using the straight line method over the life of the assets,
generally 10 years. The Company reviews its patents and trademarks
periodically to determine whether they have continuing value. Such
review includes an analysis of the patent and trademark's ultimate
revenue and profitability potential on an undiscounted cash flow
basis to support the realizability of its respective capitalized
cost. In addition, management's review addresses whether the patent
continues to fit into the Company's strategic business plans.
During the years ended December 31, 1997, 1998 and 1999, the
Company decided not to pursue the technology in certain countries
for strategic reasons and has recorded $300,253, $120,459 and
$58,511 respectively, relating to the expense of writing off these
patents as a charge to research and development. Accumulated
amortization as of December 31, 1998 and 1999 is $1,305,971 and
$1,377,024 respectively.
45
(e) Investment in Unconsolidated Affiliates
Investments in unconsolidated affiliates are accounted for
utilizing the equity method of accounting reflecting in the
investment account any initial investment plus the Company's share
of earnings and losses from date of acquisition. Ribotech, Ltd.
has had net losses since inception and the Company does not share
in those losses in accordance with the licensing agreement defined
in Note 11. The net investment in Ribotech is zero as of December
31, 1998 and 1999. Any losses incurred by Ribotech are not
recorded by the Company as the basis is zero and the Company is not
obligated to fund such losses.
(f) Revenue
Revenue is recognized immediately for nonrefundable license fees
when agreement terms require no additional performance with respect
to such on the part of the Company. Revenue from the sale of
Ampligen under cost recovery clinical treatment protocols approved
by the FDA are recognized when such product is invoiced to the
patient. Revenue related to the sale of Ampligen were $258,715,
$400,708 and $678,248 for 1997, 1998 and 1999 respectively.
(g) Net Loss Per Share
Basic net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per share is computed using the weighted average
number of shares of common and diluted potential shares outstanding
during the period. Potential common shares consist of stock options
and warrants using the treasury stock method and are excluded if
their effect is antidilutive.
(h) Accounting for Income taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The measurement of deferred income tax assets
is reduced, if necessary, by a valuation allowance for any tax
benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates
is recognized in the period that such tax rate changes are enacted.
(i) Sales of Subsidiary Stock
The Company intends to account for any sales of its subsidiaries'
stock as capital transactions. However, as of December 31, 1998 and
1999, the Company owned 100% of each subsidiaries stock. Any sales
of subsidiary stock to a third party would represent a minority
ownership in the specific subsidiary.
(j) Comprehensive Loss
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of the Company's comprehensive loss and
its components in a full set of financial statements.
Comprehensive loss consists of net loss and net unrealized gains
(losses) on securities and is presented in the consolidated
statements of changes in stockholder's equity and comprehensive
loss. The Statement requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of
SFAS No. 130.
46
Comprehensive loss is summarized below:
1997 1998 1999
Net loss $(6,106,860) $(7,324,093) $(9,201,227)
Net unrealized gain (loss)
investment securities (2,183) 2,507 (324)
------------ ----------- ------------
Total comprehensive loss $(6,109,043) $(7,321,586) $(9,201,551)
============ =========== ============
(k) Use of estimates. The preparation of
financial statements in conformity with
generally accepted accounting principles
requires management to make estimates
and assumptions that affect the amounts
reported in the financial statements and
accompanying notes. Actual results could
differ from those estimates.
(l) On December 31, 1999, Biovail
Corporation agreed to purchase 285,714
shares for $2,250,000. 120,000 of these
shares were issued from the treasury.
The remaining 165,714 shares were new
issuances. The funds were received on
February 3, 2000.
(3) Investments
Securities classified as available for sale are summarized below.
1998
--------------
Unrealized
Adjusted -------------- Carrying
Cost Gains (Losses) Value
------- ----- ------ -------
U.S. Treasury note $ 499,831 $ 324 $ - $ 500,155
Federal National Mortgage Notes 1,091,223 - - 1,091,223
--------- ----- ------- --------
$1,591,054 $ 324 $ - $1,591,378
========= ====== ======= ========
1999
--------------
Unrealized
Adjusted -------------- Carrying
Cost Gains (Losses) Value
------- ----- ------ ----------
Federal Home Loan Bank Note $ 681,210 - - $ 681,240
General Electric Note 979,840 - - 979,840
CP ML & Co. Note 491,916 - - 491,916
----------- ----- ------ ----------
$2,152,966 - - $2,152,966
=========== ===== ====== ==========
(4) Stock-Based Compensation
In 1997, the Company granted 64,597 stock purchase options to
employees with at least one year of service in recognition of
services performed and services to be performed. For purposes of
proforma disclosure required by Statement of Financial Accounting
Standards No. 123 (SFAS 123") Accounting for Stock-Based
Compensation, the per share weighted average fair value of the
stock purchase warrants granted during 1997 was determined using
the Black-Scholes option pricing model with the following weighted
average assumptions: expected dividend yield of zero, risk free
interest rate ("rate") of 6.14%, volatility 112.25%, and an
expected life of 5 years. In 1998, the Company granted 1,113,000
warrants to employees in recognition of services performed and
services to be performed. For purposes of Pro forma Disclosure for
FAS 123 the fair value of the stock purchase warrants granted
during 1998 was also determined using the Black-Scholes option
pricing model with the rate of 6.14% volatility of 45.67%-73.31%,
and expected lives of 2-5 years. In 1999, the Company granted
275,000 warrants to employees in recognition of services performed
and services to be performed. For purposes of Proforma Disclosure
for FAS 123, the fair value of the stock purchase warrants granted
during 1999 was also determined using the Black-Scholes option
pricing model with the rate of 5.81% volatility of 135.4% -
294.31%, and expected life of 2 years.
The Company applies APB Opinion No. 25 in accounting for
stock-based compensation of its employees and, accordingly, no
compensation cost has been recognized for stock purchase warrants
issued to employees in the financial statements. Had the Company
determined compensation cost based on the fair value at the grant
date for its stock-based compensation of its employees the
Company's net loss would have been increased to the pro forma
amount indicated below:
1997 1998 1999
---- ---- ----
Net loss As reported $(6,106,860) $(7,324,093) $(9,201,227)
Pro forma $(6,203,259) (8,199,994) (10,537,963)
For warrants granted to non-employees, the Company measures fair
value of the equity instruments utilizing the Black-Scholes method
if that value is more-reliably measurable than the fair value of the
consideration or service received. The Company amortizes such cost
over the related vesting period of the warrant.
The exercise price of all warrants granted was equal to the fair
market value as defined by APB 25 on the date of the grant.
(5) Accrued Expenses
Accrued expenses at December 31, 1998 and 1999 consists of the
following:
December 31,
-------------
1998 1999
---- ----
Accrued payroll and benefits . . . . . . . $ 5,981 $ 40,521
Accrued polymer purchases . . . . . . . . 66,197 -
Accrued fees for HIV studies . . . . . . . 41,936 41,936
Accrued taxes. . . . . . . . . . . . . . . 85,159 64,283
Accrued professional fees. . . . . . . . . 35,500 181,563
Accrued directors fees . . . . . . . . . . 41,350 23,350
Accrued other. . . . . . . . . . . . . . . 63,251 68,200
--------- ---------
$339,374 $419,853
========= ========
(6) Stockholders' Equity
(a) Common Stock
The Company is authorized to issue 50,000,000 shares of $.001 par
value Common Stock. As of December 31, 1998 and 1999, 26,162,040 and
27,806,572 shares were issued and outstanding, respectively.
(b) New Equity Financing
New equity financing in 1998 and 1999 included the private placement
of common stock for an aggregate of $2,234,000 and $1,969,272 in net
proceeds, respectively. Certain warrantholders exercised their
stock warrants, which generated an additional $8,812,254 and
$1,923,473 in equity proceeds to the Company in 1998 and 1999,
respectively.
(c) Common Stock Options and Warrants
47
(i) Stock Options
The 1990 Stock Option Plan provides for the grant of options to
purchase up to 460,798 shares of the Company's Common Stock to
employees, directors, and officers of the Company and to
consultants, advisors, and other persons whose contributions are
important to the success of the Company. The recipients of options
granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if
any, duration and other terms of each option shall be determined by
the Company's board of directors or, if delegated by the board, its
Compensation Committee. No option is exercisable more than 10 years
and one month from the date as of which an option agreement is
executed. These shares become vested through various periods not to
exceed four years from the date of grant. The option price
represents the fair market value of each underlying share of Common
Stock at the date of grant, based upon the public trading price.
Information regarding the options approved by the Board of Directors
under the 1990 Stock Option Plan is summarized below:
1997 1998 1999
----------- ------------- -------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Exercise Exercise
Price Shares Price Shares Price Shares Price
------ ------ ------- ------ ------- ------ -------
Outstanding,
beginning
of year $1.06-4.34 234,953 $3.23 291,256 $3.35 294,609 $3.56
Granted $3.50-6.00 64,597 $3.50 20,000 $3.50 - -
Canceled $3.50 - - (4,482) $3.50 (609) $3.50
Exercisable $1.06-3.50 (8,294) $1.06 (12,165) $2.93 - -
-------- ------ ------ ------- -----
Outstanding,
end of year $1.06-6.00 291,256 $3.35 294,609 $3.56 294,000 $3.60
======== ====== ====== =======
Exercisable 206,867 $3.62 229,523 $3.48 250,915 $3.55
====== ====== =======
Exercised in
current
and prior years (18,870) (31,035) (31,035)
======= ====== =======
Available
for future
grants 150,672 135,154 135,763
======= ====== ======
In December 1992, the Board of Directors approved the 1992 Stock
Option Plan (the 1992 Stock Option Plan) which provides for the
grant of options to purchase up to 92,160 shares of the Company's
Common Stock to employees, directors, and officers of the Company
and to consultants, advisers, and other persons whose contributions
are important to the success of the Company. The recipients of the
options granted under the 1992 Stock Option Plan, the number of
shares to be covered by each option, and the exercise price, vesting
terms, if any, duration and other terms of each option shall be
determined by the Company's board of directors. No option is
exercisable more than 10 years and one month from the date as of
which an option agreement is executed. To date, no options have been
granted under the 1992 Stock Option Plan.
The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase
Plan) was approved by the board of directors in July 1993. The
outline of the 1993 Purchase Plan provides for the issuance, subject
to adjustment for capital changes, of an aggregate of 138,240 shares
of Common Stock to employees.
49
The 1993 Purchase Plan is administered by the Compensation Committee
of the board of directors. Under the 1993 Purchase Plan, Company
employees are eligible to participate in semi-annual plan offerings
in which payroll deductions may be used to purchase shares of Common
Stock. The purchase price for such shares is equal to the lower of
85% of the fair market value of such shares on the date of grant or
85% of its fair market value of such shares on the date such right
is exercised. There have been no offerings under the 1993 Purchase
Plan to date and no shares of Common Stock have been issued
thereunder.
(ii) Warrants
The warrants outstanding at December 31, 1999, related to the
issuance of former notes payable and stockholder notes payable which
are exercisable into Common Stock, are subject to adjustments for
stock splits and dividends.
Common Stock
--------------------
Exercise Number of
Price Shares Expiration
-------- --------- ----------
Notes payable:
Former noteholders . . . . . . . . $10.85 119,807 Nov. 2005
" " " . . $2.00 30,000 " "
Stockholders notes:
Stockholders . . . . . . . . . . . $3.50 252,160 Oct. 2004
Stockholders . . . . . . . . . . . $3.50 200,000 Oct. 1999
---------
Subtotal: 601,967
=========
(iii) Other Warrants
In addition, the Company has other issued warrants outstanding -
totalling 13,406,043 which consists of the following:
In November, 1994, the Company granted Rule 701 Warrants to purchase
an aggregate of 2,080,000 shares of Common Stock to certain officers
and directors. These Warrants are exercisable at $3.50 per share
and, if not exercised, were to expire in September, 1999. On
February 19, 1999 the Board of Directors extended the expiration
date for three more years. At December 31, 1999, there were
1,845,000 Rule 701 warrants remaining.
From February through April 1995, the Company executed Bridge Loan
Agreements and promissory notes with 17 accredited lenders totaling
$1,500,000. These notes required interest at 8% per annum and were
paid on the closing date of the IPO. Interest has been imputed at
12% and is recognized as interest expense and additional paid in
capital in 1995 to reflect the issuance of additional warrants to
reflect the reduction in interest. Such agreements also included
various affirmative and negative covenants. As additional
consideration, the lenders had options to purchase 1,000,000 bridge
units issuable upon the effective date of the IPO at an exercise
price of $.50 for a period of five years. Each bridge option
consists of one share of common stock and one class A redeemable
warrant to purchase common stock at $4.00 per share. 797,917 units
were exercised in 1995 and 202,083 were exercised in 1996 at $.50
per unit.
In May, 1995, the Company and certain officers, directors and
shareholders entered into a standby finance agreement pursuant to
which the parties agreed to provide an aggregate of $5,500,000 in
financing to the Company during 1995 in the event that existing and
additional financing was insufficient to cover the cash needs of the
Company through December 31, 1996. In exchange, the Company issued
warrants to purchase an aggregate of 2,750,000 shares of Common
Stock at $1.75 per share to the parties. In 1998, 592,000 and in
1999, 15,000 of these warrants were exercised, leaving a balance of
these warrants is 1,868,000.
50
In June 1995, the Company entered into an agreement with The Sage
Group whereby, in return for identifying certain distribution
partners, The Sage Group will receive certain percentages of the
proceeds from the first distribution agreement arising from such
identification. In addition, the Company will pay to The Sage Group
a monthly retainer and has given warrants to purchase 100,000 shares
of Common Stock at an exercise price of $1.75 share. In May, 1996,
additional warrants to purchase 140,000 shares of Common Stock were
issued at an exercise price of $3.50. 50,000 of these warrants were
exercised in 1999. In May, 1997, additional warrants to purchase
250,000 shares of common stock were issued at an exercise price of
$3.50, as part of the engagement contract.
In connection with the IPO completed on November 7, 1995, the
Company sold 5,313,000 units. Each unit consisted of one share of
common stock and one Class A Redeemable Warrant exercisable at $4.00
per share. Warrant holders exercised 100 shares at the exercise
price during 1997, 664,090 during 1998 and 168,500 in 1999.
Also, as part of the underwriting agreement, the underwriter
received warrants to purchase 462,000 shares of common stock at
$5.775 per share, these warrants were exercised in 1998. The
underwriter also received 462,000 Class A Redeemable Warrants to
purchase common stock at $6.60 per share. These warrants expire
five years from the date of the IPO.
In connection with the stock issued in September, 1997, the company
issued 385,067 warrants to several entities to purchase common stock
at $4 per share, 149,034 of these warrants were exercised in 1998,
and 173,300 were exercised in 1999. The remaining 62,733 warrants
will expire December 31, 2000.
In each of the years 1998 and 1999, the Company issued 300,000
warrants to investment banking firms for services performed on
behalf of the Company. These warrants have various vesting dates
and exercise prices ranging from $4.00 to $10.00 per share. In
1999, 100,000 of these warrants were exercised.
2,748,000 warrants have been granted to other parties, stockholders
and employees for services performed. These warrants are exercisable
at rates of $2.50 to $10.00 per share of common stock and the
exercise price was equal to the fair market value of the stock on
the date of grant. 275,000 of the 2,748,000 warrants outstanding
were granted to employees with a weighted average exercise price of
$7.14 per share and have been included in the pro-forma loss
calculation in footnote 4.
(iv) Subsidiary Warrants
In May 1995, the officers and directors of BioAegean Corp. were
elected and approved. The board of directors approved the issuance
of 6,000,000 shares of Common Stock, of which 1,000,000 shares are
to be offered for sale to certain investors at $1.00 per share. In
addition, the directors approved options for directors and officers
totaling 1,200,000 shares at an exercise price of $1.00. In
consideration for licensing certain patents, the board authorized
1,000,000 shares of common stock to be issued to Hemispherx
BioPharma, Inc., options for an additional 1,000,000 shares of
common stock at the lesser of the initial public offering price of
BioAgean Corp. or $5.00 per share and 10,000 shares of Preferred
stock to Hemispherx BioPharma, Inc. Only the common stock shares of
Hemispherx BioPharma, Inc have been issued as of December 31, 1998
and 1999.
(7) Convertible Preferred Stock
In March, 1997, the Company used the services of an investment
banking firm to privately place $5 million of Series E Convertible
Preferred Stock. The proceeds from this placement were used to
retire the balance of Series D Convertible Stock issued in July of
1996. As an inducement to effect the early redemption of the Series
D Preferred Stock, the Company gave the Preferred Stockholder
200,000 shares of common stock with a guaranteed sales price of $6
per share. As a result of this inducement in 1997, the Company
incurred a $1.2 million stock conversion cost, which had no effect
on the net equity of the company as it was offset by an
51
increase in additional paid-in capital.
The holders of Series E Convertible Preferred Stock shall receive
cumulative dividends when and if declared by the board of directors
at the rate of $60 per share. Holders of Series E Convertible
Preferred Stock upon surrender of the certificates shall have the
right to convert the Series E preferred into fully paid and non-assessable
share of Common Stock.
On April 18, 1997, the Company's registration statement registering
the common stock underlying the preferred stock and warrants was
declared effective by the SEC. As of December 31, 1998, all holders
of Series E convertible preferred stock had converted their holding
into 2,500,000 shares of common stock.
(8) Segment and Related Information
In June 1997, the FASB issued Statement of Financial Standard No.
131, Disclosures about Segments of an Enterprise and Related
Information ("Statement 131"). Statement 131 supersedes Statement
of Financial Standards No. 14, Financial Reporting for Segments of
a Business Enterprise, and establishes new standards for reporting
information about operation segments in annual financial statements
and requires selected information about operating segments in
interim financial reports. Statement 131 also establishes standards
for related disclosures about products and services, geographic
areas and major customers. Statement 131 is effective for periods
beginning after December 15, 1997. This Statement affects reporting
in financial statements only and has no impact on the Company's
results of operations, financial condition or liquidity.
As the Company has one management team in one location performing
research and development activities for Ampligen, no additional
segment disclosure beyond what is reported in the consolidated
financials is necessary under SFAS No. 131.
The following table presents revenues by country based on the
location of the use of the product services.
1997 1998 1999
-------- -------- --------
United States $117,975 $194,815 $391,181
Belgium 104,044 179,120 258,817
Other 36,736 26,773 28,250
-------- -------- --------
$258,715 $400,708 $678,248
======== ======== ========
(9) Research, Consulting and Supply Agreements
The Company has entered into various clinical research agreements
for the purpose of undertaking clinical evaluations of the safety
and efficacy of Ampligen. The Company's obligation under these
agreements is primarily dependent on the number of actual patients
enrolled in the study and may be terminated without penalty at any
time. During the years ending December 31, 1997 and 1998, the
Company incurred approximately $179,000 of research fees under this
agreement with Hahnemann Medical University in Philadelphia. Such
costs were expensed as incurred. No such costs were incurred in
1999.
In August, 1988, the Company entered into a pharmaceutical use
license agreement with Temple University (the Temple Agreement). In
July, 1994, Temple terminated the Temple Agreement. In November,
1994, the Company filed suit against Temple in the Superior Court
of the State of Delaware seeking a declaratory judgement that the
agreement was unlawfully terminated by Temple and therefore remained
in full force and effect. Temple filed a separate suit against the
Company seeking
52
a declaratory judgement that its agreement with the
Company was properly terminated. These legal actions have now been
settled. Under the settlement, the parties have entered into a new
pharmaceutical use license agreement (New Temple Agreement) that is
equivalent in duration and scope to the previous license. Under the
terms of the New Temple Agreement, Temple granted the Company an
exclusive world-wide license for the term of the agreement for the
commercial sale of Oragen products using patents and related
technology held by Temple, which license is exclusive except to the
extent Temple is required to grant a license to any governmental
agency or non-profit organization as a condition of funding for
research and development of the patents and technology licensed to
the Company.
In December, 1999, the Company entered into an agreement with
Biovail Corporation International ("Biovail"). Biovail is an
international full service pharmaceutical company engaged in the
formulation, clinical testing, registration and manufacture of drug
products utilizing advanced drug delivery systems. Biovail is
headquartered in Toronto, Canada. The agreement grants Biovail the
exclusive distributorship of the Company's product in the Canadian
territories subject to certain terms and conditions. In return,
Biovail agrees to conduct certain pre-marketing clinical studies and
market development programs, including without limitation, expansion
of the Emergency Drug Release Program in Canada with respect to the
Company's products. In addition, Biovail agrees to work with the
Company in preparing and filing of a New Drug Submission with
Canadian Regulatory Authorities. Biovail invested several million
dollars in Hemispherx equity at prices above the then current market
price and agreed to make further payments based on reaching certain
regulatory milestones. The Agreement requires Biovail to penetrate
certain market segments at specific rates in order to maintain
market exclusivity.
The Company has entered into agreements for consulting services
which are performed at medical research institutions and by medical
and clinical research individuals. The Company's obligation to fund
these agreements can be terminated after the initial funding period,
which generally ranges from one to three years or on an as-needed
monthly basis. During the years ending December 31, 1997, 1998 and
1999, the Company incurred approximately $124,000, $269,000, and
$664,0000, respectively of consulting service fees under these
agreements. These costs are expenses as incurred.
(10) 401(K) Plan
The Company has a defined contribution plan, entitled the Hemispherx
BioPharma Employees 401(K) Plan and Trust Agreement (the 401(K)
Plan). All 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.
In 1997, 1998, and 1999, the Company provided matching contributions
to each employee for up to 6% of annual pay of $30,598, $36,958 and
$46,616 respectively.
(11) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group
of individuals and Hahnemann University relating to their
contributions to the development of certain compounds, including
Ampligen, and to obtain exclusive information and regulatory rights
relating to these compounds. Under this agreement, the Company will
pay 2% of net sales proceeds of Ampligen not to exceed an aggregate
amount of $6 million per year through 2005.
53
As described in Note 9, the Company has agreed to pay royalties
under the Temple Agreement and to its supplier of raw materials.
The Company has contractual agreements with three of its officers.
The contract with one of the officers was terminated in 1999 and a
buy-out amount of $143,000 was paid to this officer. The aggregate
annual base compensation under these contractual agreements for
1997, 1998, 1999 is $611,678, $622,952 and $815,413 respectively.
1999 includes the buy-out amount of $143,000 for the terminated
contract. In addition, certain of these officers are entitled to
receive performance bonuses of up to 25% of the annual base salary
(in addition to the bonuses described below). In 1998, a performance
bonus of $90,397 was granted. In 1997 no performance bonuses were
granted. Pursuant to the employment agreements, certain officers
were granted options under the 1990 Stock Option Plan to purchase
an aggregate of 82,942 shares of the Company's Common Stock at
exercise prices ranging from $2.72-$4.34 and Rule 701 Warrants to
purchase 2,080,000 shares of Common Stock at $3.50 per share. One
of the employment agreements provides for bonuses based on gross
proceeds received by the Company from any joint venture or corporate
partnering agreement.
In October 1994, the Company entered into a licensing agreement with
Bioclones (Propriety) Limited (SAB/Bioclones) with respect to
codevelopment of various RNA drugs, including Ampligen, for a period
ending three years from the expiration of the last licensed patents.
The licensing agreement provides SAB/Bioclones with an exclusive
manufacturing and marketing license for certain southern hemisphere
countries (including certain countries in South America, Africa and
Australia) as well as the United Kingdom and Ireland (the licensed
territory). In exchange for these marketing and manufacturing
rights, the licensing agreement provides for: (a) a $3 million cash
payment to the Company, all of which was recorded during the year
ended December 31, 1995; (b) the formation and issuance to the
Company of 24.9% of the capital stock of Ribotech, a company which
develops and operates a new manufacturing facility by
SAB/Bioclones, and (c) royalties of 6% to 8% of net sales of the
licensed products in the licensed territories as defined, after the
first $50 million of sales. SAB/Bioclones will be granted a right
of first refusal to manufacture and supply to the Company licensed
products for not less than one third of its world-wide sales of
Ampligen, excluding SAB/Bioclones related sales. In addition,
SAB/Bioclones will have the right of first refusal for oral vaccines
in the licensed territory. In 1996, 1997, 1998 and 1999, the Company
paid Ribotech a total of $581,556 for the purchase and delivery of
polymers.
In October 1994, the Board of Directors granted a director of the
Company the right to receive 3% of gross proceeds of any licensing
fees received by the Company pursuant to the SAB licensing
agreement, a fee of .75% of gross proceeds in the event that SAB
makes a tender offer for all or substantially all of the Company's
assets, including a merger, acquisition or related transaction, and
a fee of 1% on all products manufactured by SAB. The Company may
prepay in full its obligation to provide commissions within a ten
year period.
In December, 1995, the Company retained the law firm of Akin, Gump,
Strauss, Hauer & Feld, L.L.P. (Akin-Gump) to provide general legal
counsel, advise and representation with respect to various United
States regulatory agencies, primarily the Food and Drug
Administration (FDA). This agreement expired in August, 1997. In
September, 1997, the Company acknowledged a contingent liability of
$147,000 to Akin-Gump for certain fees billed and not covered by the
agreement. These fees are due Akin-Gump if and only if the Company
achieves regulatory approval of Ampligen in the future.
54
(12) Leases
The Company has several noncancelable operating leases for the
space in which its principal offices are located and certain office
equipment.
Future minimum lease payments under noncancelable operating
leases are as follows:
Year ending Operating
December 31, leases
----------- ---------
2001. . . . . . . . . . . . . . . . . . . . $ 33,622
2002. . . . . . . . . . . . . . . . . . . . 15,972
2003. . . . . . . . . . . . . . . . . . . . 2,240
----------
Total minimum lease payments . . . . . . $ 51,834
==========
Rent expense charged to operations for the years ended December 31,
1997, 1998 and 1999 amounted to approximately $292,000, $308,000 and
$340,978 respectively.
The term of the lease is through April 30, 2000 with an average rent
of $14,507 per month, plus applicable taxes and charges.
(13) Income Taxes
As of December 31, 1999, the Company has approximately $53,231,000
of federal net operating loss carryforwards (expiring in the years
2003 through 2019) available to offset future federal taxable
income. The Company also has approximately $5,096,000 of state net
operating loss carryforwards (expiring in the years 2006 through
2009) available to offset future state taxable income. In addition,
the utilization of the state net operating loss carryforward is
subject to a $2,000,000 annual limitation.
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss carryforward is limited following a greater than
50% change in ownership. Due to the Company's prior and current
equity transactions, the Company's net operating loss carryforwards
may be subject to an annual limitation generally determined by
multiplying the value of the Company on the date of the ownership
change by the federal long-term tax exempt rate. Any unused annual
limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for
financial reporting purposes and the carrying amounts used for
income tax purposes. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The ultimate goal realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in
which temporary differences representing net future deductible
amounts become deductible. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax asset, the
deferred tax assets are fully offset by a valuation allowance at
December 31, 1998 and 1999.
During 1999, the Company amended their prior year tax returns to
capitalize research and development costs to extend the life of the
net operating losses. The effect of the amended returns is an
increase in the deferred tax asset for research and development and
a decrease in the deferred tax asset for net operating losses at
December 31, 1999.
The components of the net deferred tax asset of December 31, 1998
and 1999 consists of the following:
55
Deferred tax assets: 1998 1999
----------- -----------
Net Operating Losses $20,526,592 $18,607,504
Accrued Expenses and
Other 19,617 41,117
Capitalized R&D Costs 0 3,722,346
---------- ----------
20,546,209 22,370,967
Valuation Allowance (20,039,868) (21,840,360)
---------- ----------
$ 506,341 $ 530,607
Deferred tax
liabilities:
Amortization and Other (506,341) (530,607)
=========== ==========
$ 0 $ 0
=========== ==========
(14) Contingencies
On September 14, 1998, VMW, Inc. filed a complaint against the
Company in the United States District Court, Southern Division of
New York, The complaint alleges that the Company failed to fulfill
its financial obligations to VMW, Inc. with respect to a certain
letter agreement pertaining to marketing services rendered. VMW,
Inc. claims damages of less than $100,000. The Company
counterclaimed alleging breach of contract by VMW and have demanded
damages of approximately $25,000. Both parties settled this dispute
in 1998 and executed Mutual Releases.
On September 30, 1998, the Company filed a multi-count complaint
against Manuel P. Asensio, Asensio & Company, Inc., and others in
the United States District Court for the Eastern District of
Pennsylvania. On October 22, 1998, the Company amended the
complaint to add additional counts and to conform the complaint to
agreed upon dismissals without prejudice as to certain of the
defendants. On August 13, 1999, the Company amended and
supplemented the complaint for a second time to conform the
complaint to court ordered dismissals of certain counts of the
complaint and parties, to add Asensio.com, Inc. (formerly known as
Asensio Holdings, Inc.), the holding company of defendant Asensio
Company Inc., and to add a conspiracy charge against the remaining
defendants and certain unnamed John Does.
The complaint presently contains claims of defamation,
disparagement, tortious interference with existing and prospective
business relations and conspiracy, arising out of the current
defendants' false and defamatory statements. (The complaint further
alleges that defendants defamed and disparaged the Company in
furtherance of a manipulative, deceptive and unlawful short-selling
scheme between August, 1998, and the present).
On April 19, 1999, defendants Asensio and Asensio & Company, Inc.,
filed an answer and counterclaim against the Company. The
counterclaim alleges that on or about September, 1998, and in
response to defendants' strong sell recommendation and other press
releases about Hemispherx and its officers and directors, the
Company made defamatory statements about defendants, including that
defendants' attacks and manipulative short-selling scheme may have
constituted criminal wrongdoing on the part of defendants. The
Company has denied the material allegations of the counterclaim and
is vigorously defending against the counterclaim. In August, 1999,
several of the short sellers in Hemispherx were indicted by the U.S.
Attorney in New York for money laundering and manipulation in
another non-Hemispherx matter. The parties are presently engaged
in discovery which is currently scheduled to conclude in the Spring,
2000.
56
The Company is subject to claims and legal actions that arise in the
ordinary course of their business. Management believes that the
ultimate liability, if any, with respect to these claims and legal
actions will not have a material effect on the financial position
or results of operations of the Company.
(15) Stock Repurchase
On February 19, 1999, the Board of Directors authorized the
repurchase of up to 200,000 shares of the Company's common stock on
the open market. The repurchased shares will eventually be used for
acquisitions or other purposes. On February 8, 2000, the Board
authorized the repurchase of another 200,000 shares.
(16) Subsequent Events
On March 6, 2000, Cook Imaging Corp. et. al, filed a complaint
against the Company in the United States District Court for the
Eastern District of Pennsylvania. Cook Imaging Corp. asserts that
the Company refuses to pay for certain Ampligen manufacturing
efforts undertaken by Cook. The Company plans to respond to the
complaint within the next twenty days. In essence, the Company
maintains that Cook Imaging Corp. did not perform as required by the
contract under GMP (Good Maintenance Practices) conditions. The
Company does not believe that Cook Imaging Corp. will prevail in
this matter.