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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, 2000
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:
Common Stock, $.001 par value
Class A Common Stock Redeemable
Purchase Warrant
Securities registered pursuant to Section 12(g) of the Act:
(Title of ,Each Class)
NONE
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 March 27,
2001 was $125,958,609. For purposes of this calculation, it was assumed that
all Common Stock is valued at the closing price of the stock as of March 27,
2001.
The number of shares of the registrant's Common Stock outstanding as of
December 31, 2000 was 29,972,242.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection with the
Registrant's 2000 Annual Meeting of Stockholders, to be held on July 12, 2001,
are incorporated by reference into Part III of this Annual Report on Form 10-K.
PART I
ITEM 1. Business
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business," "Item 3 Legal Proceedings" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Result
of Operations," constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but
not necessary all, of such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," or "anticipates" or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Hemispherx Biopharma, Inc. and its
subsidiaries (collectively, the "Company", "we or "us") to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements and other factors referenced in this
Form 10-K. The Company does not undertake and specifically declines any
obligation to publicly release the results of any revisions which may be made
to any forward-looking statement to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
GENERAL
We are a pharmaceutical research and development company using Nucleic Acid
technologies to develop therapeutic products for the treatment of certain viral
diseases and cancers. Our proprietary drug technology utilizes specifically
configured ribonucleic acid (RNA). Over the years, we have established a strong
base of laboratory, pre-clinical and clinical data to support the successful
commercialization of our lead compound, Ampligen , for use in treating immune
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system dysfunction, viral diseases and certain cancers. Ampligen is presently
undergoing phase II/III clinical trials in the United States and Europe for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue syndrome ("ME/CFS").
We have focused on the treatment of diseases for which adequate treatment is
not currently available and for which the antiviral and immunostimulatory
properties of Ampligen may be beneficial. Such diseases include ME/CFS,
Hepatitis, HIV and certain cancers. In recent years, the understanding of
ME/CFS has grown substantially. The Centers for Disease Control and Prevention
(CDC) estimates that the prevalence rate of this disease in the United States
is in excess of 500,000 cases. Other medical researchers have reported evidence
that ME/CFS is related to viral infection and systemic disorders. These
findings led the Company to focus on pursuing the clinical development of
Ampligen for regulatory approval to use in the treatment of those people
afflicted with ME/CFS.
Over the years, we have secured a significant patent estate consisting of 24
patents issued in the United States and over 300 international filings. These
patents primarily cover our technology platform that involves nucleic acid
polymers that have specifically configured base pairs. Our policy is to file
or license existing patent applications on a worldwide basis to protect
technology and improvements that are considered important in the development
of our business.
As an emerging, biopharmaceutical Company, we depend on accessing external
resources for manufacturing, distribution and research and development. A large
portion of our research and development is provided under contract with
scientists and technicians who are not employed by us, and are employed by
various health care and academic institutions.
We expect to continue our research and clinical efforts for the next several
years with some financial benefit accruing as a result of certain revenues
expected from various cost recovery treatment programs, notably in Canada,
Europe and the United States. However, we may continue to incur losses over the
next several years due to clinical costs incurred in the continued development
of Ampligen for commercial application. Possible losses may fluctuate from
quarter to quarter as a result of differences in the timing of significant
expenses incurred and receipt of licensing fees and/or cost recovery treatment
revenues in Europe, Canada and in the United States. We are also pursuing
similar programs in other countries, especially within the European Union,
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where resources have been expanded with respect to pursuing regulatory
approvals.
We were incorporated in Maryland in 1966 under the name HEM Research, Inc., and
originally served as a supplier of research support products. Our business was
redirected in the early 1980's to the development of nucleic acid
pharmaceutical technology and the commercialization of RNA drugs. We were
reincorporated in Delaware and changed our name to HEM Pharmaceuticals Corp.
in 1991 and to Hemispherx BioPharma, Inc. in June 1995. We have three domestic
subsidiaries BioPro Corp., BioAegean Corp. and Core BioTech Corp., all of which
are incorporated in Delaware. Our foreign subsidiary, Hemispherx BioPharma
Europe, N.V./S.A. was established in Belgium in 1998. Our principal executive
offices are located at One Penn Center, 1617 JFK Boulevard, Philadelphia,
Pennsylvania 19103, and its telephone number is (215) 988-0080.
AMPLIGEN
There are two forms of nucleic acids DNA and RNA. DNA is a group of naturally
occurring molecules found in chromosomes, the cell's genetic machinery. RNA is
a group of naturally occurring informational molecules which orchestrate a
cell's behavior and which regulate the action of groups of cells, including the
cells which comprise the body's immune system. RNA directs the production of
proteins and regulates certain cell activities including the activation of an
otherwise dormant cellular defense against virus and tumors.
Nucleic acid compounds represent a potential new class of pharmaceutical
products that are designed to act at the molecular level for treatment of human
diseases. The Company's drug technology utilizes specially-configured RNA. Our
double-stranded RNA drug product, trademarked Ampligen , which is administered
intravenously, is in or has been in human clinical development for various
disease indications, including treatment for ME/CFS, HIV, renal cell carcinoma
and malignant melanoma.
Based on the result of pre-clinical studies and clinical trials, the Company
believes that Ampligen may have broad-spectrum anti-viral and anti-cancer
properties. Over 500 patients have received Ampligen in clinical trials
authorized by the Food and Drug Association ("FDA") at over twenty clinical
trial sites across the U.S., representing the administration of more than
41,000 doses of this drug.
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MYALGIC ENCEPHALOMYELITIS/CHRONIC FATIGUE SYNDROME (ME/CFS)
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.
Although the etiology of ME/CFS is unknown, a segment of the medical community
believes that it may be caused by a virus as the onset of the condition is
usually characterized by flu-like symptoms followed by chronic tiredness that,
in some cases, can continue for years. ME/CFS is also often accompanied by a
disturbance of the patient's immune system, as measured by lower levels of
natural killer cell activity and/or lower lymphocyte counts. People suffering
from this illness experience among other symptoms, 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 system symptoms may include memory loss.
Because there may be both viral and immune components to this disease, we
believe, although it has not yet been clinically proven, that Ampligen may be
well suited as a treatment for ME/CFS. There is no drug specifically approved
by the FDA for this disorder and physicians typically prescribe analgesics and
anti-inflammatory drugs to combat the painful symptoms. Since the early 1990's
the Company has clinically studied the use of Ampligen in the treatment of
ME/CFS patients in four (4) separate clinical trials. Three studies in the
United States were approved by the FDA and the one study that is ongoing in
Belgium was approved by Belgian regulatory authorities.
In 1998, we initiated, with FDA authorization, a confirmatory, double-blind,
placebo-controlled clinical study with Poly I:Poly C12U (Ampligen ) in
treatment of 230 patients in the U.S. with severely debilitating ME/CFS.
The objective of this confirmatory Phase III clinical study is to further
evaluate the safety and efficacy of Ampligen as a treatment for ME/CFS.
As of February, 2001 we have engaged the services of eleven (11) clinical
investigators at Medical Centers in California, New Jersey, Florida, North
Carolina, Wisconsin, Nevada, Illinois and Connecticut. These clinical
investigators are Medical Doctors with some knowledge of ME/CFS and
usually are treating the symptoms of several ME/CFS patients. These
investigators have recruited, prescreened and enrolled an aggregate of
236 ME/CFS patients for inclusion in the Phase II/III ME/CFS clinical trial.
Over 60% of the enrolled ME/CFS patients have completed the stage I, forty
week, double-blind, randomized, placebo-controlled portion of the clinical
trial and moved into the stage II or the open label treatment portion of the
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clinical trial. There have been no serious adverse events reported related to
the study medication. Additional ME/CFS patients are being recruited by the
clinical investigators.
In April, 1999 the FDA authorized us to expand our ME/CFS Cost Recovery
Treatment Program to provide therapy to 100 active patients in the U.S. Under
this clinical program, the enrolled patients may pay for the cost of the
Ampligen doses infused. This cost totals approximately $7,200 for a 24 week
treatment program. Approximately 82% 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. During the twelve months ended December 31, 2000,
we received $506,000 in reimbursement for Ampligen used under this plan from
the U.S. component of ME/CFS treatment protocols. Overall revenue from these
programs, including Europe, was $788,000 for the twelve month period.
We have established relationships with three other companies to provide
clinical/pharmacy support services and to facilitate the conduct of our
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, WorkWell, provides
exercise physiologists to conduct standardized exercise tolerance and oxygen
consumption tests at the various clinical facilities across the United States.
We believe that we have various corporate relationships and programs in place
to insure the quality of data collection to a high international regulatory
standard.
Our ME/CFS Cost Recovery Treatment Program in Belgium was started in
1994 with the approval of the Belgian regulatory authorities. Since its
inception, over 100 patients have enrolled in this program. Clinical data
collected in the treatment of these ME/CFS patients will be used to support
our European Medical Evaluation Agency ("EMEA") Drug Approval Application and
in applications in other regulatory jurisdictions. This program is being
extended 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.
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HIV/AIDS
Today, patients infected with HIV receive a number of different combinations
of anti-retroviral compounds (so called "Cocktails") that target two essential
viral enzymes; reverse transcriptase and protease. However, it appears that
after some period of time, the AIDS virus may become resistant to these
antiviral cocktails and that drug resistance is a critical obstacle to the
long-term efficacy of present (cocktail) therapies for HIV.
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, termed "HAART."
Many HIV patients who receive HAART (including a protease inhibitor) may
encounter virologic failure. 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 other cocktail components of HAART.
These presumptive benefits have been evaluated by us in in vivo studies and
will be evaluated in 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 now been authorized by
the FDA.
Alone, or in conjunction with AZT, Ampligen infusion therapy has been
historically well tolerated in the initial clinical tests, some of which have
been published in peer review journals. Thus, overall safety assessments
supported a reasonable safety profile of this drug alone or in combination with
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the antiretroviral agent (AZT). Clinical studies are now being designed to
combine Ampligen with certain other reverse transcriptase inhibitors of HIV
as well as protease inhibitors of HIV. Ex vivo tests which have been
conducted at various academic and industrial laboratories around the U.S. via
research agreements and corporate partnerships support this combination
approach.
The Company has received two (2) authorizations from the FDA to commence
clinical studies using Ampligen to treat patients affected with HIV that
are now involved in existing HAART protocols.
The objective of the first study protocol, designated as AMP 719, is to
evaluate the effects of adding Ampligen (or no Ampligen ) to the HAART
treatment of HIV patients for evidence of reductions in the HIV-1 viral
load in plasma.
The objective of the second study protocol, designated as AMP 720, is to
evaluate the potential activity of Ampligen to increase the HAART-free
time interval before HIV rebound during a strategic therapeutic
intervention ("STI") of the HAART protocols.
Each study will be multi-center, randomized and controlled consisting of 120
patients. Each study will consist of two arms, one arm of 60 patients will
receive Ampligen in connection with HAART and one arm of 60 patients
will receive no Ampligen in connection with their HAART treatment.
Protocol AMP 719 has 24 weeks of randomized Ampligen /HAART treatment
plus 24 weeks of open label treatment. Protocol AMP 720 consist of eight
weeks of randomized Ampligen /HAART treatment followed by the STI and weekly
monitoring to determine HIV rebound. Following HIV rebound, HAART will
be restarted. This sequence will be replicated for a duration of 64 weeks.
Reasonably rapid clinical results are expected because the efficacy
determination, or end points, of the clinical study are a series of
well-established virus measurements. The virology will be performed at a
national reference laboratory. Potential patients for these studies
are now being screened in California and Connecticut.
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HEPATITUS C VIRUS (HCV)
Hepatitis C infection is typically mild in its early stages, and is often not
diagnosed until a late stage when it has caused severe liver disease. A typical
cycle of disease from infection to symptomatic liver disease can take 20 years,
therefore, the true impact of HCV may not be fully apparent. Hepatitis C is
believed to be transmitted only by blood. However, unlike many other blood
borne viruses (like HIV), virtually any source of blood products seems to be
capable of carrying the virus, even if the source is indirect like a used
razor, for example. This makes hepatitis C far more transmittable than most
other blood borne viruses including HIV.
Hepatitis C is an RNA virus. Once an infection has begun, Hepatitis C creates
different genetic variations of itself within the body of the host. The mutated
forms are frequently different enough from their ancestor that the immune
system cannot recognize them. Thus, even if the immune system begins to succeed
against one variation, the mutant strains quickly take over and become new,
predominant strains. Thus, the development of antibodies against HCV may
not produce an immunity against the disease like it does with most other
viruses. More than 80% of individuals infected with HCV will progress to a
chronic form of the disease.
The World Health Organization estimates that more than 4.5 million people in
the United States are infected with Hepatitis C and more than 200 million
worldwide. A vaccine against Hepatitis C is not available and there are many
times more people infected with HCV than HIV (the virus that causes AIDS).
It is anticipated that without prompt intervention to treat infected
populations, the death rate from Hepatitis C could surpass that from AIDS.
We currently have a research and development arrangement with the California
Institute of Molecular Medicine ("CIMM") to collaborate and fund the
replication of human Kuffer's cells obtained from HCV infected patients. This
proprietary CIMM approach would involve the in vitro growth of hepatic
macrophages (called Kuffer's cells) from the failing liver of a patient and
reinfusion of liver cells into the same patient. This would not raise the
question of immunological incompatibility. CIMM is also developing a process
for maintaining and propagating Kuffer's cells ("KC") reproducibly in defined
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cell cultures from fine needle liver aspirates from living human volunteers
with potential for patients with failing liver due to a variety of etiologies.
We have a 30% equity position in CIMM, which is located in California and
recently opened a new state-of-the-art research lab.
EUROPEAN OPERATIONS
While we cannot market Ampligen in Europe until approval is obtained from
the European Medical Evaluation Authority ("EMEA"), we are allowed to deliver
Ampligen on a cost recovery basis to ME/CFS patients through an expanded
access program. Each country has different requirements for authorizing and
allowing these programs.
Through Hemispherx Biopharma-Europe, N.V./S.A. we are developing an
organization and infrastructure to expand access to Ampligen while under
clinical development. This will allow us to have a basic marketing and
distribution system in place pending approval from EMEA. Initial efforts
include recruiting staff to establish potential 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 certain severely disabled ME/CFS
patients in those countries to have access to Ampligen prior to the completion
of the full commercial registration process. During this time, we may realize
revenues from our expanded access programs.
In France and Italy, the use of a drug before registration is possible under
special circumstances (serious illness, no alternative treatment, likelihood
of efficacy and tolerance of the drug) either on a named patient basis or for
a group of patients. For a named patient authorization, the request is made by
a physician and the prescription will be his or her responsibility. For a
group of patients, the request is normally initiated by a drug company and by
an institution (e.g. a hospital) or a scientific body. In Germany and Spain,
only clinical trials are possible before registration, but they can be open-
label with relaxed inclusion/exclusion criteria. In Spain, Expanded Use
Clinical Trials are possible if a controlled clinical trial is already being
implemented with the test drug.
In all four countries, the drug can be sold to patients pursuant to the
applicable expanded access criteria, but the reimbursement of the cost may not
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be possible in some situations. In France, patients are likely to be reimbursed
if the drug is provided for a group of patients, not on a named patient basis;
and some regional health insurance bodies can decline the reimbursement. In
Germany, reimbursement is possible but again, depends on regional health
authorities. In Spain, reimbursement may be possible for Expanded Use/Cost
recovery Clinical Trials.
We plan to support different tax exempt educational based organizations and
physicians who seek to increase scientific/medical insight into the potential
treatment of ME/CFS. A number of such advocacy groups are already
organized in Germany, Italy, the Benelux, the United Kingdom, France, and other
countries. We are also assisting physicians/advocacy groups to establish a Pan
European Web site to enable them to hold scientific forums and exchange medical
information and clinical experiences to enable a better understanding of the
morbidity of ME/CFS.
In November 1998 we conducted a scientific meeting in Rome, assembling 35
physicians (internists) and (specialists concentrating on viral infections and
chronic diseases) from 10 different European countries. We plan to conduct a
similar convention in 2001.
The expanded access program will be organized using Approved Clinical Centers
("ACC"). Each ACC is expected to be a clinic or hospital service in which a
physician is ready to diagnosis and treat selected patients with Ampligen
under an approved protocol designed by the Company. Our target will be
eventually to have a network of approximately 30 ACCs set up throughout Europe
starting with an initial goal of 12. Once this network is established and
developed we intend to move on a country by country basis to helping develop
home care treatments under the supervision and responsibility of approved
specialists and general practitioners.
In April 2000 we withdrew our ME/CFS treatment application that was originally
filed with the EMEA in December, 1998. The application was withdrawn for two
economically compelling reasons. First of all, subsequent to the original
filing, we executed a manufacturing agreement with a multinational company to
manufacture Ampligen in an easier to use, more economic, liquid form.
Secondly, in December, 1999, the European Parliament established new
regulations for orphan medicinal products which creates various important
economic incentives for certain manufacturers including, a ten (10) year period
of marketing exclusivity, financial support of research, waiver of various
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administrative fees as well as regulatory assistance in developing certain new
drug products. Under current European Union ("EU") laws, pending
marketing applications cannot be amended, either with respect to a change in
manufacturing format to reflect the application of new orphan drug
regulations, without withdrawal and resubmission. The overall economic
advantages of submitting the application with a new manufacturing format and the
possibility of qualifying under the new regulations offered economic advantages
which outweigh any attendant delays in the overall review process. In August
2000 we filed an application for orphan drug designation for potential treatment
of several forms of ME/CFS with our investigational drug Ampligen . In
December 2000, a group within EMEA determined that the prevalence of ME/CFS may
be 10 to 50 times higher than originally reported. An EU subcommittee, whose
mandate is to evaluate and designate rare (also called "orphan") diseases in
the EU, found the current number of potential CFS cases as high as 8,000,000
in the European Union. The committee relied in part on the Year 2000 British
Journal of Medicine, which reported projected prevalence ratios within the
entire EU population of 320,000,000. Under recently enacted laws of the European
Parliament, a rare disease cannot exceed 160,000 total cases in the entire EU
or 5 cases per 10,000 population. The clinical studies cited used the EU based
"Oxford criteria" for ME/CFS diagnosis and were conducted in both health
communities and primary care-based facilities within the EU. These findings
rule out any orphan drug designation for ME/CFS therapies in the European
Union. The orphan designation for ME/CFS was received several years earlierfor
the United States pharma market, before the dramatic increase in prevalence of
this worldwide disorder.
In July 2000 we entered into a pharmaceutical marketing/licensing agreement
with AOP Orphan Pharmaceuticals headquartered in Vienna, Austria. The
new licensee is well established in a territory which includes Austria,
the Czech Republic, Slovakia, Poland and Hungary.
INTERNATIONAL
Our licensee partner, Bioclones (PTY) Ltd ("Bioclones") located in the
Republic of South Africa, has initiated Ampligen treatment of patients
severely affected by ME/CFS on a cost recovery basis in South Africa, Australia
and Great Britain. Bioclones announced planned collaborative research with
British ME/CFS research centers in order to further evaluate ME/CFS
treatment and diagnosis.
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In December 2000 we entered the first phase of a new relationship with Ie Sung
International of Seoul, Korea and Tokyo, Japan to facilitate accelerated
development of its clinical programs in chronic viral diseases in selected
Pacific Rim markets. Ie Sung International maintains a team of chemists,
regulatory experts and clinicians who tailor the positioning of promising new
drug candidates to maximize their potential entrance into emerging markets.
COMPETITION
There are several publicly held companies that place emphasis on nucleic acid
technology such as ours. Gilead Sciences, Inc. (Foster City, California;
GILD/NASDAQ) is 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). 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.
These competing products may be more effective and less costly than our
products. In addition, conventional drug therapy, surgery and other more
familiar treatments will offer competition to our products. Furthermore, many
of our competitors have significantly greater experience than us in preclinical
testing and human clinical trials of pharmaceutical products and in obtaining
FDA, Health Protection Branch ("HPB") and other regulatory approvals of
products. Accordingly, our competitors may succeed in obtaining FDA and HPB
product approvals more rapidly than us. If any of our products receive
regulatory approvals and we commence commercial sales of our products, we will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have no experience. Our competitors may possess
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or obtain patent protection or other intellectual property rights that prevent,
limit or otherwise adversely affect our ability to develop or exploit our
products.
Many of our existing or potential competitors have substantially greater
financial, technical and human resources than we have. In addition, many of
these competitors may have significantly greater experience than we do 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, our
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 our proposed
products and our ongoing research and product development activities. Our
existing product and the products of the 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 us or our 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. We have received
orphan drug designation for certain therapeutic indications which might, under
certain conditions, accelerate the process of drug commercialization.
As of December 31, 2000, we have not received a "Fast-Track" designation for
any of our 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. We will continue to present data in support of
obtaining a Fast-Track designation. We have not yet submitted any New Drug
Application (NDA) to a North American regulatory authority. There are no
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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. We have submitted an emergency treatment
protocol for clinically-resistant HIV patients which was withdrawn by us during
the statutory 30 day regulatory review period in favor of a set of individual
physician-generated applications. 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. We also have FDA authorization for two phase II/III HIV treatment
protocols in which the Company's drug is combined with certain presently
available antiretroviral agents.
We are subject to various federal, state and local laws, regulations and
recommendations relating to such matters as safe working conditions, 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 our research work. We believe that our Rockville, Marylandmanufacturing
and quality assurance/control facility is in substantial compliance with all
material regulations applicable to these activities. However, we cannot give
assurances that facilities owned and operated by third parties, that are
utilized in the manufacture of our 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, Columbia, Maryland, and Melbourne, Australia.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
In 1994, we formed a strategic alliance with Bioclones 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 of 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, we
received access to worldwide markets and commercial-scale manufacturing
resources, as well as a $3 million cash payment in 1995 from Bioclones, a 24.9%
16
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. We regularly conduct 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 home infusion market upon commercialization. Gentiva is one of the
nation's largest home health care companies with over 400 offices and sixty
thousand caregivers 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.
We have acquired a series of patents on Oragen , potentially an oral broad
spectrum antiviral, through a licensing agreement with Temple University. We
were granted an exclusive worldwide license from Temple for the Oragen
products. Pursuant to the arrangement, we are obligated to pay royalties of
2% to 4% on sales of Oragen , depending on how much technological assistance
is required of Temple. We currently pay minimum royalties of $30,000 per year
to Temple. These compounds have been evaluated in various academic and
government laboratories.
In December, 1999, we 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 our 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 our products. In addition, Biovail agrees to
work with us in preparing and filing 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
17
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.
In May 2000, we acquired an interest in Chronix Biomedical Corp. ("CHRONIX").
Chronix focused upon the development of diagnostics for chronic diseases.
100,000 shares of common stock were issued from the treasury to Chronix toward
a total equity investment of $700,000. Pursuant to a strategic alliance
agreement, we provided Chronix with $250,000 to conduct research in an effort
to develop intellectual property on potential new products for diagnosing and
treating various chronic illnesses such as chronic fatigue syndrome. The
strategic alliance agreement provides us certain royalty rights with respect
to certain diagnostic technology developed from this research and a right of
first refusal to license certain therapeutic technology developed from this
research.
HUMAN RESOURCES
As of February 28, 2001 we had 48 employees consisting of 23 full time, three
(3) part-time employees and 22 regulatory/research medical personnel on a
part-time basis. Such parties are paid on a per diem or monthly basis. 27
personnel are engaged in our research, development, clinical, manufacturing
effort, including 5 individuals in Europe. 14 of our personnel perform
regulatory, general administration, data processing, including bio-statistics,
financial and investor relations functions. We consider our relationship with
our employees to be good and believe that this arrangement provides the most
efficient approach to drug development at this point in time. While we have
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.
FINANCING
The development of the our products requires 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-scale production and marketing capabilities.
During our last three fiscal years, we have spent approximately $15,435,000 in
research and development, of which approximately $6,136,000 was expended
in the year ended December 31, 2000.
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At the present time, we are funding our European subsidiary from our cash
flows. These costs could be substantial over the next several years. The
European expanded access program (cost recovery) should provide some funds to
offset costs and, other funding will be provided by us as required.
Our European subsidiary has an exclusive license on all the technology and
support from us 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, the
Balkans, Russia, Ukraine, Romania, Bulgaria, Slovakia, Turkey, Iceland and
Liechtenstein. There is also an agreement between us and our European
subsidiary to ensure that the commercialization of future technologies can take
place under conditions which would provide proper incentives to Hemispherx
Biopharma Europe.
As of December 31, 2000, we had approximately $8,378,000 in cash and short term
investments. Based on our current operating plan, we expect that these funds
and anticipated receipt of revenues from the cost recovery treatment protocols
and interest income on unused funds will be sufficient to meet our operating
requirements well into 2002. In addition, we may receive proceeds in the form
of equity from the exercise of shareholder warrants. For the fiscal year 2000,
the Company received $9,985,000 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, we 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 our products. If adequate funds are not available from
operations and if we are not able to secure additional sources of financing on
acceptable terms, we would be materially adversely affected.
RISK FACTORS
All of our drugs and associated technologies are investigational and must
receive prior regulatory approval by appropriate regulatory authorities for
general use and are currently legally available only through clinical trials
with specified disorders. Our principal development efforts are currently
focused on Ampligen , which has not been approved for commercial use in the
U.S. or elsewhere. Our products, including Ampligen , are subject to extensive
19
regulation by numerous governmental authorities in the U.S. and other
countries, including, but not limited to, the Food and Drug Administration in
the U.S., the Health Protection Branch of Canada, and the European Medical
Evaluation Agency in Europe. Obtaining regulatory approvals is a rigorous and
lengthy process and requires the expenditure of substantial resources. In
order to obtain final regulatory approval of a new drug, we must demonstrate
to the satisfaction of the regulatory agency that the product is safe and
effective for its intended uses and that we are capable of manufacturing the
product to the applicable regulatory standards. We require regulatory approval
in order to market our products and receive product revenues or royalties. No
regulatory agency has approved the full commercial sale of any of our products.
We cannot assure that the drug will ultimately be demonstrated to be safe or
efficacious. In addition, while Ampligen is authorized for use in clinical
trials in the United States and other countries, we cannot assure that
additional clinical trial approvals will be authorized in the United States or
in other countries, in a timely fashion or at all, or that we will complete
these clinical trials. Moreover, we cannot assure that Ampligen will be
commercially successful in any country that may approve its use. If Ampligen
or one of our other products does not receive regulatory approval in the U.S.
or elsewhere, our operations will be significantly affected.
The following cautionary statements identify important factors that could cause
our actual results to differ materially from those projected in the
forward-looking statements made in this prospectus. Among the key factors
that have a direct bearing on our results of operations are:
Our drug and related technologies are investigational and subject to
regulatory approval
All of our drugs and associate technologies are investigational and must
receive prior regulatory approval by appropriate regulatory authorities for
general use and are currently legally available only through clinical trials
with specified disorders. Our principal development efforts are currently
focused on Ampligen , which has not been approved for commercial use. Our
products, including Ampligen are subject to extensive regulation by numerous
governmental authorities in the U.S. and other countries, including, but not
limited to, the Food and Drug Administration in the U.S., the Health Protection
Branch of Canada, and the European Medical Evaluation Agency in Europe.
Obtaining regulatory approvals is a rigorous and lengthy process and requires
the expenditure of substantial resources. In order to obtain final regulatory
20
approval of a new drug, we must demonstrate to the satisfaction of the
regulatory agency that the product is safe and effective for its intended uses
and that we are capable of manufacturing the product to the applicable
regulatory standards. We cannot assure you that the drug will ultimately be
demonstrated to be safe or efficacious. In addition, while Ampligen is
authorized for use in clinical trials in the United States and other countries,
we cannot assure you that additional clinical trial approvals will be
authorized in the United States or in other countries, in a timely fashion or
at all, or that we will complete these clinical trials. If Ampligen or one of
our other products does not receive regulatory approval in the U.S. or
elsewhere, our operations will be materially adversely effected.
We may continue to incur substantial losses and our future profitability is
uncertain
We began operations in 1966 and last reported net profit from 1985
through 1987. Since 1987, we have incurred substantial operating losses.
As of December 31, 2000 our accumulated deficit was approximately
$82,566,000. We have not yet generated significant revenues from our
products and may incur substantial and increased losses in the future. We
cannot assure that we will ever achieve significant revenues from product
sales or become profitable. We require, and will continue to require, the
commitment of substantial resources to develop our products. We cannot
assure that our product development efforts will be successfully completed
or that required regulatory approvals will be obtained or that any products
will be manufactured and marketed successfully, or profitability.
Additional financing requirements.
The development of our products will require the commitment of
substantial resources to conduct the time-consuming research, preclinical
development, and clinical trials that are necessary to bring pharmaceutical
products to market. Based on our current operating plan, we anticipate
receipt of limited revenues form the sales of Ampligen under the Cost
Recovery Clinical Programs and investors exercising our Class A Redeemable
Warrants, which we believe will be sufficient to meet our capital
requirements for the near future. The Company may need to raise substantial
additional funds through additional equity or debt financing or from other
sources in order to complete the necessary clinical trials and the
regulatory approval processes and begin commercializing its products. There
can be no assurances that our Class A Redeemable Warrants will be exercised
or that we will raise any proceeds from possible equity financing, which may
21
have a material effect on our ability to develop our products.
No regulatory agency has approved the full commercial sale of any of the our
products.
We cannot assure you that Ampligen will ultimately be demonstrated to
be safe or efficacious. While Ampligen is authorized for use in clinical
trials in the United States and other countries, we cannot assure you that
additional clinical trial approvals will be authorized in the United States,
or in other countries in a timely fashion or at all or that we will complete
these clinical trials. If Ampligen or one of our other products does not
receive regulatory approval in the United States or elsewhere, our
operations will be significantly affected.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to acquire enforceable patents covering the use of Ampligen
for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen for such disease. Our success depends, in large
part, on our ability to obtain patent protection for our products and to
obtain and preserve our trade secrets and expertise. We have been issued
certain patents on the use of Ampligen and Ampligen in combination with
certain other drugs for the treatment of HIV. We have also been issued
patents on the use of Ampligen in combination with certain other drugs for
the treatment of chronic hepatitis B virus, chronic hepatitis C virus, and a
patent which affords protection on the use of Ampligen in patients with
chronic fatigue syndrome. We have not been issued any patents in the United
States for the use of Ampligen as a sole treatment for any of the cancers
which we have sought to target. Our applications for United States patents
for the use of Ampligen in the treatment of renal cell carcinoma and lung
cancer are currently pending. We cannot assure you that any of these
applications will be approved or that our competitors will not seek and
obtain patents regarding the use of Ampligen in combination with various
other agents, including AZT, for a particular target indication prior to us.
If we cannot protect our patents covering the use of Ampligen for a
particular disease, or obtain additional pending patents, we may not be able
to successfully market Ampligen .
22
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can
be no assurance that patent applications relating to our products or
technology will result in patents being issued or that, if issued, such
patents will afford meaningful protection against competitors with similar
technology. It is generally anticipated that there may be significant
litigation in the industry regarding patent and intellectual property
rights. Such litigation could requires substantial resources from us. No
assurance can be made that our patents will provide competitive advantages
for our products or will not be successfully challenged by competitors. No
assurance can be given that patents do not exist or could not be filed which
would have a materially adverse effect on our ability to market our
products or to obtain or maintain any competitive position the we may
achieve with respect to our products. Our patents also may not prevent
others from developing competitive products using related technology.
There can be no assurance that we will have the financial resources
necessary to enforce patent rights we may hold.
If we cannot enforce the patent rights we currently hold we may be
required to obtain licenses from others to develop, manufacture or market
our products. There can be no assurance that we would be able to obtain any
such licenses on commercially reasonable terms, if at all. We currently
license certain proprietary information from third parties, some of which
may have been developed with government grants under circumstances where the
government maintained certain rights with respect to the proprietary
information developed. No assurances can be given that such third parties
will adequately enforce any rights they may have or that the rights, if any,
retained by the government will not adversely affect the value of our
license. Certain of our know-how and technology is not patentable,
particularly the procedures for the manufacture of our drug product which
are carried out according to standard operating procedure manuals.
We may not be profitable unless we can produce Ampligen in commercial
quantities at costs acceptable to us.
We have never produced Ampligen or any other products in large
commercial quantities. Ampligen is currently produced only for use in
clinical trials. We must manufacture our products in compliance with
regulatory requirements in commercial quantities and at acceptable costs in
order for us to be profitable. We intend to utilize third-party
manufacturers and/or facilities if and when the need arises or, if we are
23
unable to do so, to build or acquire commercial-scale manufacturing facili-
ties. If we cannot manufacture commercial quantities of Ampligen or enter
into third party agreements for its manufacture at costs acceptable to us,
our operations will be significantly affected.
If our distributors do not market our product successfully, we may not
generate significant revenues or become profitable.
We have limited marketing and sales capability. We need to enter into
marketing agreements and third party distribution agreements for our products
in order to generate significant revenues and become profitable. To the extent
that we enter into co-marketing or other licensing arrangements, any revenues
received by us will be dependent on the efforts of third parties, and there is
no assurance that these efforts will be successful. Our agreement with Gentiva
Health Services offers the potential to provide significant marketing and
distribution capacity in the United States while licensing and marketing
agreements with certain foreign firms should provide an adequate sales force
in South America, Africa, United Kingdom, Australia and New Zealand,
Canada and Austria.
Gentiva Health Services is able to deliver treatment and services to
chronic disease patients including infusion services, home nursing and other
medical services through a national network of more than 500 locations. We
cannot assure that Gentiva Health Services or our foreign marketing partners
will be able to successfully distribute our products, or that we will be able
to establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The failure to continue these arrangements or to
achieve other such arrangements on satisfactory terms could have a materially
adverse effect on us. We are dependent upon certain third party suppliers for
key components of the proposed products and for substantially all of the
production process. If we cannot enter into future marketing and distribution
agreements at terms acceptable to us, or if these distributors cannot
effectively market and distribute our products, our operations will be
negatively affected.
No assurance of successful product development of Ampligen .
The development of Ampligen and our other products is subject to a
number of significant risks. Ampligen may be found to be ineffective or to
have adverse side effects, fail to receive necessary regulatory clearances, be
difficult to manufacture on a commercial scale, be uneconomical to market or
be precluded from commercialization by proprietary rights of third parties. Our
24
products are in various stages of clinical and pre-clinical development and,
require further clinical studies and appropriate regulatory approval processes
before any such products can be marketed. We do not know when, or if ever,
Ampligen will be generally available for commercial sale for any indication
for at least the next several years, if at all. Generally, only a small
percentage of potential therapeutic products are eventually approved by the
FDA for commercial sale.
Ampligen safety profile.
We believe that Ampligen has been generally well tolerated with a low
incidence of clinical toxicity, particularly given the severely debilitating
or life threatening diseases that have been treated. A mild flushing reaction
has been observed in approximately 15% of patients treated in our various
studies. This reaction is occasionally accompanied by rythema, a tightness of
the chest, tachycardia, anxiety, shortness of breath, subjective reports of
''feeling hot,'' sweating and nausea. The reaction is usually infusion-rate
related and can generally be controlled by slowing the infusion rate. Other
adverse side effects include liver enzyme level elevations, diarrhea, itching,
urticaria (swelling of the skin), bronchospasm, thypotension, photophobia,
rash, bradycardia, transient visual disturbances, transient arrhythmias,
decreased visual activity in platelets and white blood cell counts, anemia,
dizziness, confusion, elevation of kidney function tests, occasional temporary
hair loss and various flu-like symptoms, including fever, chills, fatigue,
muscular aches, joint pains, headaches, nausea and vomiting. These flu-like
side effects typically subside within several months.
There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will lead to a successful transition to
commercial, large-scale production.
Small changes in methods of manufacturing may affect the chemical structure
of Ampligen and other such RNA drugs, as well as their safety and efficacy.
Changes in methods of manufacture, including commercial scale-up may affect the
chemical structure of Ampligen and, can, among other things, require new
clinical studies and affect orphan drug status, particularly, market exclusivity
rights, if any, under the Orphan Drug Act. The transition from limited
production ofpre-clinical and clinical research quantities to production of
commercial quantities of our products will involve distinct management and
technical challenges and will require additional management and technical
personnel and capital to the extent such manufacturing is not handled by third
parties. There can be no assurance that our efforts will be successful or that
25
any given product will be determined to be safe and effective, capable of being
manufactured economically in commercial quantities or successfully marketed.
Rapid technological change.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase.Most of these
entities have significantly greater research and development capabilities than
us, as well as substantial marketing, financial and managerial resources, and
represent significant competition for us. There can be no assurance that
developments by others will not render our products or technologies obsolete
or noncompetitive or that we will be able to keep pace with technological
developments.
Substantial competition.
Competitors have developed or are in the process of developing
technologies
that are, or in the future may be, the basis for competitive products. Some of
these products may have an entirely different approach or means of accomplishing
similar therapeutic effects to products being developed by us. These competing
products may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments will offer
competition to our products. Furthermore, many of our competitors have
significantly greater experience than us in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, our competitors may succeed
in obtaining FDA and HPB product approvals more rapidly than us. If any of
our products receive regulatory approvals and we commence commercial sales of
our products, we will also be competing with respect to manufacturing efficiency
and marketing capabilities, areas in which we have no experience. Our
competitors may possess or obtain patent protection or other intellectual
property rights that prevent, limit or otherwise adversely affect our ability to
develop or exploit our products.
Limited manufacturing experience and capacity.
Ampligen is currently produced only in limited quantities for use in our
clinical trials. To be successful, our products must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. To the extent we are involved in the production process, our
26
current facilities are not adequate for the production of our proposed products
for large-scale commercialization, and we currently do not have adequate
personnel to conduct commercial-scale manufacturing. We intend to utilize
third-party facilities if and when the need arises or, if we are unable to do
so, to build or acquire commercial-scale manufacturing facilities. We will need
to comply with regulatory requirements for such facilities, including those of
the FDA and HPB pertaining to Good Manufacturing Practices ("GMP") regulations.
There can be no assurance that such facilities can be used, built, or acquired
on commercially acceptable terms, that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
We may be subject to product liability claims from the use of Ampligen
or other of our products which could negatively affect our future operations.
We face an inherent business risk of exposure to product liability claims
in the event that the use of Ampligen or other of our products results in
adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively effected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain worldwide product
liability insurance coverage in the amount of $1,000,000, there can be no
assurance that this insurance will provide adequate coverage against product
liability claims. While no product liability claims are pending or threatened
against us to date, a successful product liability claim against us in excess of
our insurance coverage could have a negative effect on our business and
financial condition.
Members of our Scientific Advisory Board may have conflicting interests and
may disclose data and technical know how to our competitors.
All of our Scientific Advisory Board members are employed by other
entities, which may include our competitors. Although we require each of our
Scientific Advisory Board members to sign a non-disclosure and non-competition
agreement with respect to the data and information that he or she receives from
us, we cannot assure you that members will abide by them. If a member wereto
reveal this information to outside sources, accidentally or otherwise, our
operations could be negatively effected. Since our business depends in large
part on our ability to keep our technical expertise confidential, any revelation
of this information to a competitor or other source could have an adverse
effect on our operations.
27
There is no guarantee that our trade secrets will not be disclosed or known by
our competitors.
To protect our rights, we require certain employees and consultants to
enter into confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will not
otherwise become known or be independently developed by competitors.
The loss of Dr. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A. Carter.
The loss of Dr. Carter's services could have a material adverse effect on our
operations. While we have an employment agreement with Dr. William A. Carter,
and have secured key man life insurance in the amount of $2 million on the life
of Dr. Carter, the loss of Dr. Carter or other key personnel, such as Dr. David
Strayer or Dr. Carol Smith, or the failure to recruit additional personnel as
needed could have a materially adverse effect on our ability to achieve our
objectives.
Uncertainty of health care reimbursement and potential legislation.
Our ability to successfully commercialize our products will depend, in
part, on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and from time to time legislation is proposed, which, if
adopted, could further restrict the prices charged by and/or amounts
reimbursable to manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on us. There can be no assurance that third party insurance
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.
Hazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
28
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, we could be held liable for any damages
that result, and any such liability could be significant. The company does not
maintain insurance coverage against such liabilities.
Exercise of Class A Redeemable Warrants may have dilutive effect on market.
Holders of the Class A Redeemable Warrants may exercise the Class A
Redeemable Warrants and purchase the underlying Common Stock at a time when we
may be able to obtain capital by a new offering of securities on terms more
favorable than that provided by such Class A Redeemable Warrants, in which
event our ability to obtain additional capital would be affected adversely.
Litigation in Pennsylvania involving us and Manuel Asensio and Asensio &
Company,Inc.
In 1998, we 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. The action presently includes 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
unlawfulshort-selling scheme between August, 1998, and the present.
In 1999, Manuel P. Asensio, and Asensio & Company, Inc., and others filed
an answer and counterclaim against the Company. The counterclaim alleges that in
or around September 1998, and in response to defendants' strong sell
recommendation and other press releases about the Company and its officers and
directors, the Company made defamatory statements about defendants, including
statements that defendants' attack 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. The action has been transferred to Pennsylvania State
Court and is presently listed for trial in August 2001.
Litigation in New York involving us and Manuel Asensio, Asensio &
Company Inc., and Asensio.com Inc.
In May 2000, we received notice of a claim by Manuel P. Asensio and Asensio
& Company, Inc., in the Supreme Court of the State of New York against the
Company, the Chairman and Chief Executive Officer, William A. Carter, and our
prior auditors (the "first New York Action") in which they allege that
defendants defamed them in oral and written communications made in March 2000.
29
The allegations of Manuel P. Asensio and Asensio & Company, Inc. in the first
New York Action are similar in substance to the alleged defamation which are the
subject of the counterclaims filed by them in the action presently pending in
Pennsylvania State Court.
In June 2000, Manuel P. Asensio, Asensio & Company, Inc. and Asensio.com
Inc.,("Asensio plaintiffs") filed a second action against the Company and Dr.
William Carter, the Company's Chairman and Chief Executive Officer in the
Supreme Court of the State of New York. (the "second New York Action"). In
September 2000, we were served with a complaint in this action. The second New
York Action purports to seek a declaratory judgment that Asensio plaintiffs
statements regarding the Company constituted protected speech, and that they did
not engage in any actionable interference with our existing or prospective
business relations. We intend to vigorously defend against the claims asserted
in both the First and Second New York Actions. However, this litigation could
subject us to significant liability for damage and, even if it does not subject
us to liability for damage, it could be time-consuming and expensive to defend,
and could result in the diversion of management time and attention.
ITEM 2. Properties
We currently lease and occupy a total of approximately 18,850 square feet of
laboratory and office space in two states. Our headquarters is located in
Philadelphia, Pennsylvania consisting of a suite of offices of approximately
15,000 square feet. We also lease space of approximately 3,850 square feet in
Rockville, Maryland for our pharmacy, packaging, quality assurance and quality
control laboratories, as well as additional office space. Approximately 2,000
square feet are dedicated to the pharmacy, packaging, quality assurance and
control functions. The Company believes that its Rockville facilities will meet
its requirements, for planned clinical trials and treatment protocols, through
2001, after which time it may need to increase its Rockville facilities either
through third parties or by building or acquiring commercial-scale facilities.
We have a 24.9% interest in Ribotech, Ltd. located in South Africa. Ribotech
Ltd. was established by Bioclones Pty. to develop and operate a manufacturing
facility. Manufacturing at the pilot facility commenced in 1996. We expect
that Ribotech will start construction on a new commercial production facility in
the future, although no assurance can be given that this will occur. The Company
has no obligation to fund this construction. Our interest in Ribotech, Ltd. is a
30
result of the marketing and manufacturing agreement executed with Bioclones in
1994.
ITEM 3. Legal Proceedings
In September, 1998, we filed a multi-count complaint against Manuel P. Asensio,
("Asensio") Asensio & Company, Inc., ("ACI") and others in the United States
District Court for the Eastern District of Pennsylvania. On October 22, 1998,
we amended the complaint to add additional counts and to conform the complaint
to agreed upon dismissals without prejudice as to certain of the defendants. In
August, 1999, we 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 ACI and to add a conspiracy
charge against the remaining defendants and certain unnamed John Does.
As amended, our complaint seeks recovery on common law theories of intentional
interference with existing and prospective business relations, defamation,
commercial disparagement, and conspiracy on account of defendants' short selling
of our stock and the publication, by defendants Asensio and ACI, of defamatory
statements regarding the Company. In April 1999, defendants Asensio and ACI
answered the complaint and asserted defamation and disparagement counterclaims
against us seeking damages in an unspecified amount. Defendants' counterclaims
allege that we, through our officers, defamed Asensio in oral and written
communications accusing Asensio and ACI of having engaged in possibly criminal
behavior with respect to the short selling of our stock and the subsequent
publication of various defamatory statements regarding us . In May 1999, we
filed an answer, including affirmative defenses, to these counterclaims.
In June 2000, the United States District Court dismissed the Company's complaint
and the defendants' counterclaims for lack of federal subject matter
jurisdiction over the action. In July 2000, we transferred the action to the
Pennsylvania State Court. In September 2000 defendants in the action filed
preliminary objections seeking the dismissal of the transferred action on
various grounds. Those objections were disposed of and the case in scheduled
for trial is August 2001. In August 2000, we filed a Notice of Appeal from the
decision of the United States District Court dismissing the action. The appeal
is presently pending, although it has been stayed pending the determination of
the case in the Pennsylvania State Court.
31
In May 2000, Asensio and ACI filed a separate action in the Supreme Court of the
State of New York against our company, our Chairman and Chief Executive Officer,
William A. Carter and our prior auditors ("the first New York action"). The
action was commenced by Summons. In July 2000, Asensio and ACI filed a Complaint
in which they allege that the defendants defamed them in oral and written
communications made in March 2000. Plaintiff's allegations in the first New York
action are similar in substance to the alleged defamations which are the subject
of the counterclaim filed by them in the action presently pending in
Pennsylvania State Court. In August 2000, we filed an answer, including
affirmative defenses to these claims, and Dr. Carter moved to dismiss the
claims. In October 2000, the Company and Dr. Carter moved to dismiss the action.
In June 2000, Asensio, ACI and Asensio.Com, Inc. filed a second action against
us and Dr. Carter in the Supreme Court of the State of New York ("the second New
York action"). The action was commenced by Summons. In September 2000,plaintiffs
filed a Complaint in the second New York action which purports to seek a
declaratory judgment that the statements of Asensio, ACI and Asensio.com, Inc.
about the Company constituted protected speech, and that plaintiffs did not
engage in any actionable interference with existing or prospective business
relations of the Company. In essence, the second New York action seeks to
establish the validity of the affirmative defenses asserted by the defendants in
the action now listed for trial in August 2001 in the Pennsylvania State Court.
We intend to vigorously defend against the "claims" asserted by Asensio, ACI
and Asensio.com, Inc. in the New York actions and we have moved to consolidate
and dismiss the first New York actions.
Cook Imaging Corp. ("Cook") commenced action against us in March 2000, which is
presently pending in the United States District Court for the Eastern District
of Pennsylvania. From approximately 1997 through 1999, Cook manufactured
the drug Ampligen (as well as Ampligen placebo) for us. Cook has sued for
approximately $250,000 in unpaid invoices related to four Ampligen batches
manufactured by
Cook and delivered to us in 1999. Cook contends that the four batches at issue
were deemed to be sterile by us and had been released for clinical use. The
Company has denied that the such amounts are owed and has asserted a
counterclaim for approximately $1 million. The basis of counterclaim is Cook's
32
failure to consistently manufacture Ampligen in strict conformance with federal
regulations known as current good manufacturing practices ("cGMP"). We are
seeking the costs we have incurred as a result of Cook's cGMP deviations, as
well as the market value of raw materials (supplied by us) that were lost or
destroyed due to Cook's cGMP deviations. Discovery in the action in ongoing, and
on December 22, 2000, the court denied Cook's motion for summary judgment on its
claims. The case is presently scheduled for trial in April 2001. We are unable
at this time to express any opinion as to likely outcome of the action.
In October 1998, the Company contacted the Securities and Exchange Commission
("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 July 1999, the Company was advised by the SEC
of a private investigation authorized by the SEC on April 1, 1999 into various
allegations of misrepresentations by the Company and its officers. In general,
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" which the Company
considers defamatory and for which the Company has sued Asensio and his company.
In October 2000, the SEC brought forth certain specific concerns with respect
to certain alleged omissions in the Company's public statements to which the
Company replied in November. The Company has had no further contact with the SEC
on this matter.
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. In November 2000, Asensio and
his Company were censured and fined $ 75,000 by the NASD. The censure and fine
were based on short selling violations and advertising violations between
September 1996 and July 1999. By consenting to the NASD sanction and censure,
Asensio was further required to hire an independent compliance officer and
discontinue the conduct sanctioned by NASD.
33
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders during the year
ended December 31, 2000.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
In the year 2000, we acquired 350,800 shares of common stock on the open market
at an average cost of $ 10.24 per share. The acquisition of the shares was
authorized under a stock buy-back program authorized by the board of directors.
Certain of the acquired shares were utilized to fund strategic alliances and
obtain equity positions in other companies in order to potentially increase the
breadth and depth of our drug technology portfolio.
In October 2000 we filed a registration statement on form S-3 with the SEC
registering certain warrants and underlying common stock on behalf of certain
warrant holders. In addition, we registered 500,000 shares of our common
stock to be used in pursuit of our business objectives.
In fiscal 2000, we issued 830,879 new shares of common stock to warrant holders
exercising non-public warrants at an average exercise price of $4.495. The
warrants exercised were granted by us in the period covering 1995 through
1998. In addition, we issued 1,562,502 new shares of common stock to warrant
holdersexercising publicly traded Class A Redeemable Warrants at $4.00 per
share.
The foregoing private offerings were private transactions and exempt from
registration under section 4(2) and 4(6) of the Securities Act and/or
regulation D rule 506 promulgated under the Securities Act. Investors in these
transactions are accredited.
Since October 1997 our common stock and warrants have been listed and traded on
the American Stock Exchange ("AMEX") under the symbol HEB and HEBws,
respectively. The following table sets forth the high and low list prices for
our Common Stock and the Warrants for the last two fiscal years as reported by
the AMEX. Such prices reflect inter-dealer prices, without retail markup, mark
downs or commissions and may not necessarily represent actual transactions.
34
COMMON STOCK High Low
------- -------
Time Period:
January 1, 1999 through March 31, 1999 $ 7.375 $ 4.688
April 1, 1999 through June 30, 1999 10.063 5.563
July 1, 1999 through September 30, 1999 8.125 5.875
October 1, 1999 through December 31, 1999 10.500 6.000
January 1, 2000 through March 31, 2000 18.538 8.625
April 1, 2000 through June 30, 2000 11.125 5.250
July 1, 2000 through September 30, 2000 7.938 7.500
October 1, 2000 through December 31, 2000 5.875 4.438
WARRANTS
Time Period:
January 1, 1999 through March 31, 1999 $ 3.750 $ 1.750
April 1, 1999 through June 30, 1999 6.188 2.250
July 1, 1999 through September 30, 1999 4.125 2.250
October 1, 1999 through December 31, 1999 6.500 4.125
January 1, 2000 through March 31, 2000 14.938 4.875
April 1, 2000 through June 30, 2000 6.750 1.750
July 1, 2000 through September 30, 2000 4.188 2.125
October 1, 2000 through December 31, 2000 3.500 0.875
As of December 31, 2000 there were approximately 330 holders of record of
our 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 areheld in the names of various dealers and/or
clearing agencies.
35
As of December 31, 2000, we had approximately 3,917,808 Class A
Redeemable Warrants registered and outstanding at an exercise price of $4.00 per
share. As of March 27, 2001, our common stock was trading at $ 4.50 per share.
We have not paid any dividends on our Common Stock in recent years. It is
management's intention not to declare or pay dividends on our Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
ITEM 6. Selected Financial Data ( in thousands except for share and per
share data)
Year Ended RESTATED(1)
December 31 1996 1997 1998 1999 2000
------ ------- ------ -------- --------
Statement of
Operations Data
Net revenues $32 $259 $401 $678 $788
Net loss (4,554) (6,107) (7,324) (12,298) (8,552)
Basic and
diluted loss per
share (0.29) (0.35) (0.32) (0.47) (0.29)
Shares used in
computing basic
and diluted net
loss per share. 15,718,136 17,275,994 22,724,913 26,380,351 29,251,846
Balance Sheet Data
Total Assets 6,999 11,543 16,327 14,168 13,067
Common
Stockholders Equity 5,853 10,745 15,185 12,657 11,572
Other Cash Flow
Data
Cash used in
operating
activities (6,098) (4,642) (5,751) (6,990) (8,074)
Capital
expenditures (86) (15) (151) (251) (171)
(1) See note 1 to the consolidated financial statements.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis is related to our financial condition and
results of operations for the three years ended December 31, 2000. This
information should be read in conjunction with the Item 6
"Selected consolidated financial data" and our consolidated
financial statements and related notes thereto beginning on F-1 of this Form
10-K.
36
Statement of Forward-Looking Information
Certain statements in the section are "forward-looking statements". You
should read the information under Part I, "Special Notes Regarding Forward-
Looking Statements" for more information about our presentation of
forward-looking information.
Background
We are actively engaged in various clinical efforts and market development
strategies in the United States, European Union, Canada, Australia and South
Africa. Disease categories under active development include ME/CFS, Hepatitis
and HIV. We maintain offices and clinical operations in both the United States
and the European Union. We also have ownership interests in R.E.D. Laboratories
a European based diagnostic company and Ribotech Ltd. a South African
manufacturing entity, which produces our raw drug materials.
We have reported net income only from 1985 through 1987. Since 1987, we
have incurred substantial operating losses. Prior to completing an Initial
Public Offering ("IPO") in November 1995, we financed operations primarily
through the private placement of equity and debt securities, equipment lease
financing, interest income and revenues from licensing and royalty agreements.
Our 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 N.V./S.A.
The U.S. subsidiaries were incorporated in September 1994 for the purpose of
developing technology for ultimate sale into certain non-pharmaceutical
specialty consumer markets. The European subsidiary was formed for the purpose
of serving our needs with respect to pursuing clinical trials and regulatory
approval in the European Union. The U.S. subsidiaries
are inactive at this time. All significant intercompany balances and
transactions have been eliminated in consolidation.
In 1998, we initiated a Phase III clinical study of using Ampligen to treat 230
patients affected by ME/CFS at various medical centers in the United States.
ME/CFS patients that are not eligible for the Phase III clinical study may seek
treatment under a ME/CFS Cost Recovery Treatment Program that has been
authorized by the FDA. Under the cost recovery program, enrolled patients pay
for the cost of Ampligen administered, which totals $7,200 for a 24 week
37
treatment program. Patients are also treated in Belgium and Austria under
similar cost recovery programs.
In March 2001, we discovered that we should have recorded a non-cash
charge for stock compensation expense in our 1999 financial statements.
This change is related to the extension of the expiration date of certain Rule
701 warrants in February 1999. The $3,097,000 adjustment does not affect our
cash or our shareholder net worth, but it does affect the 1999 net loss and
earnings per share. All references to the 1999 financial
statements in this form 10K, have been adjusted to reflect this change.
We expect to continue our research and clinical efforts for the next several
years with some benefit of certain revenues from our cost recovery treatment
programs. These cost recovery treatment sales were approximately $ 788,000 in
fiscal year 2000. We may continue to incur losses over the next several years
due to clinical and operating costs which may be partially offset by cost
recovery treatment 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 our cash flow. There are no assurances that such
approvals will ever happen in any major pharmaceutical market.
38
RESULTS OF OPERATIONS
The Company is restating its consolidated financial statements as of and for
the year ended December 31, 1999 and for the first quarter of 1999. The restated
financial statements now reflect a non-cash charge for the extension of the
lives of certain Section 701 warrants on February 19, 1999, as described in
note 7 to the financial statements. The following discussion of results has been
amended for the $3.1 million non-cash charge.
Years Ended December 31, 2000 vs. 1999
Net loss
We reported a net loss of approximately $8,552,000 for the year ended
December 31, 2000 versus a net loss of approximately $12,298,000 for the same
period in 1999. Several factors contributed to the $3,746,000 decrease.
Revenues
Overall revenues from the Cost Recovery Treatment Programs in the United
States, Canada and Europe increased by $110,000 in 2000 compared to 1999.
Cost recovery revenues in the United States were up $ 115,000 or 29.5%. European
cost recovery revenues declined by $5,000 or 18%. The Company expects the
European operations to expand significantly in 2001. The Company's European
operations received a $97,000 research grant in 2000
from a France based pharmaceutical company.
Research and Development costs
In 2000, research and development costs increased $1,399,000 primarily due to a
major increase in patients entering the AMP 516 ME/CFS clinical trial
initiated by us in 1998 and our efforts in Europe to increase the expanded
ME/CFS access program in European countries other than Belgium. By year end 2000
we had engaged the services of eleven (11) clinical investigators located
throughout the United States to enroll eligible ME/CFS patients in the Amp 516
program. As of December 31, 2000 some 212 patients were involved in the clinical
study. Cost incurred in producing Ampligen and other drugs
for clinical studies were $919,000 in 2000 compared to $1,503,000 in 1999.
The 1999 production costs reflect the build-up of drug supplies needed to
support clinical trials and other research and development efforts expected in
2000 and 2001. At present, we charge all raw material and related production
costs to research and development expense as incurred.
39
General and Administrative Expenses
General and administrative expenses were down $5,026,000 in 2000
compared to 1999. Lower stock compensation expense accounted for $4,221,000 of
this decrease. This expense was $397,000 in 2000 versus $4,618,000 in 1999.
Stock compensation expense is a non-cash expense that reflects the fair value of
our common stock and warrants granted to non-employees of our Company for
services or benefits provided. The decrease in 2000 reflects fewer warrants
granted to consultants and other service providers. Legal and
related expenses in 2000 were lower by $ 354,000 compared to 1999, primarily due
to lower costs from litigation associated with the Asensio & Company lawsuit,
and other legal matters. Legal expenses associated with the Company's defense of
the Asensio countersuit are mostly paid by our Company's liability insurance 3
carrier. Expenses associated with stock transactions, the filing of
registration statements and financing costs were lower by $173,000. The cost of
evaluating the feasibility of the proposed spin-off of the Company's wholly
owned subsidiary, Core Biotech Corp., was $124,000 in 1999 which did not occur
in 2000. We have not decided whether to spin-off Core BioTech Corp.
Years Ended December 31, 1999 vs. 1998
Net loss
We reported a net loss of approximately $12,298,000 (including a non-cash
loss of $4,618,000 for stock compensation expense) for the year ended December
31, 1999 as compared to a net loss of approximately $7,324,000 for the same
period in 1998. Several factors contributed to the $4,974,000 increase in net
losses in 1999. In general, non-cash stock compensation expense, increased
clinical costs and legal fees account for the increase in net losses in 1999.
Revenues
Revenues from our Cost Recovery Treatment Program in the United States
and Europe were up by $277,000 in 1999 compared to 1998. Cost recovery treatment
protocols were approved for severely affected ME/CFS patients in the United
States in 1998. The cost recovery treatment program in Belgium was approved by
regulatory authorities in 1994.
Research and Development Cost
In 1999, research and development costs increased $175,000 basically due to
increased activity in the AMP 516 ME/CFS clinical trial initiated by us in
October 1998. Drug production and related costs were $1,503,000 in 1999 versus
$1,923,000 in 1998. The 1998 costs reflects the build-up of drug supplies
40
needed to support clinical trials and other research and development efforts.
At present, the Company charges all raw material and related production costs to
research and development as incurred.
General and Administrative Expenses
General and administrative expenses were up $4,968,000 in 1999 compared to
1998. Legal expenses for attorneys increased $603,000 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 statement filing and financing expenses
were up $156,000 The cost of funding the European operation was up by $187,000
in 1999 due to establishing and staffing of our European subsidiary. The cost
of evaluating the feasibility of the spin-off of the Company's wholly owned
subsidiary Core BioTech Corp. was $116,000 more than expensed in 1998.
Stock compensation expense, included in general and administrative expense,
was $4,618,000 for 1999 versus $795,000 recorded for 1998. This non-cash
expense reflects the fair value of the common stock including the warrants
granted to non-employees of our Company and the extension of the lives of our
Rule 701 warrants. The increase in 1999 reflects warrants granted to consultants
for various types of assistance and professional services provided to us.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short term investments at December 31, 2000 were
approximately $8,378,000. Cash used for operating activities in 2000 was
approximately $8,074.000. Cash used for investing and financing activities
totaled $4,404,000 and consists of expenditures of $171,000 for capital
expenditures $197,000 for patent acquisition cost, $411,000 investments in
unconsolidated subsidiaries, $34,000 in other investments and $3,591,000 to
acquire 350,800 shares of our company stock which will be used to acquire
interest in companies and biotechnologies that may benefit our
purposes. In addition, purchases of short term investments exceeded maturities
of these investments by $230,000.
Cash proceeds from financing activities in 2000 were approximately $12,235,000.
$2,250,000 was received from the collection of stock subscriptions and
$9,985,000 was generated from the exercise of warrants to acquire 2,386,625
shares of our stock.
41
Our operating cash burn rate for the last six months of fiscal year 2000 was
approximately $603,000 per month or $7,236,000 on an annualized basis. All
clinical trial drug products produced in 2000 were fully expensed and some
costs are expected to be recovered under the expanded access, cost recovery
programs authorized by FDA and regulatory bodies in other countries. As the
clinical testing efforts in the United States moderates and the European market
development activity increases cost recovery
revenues, the operating cash burn rate should decline somewhat in 2001. Also,
certain of the operating, as well as the non-operating cash outlays are of a
one-time nature and are expected to decline.
We also expect warrant holders to continue exercising the Class A redeemable
warrants and private warrants from time to time depending on the trading price
of our common stock. As of December 31, 2000, we had 3,866,518 Class A
Redeemable Warrants outstanding. These warrants are exercisable 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. Private warrants outstanding total
7,295,650 with a weighted average exercise price of $4.05.
Based on cash, cash equivalents and short term investments on hand at December
31, 2000 and projected operating cash needs, we expect to have sufficient cash
to fund operations through at least the second quarter of 2002.
Because of our long-term capital requirements, we may seek to access the
public equity market whenever conditions are favorable, even if we do 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. We
may also need additional funding earlier than anticipated, and our cash
requirements, in general, may vary materially from those now
planned, for reasons including, but not limited to, changes in our research and
development programs, clinical trials, competitive and technological
advances, the regulatory process, and higher than anticipated expenses and lower
than anticipated revenues from certain of our clinical trials for which cost
recovery from participants has been approved.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities. "SFAS No.133"
42
requires companies to recognize all derivative contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended by SFAS No.
137, is effective for fiscal years beginning January 1, 2001. Historically, the
Company has not entered into derivative contracts either to hedge existing risks
or for speculative purpose. Accordingly, the Company does not expect adoption of
the new standard to affect its financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),"Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of
Accounting Principle Board ("APB") Opinion No. 25."FIN 44" clarifies the
application of APB No. 25 for (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company adopted FIN 44
in fiscal 2000 and it did not have a material effect on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting bulletin is effective for 2000. The
initial adoption of this guidance did not have a material impact on the
Company's results of operations or financial position.
ITEM 7a. Quantitative and Qualitative Market Risk
Market Risk
We had $8.4 million in cash, cash equivalents and short term investments at
December 31, 2000. To the extent that our cash and cash equivalents exceed our
near term funding requirement, we invest the excess cash in three (3) to six (6)
month high quality financial instruments. We employ established policies and
procedures to manage any risks with respect to any investment exposure.
43
ITEM 8. Financial Statements and Supplementary Data
The consolidated balance sheets as of December 31, 1999 and 2000, and our
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, 2000, together with the reports of BDO
Seidman, LLP and 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 47.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
On May 3, 2000, KPMG LLP ("KPMG") resigned from the client-auditor
relationship with our Company. On May 3, 2000, pursuant to the prior decision
of our Board Of Directors and Audit Committee of the Board of Directors to seek
and retain the services of an independent accounting firm other than KPMG, we
accepted the resignation of KPMG and confirmed that the client-auditor
relationship with us had ceased.
KPMG's reports on our financial statements for the fiscal years ended
December 31, 1998, and December 31, 1999, did not contain any adverse opinion
or any disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During our two most recent fiscal years ended December 31, 1998, and
December 31, 1999, and the subsequent interim period through May 3, 2000, there
were no "reportable events" as described in Items 304(a) (1) (iv) and (v) of
Regulation S-K and no disagreements between the Registrant
and KPMG on any matter of accounting principles or practice, financial
statement disclosure or auditing scope of procedure which, if not resolved to
the satisfaction of KPMG would have caused KPMG to make a reference to the
subject matter thereof in connection with its reports.
On June 5, 2000, we engaged the services of BDO Seidman, LLP as our
Independent Certified Public Accountants.
44
PART III
The information called for by this Part III (items 10,11,12 and 13) is not set
forth herein because we intend to file with the SEC no later than 120 days after
the end of this fiscal year ended December 31, 2000 the Definitive Proxy
Statement for the 2000 Annual Meeting of Stockholders to be held on July 12,
2001. Such information to be included in the Definitive
Proxy Statement is hereby incorporated into items 10,11,12 and 13 by this
reference.
45
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 47 of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) Exhibits and Reports on Form 8K
NONE in the fourth quarter 2000.
(c) As of the date of the filing of this Annual Report on From 10K no proxy
materials have been furnished to security holders, Copies of all proxy
materials will be sent to the Commission in compliance with its rules. 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 the Company, 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 our Common Stock
4.2 Form of Class A Redeemable Warrant Certificate
4.3 Form of Underwriter's Unit Option Purchase Agreement
4.4 Form of Class A Redeemable Warrant Agreement with Continental
Stock and
transfer and Trust Company
10.1 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
Company 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 Company and Sharon
Will, dated August 1, 1994
46
10.10 License Agreement by and between the Company and The Johns
Hopkins University, dated December 31, 1980
10.11 Technology Transfer, Patent License and Supply Agreement by and
between the Company, Pharmacia LKB Biotechnology Inc., Pharmacia P-L
Biochemicals Inc. and E.I. du Pont de Nemours and Company, dated
November 24, 1987
10.12 Pharmaceutical Use Agreement, by and between the Company and
Temple University, dated August 3, 1988
10.13 Assignment and Research Support Agreement by and between the
Company, Hahnemann University and Dr. David Strayer, Dr. lsadore
Brodsky and Dr. David Gillespie, dated June 30, 1989
10.14 Lease Agreement between the Company and Red Gate Limited
Partnership, dated November 1, 1989, relating to the Company's
Rockville, Maryland facility
10.15 Agreement between the Company and Bioclones (Proprietary)
Limited
10.16 Amendment, dated August 3, 1995, to Agreement between the Company
and Bioclones (Proprietary) Limited (contained in Exhibit (10.46)
21 Subsidiaries of the Registrant
47
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 30, 2001
We, the undersigned officers and directors of Hemispherx Biopharma, Inc.
hereby severally constitute William A. Carter, our true and lawful attorney with
full power to him, and to him singly, to sign for us and in our names in the
capacities indicated below, any and all reports (including any amendments
thereto), with all exhibits thereto and any and all documents in
connection therewith, and generally do all such thing in our name and on our
behalf in such capacities to enable Hemispherx Biopharma, Inc. to comply with
the applicable provision of Securities Exchange Act of 1934, as amended, and all
requirements of the Securities and Exchange Commission, and we hereby ratify and
confirm our signatures as they may be signed by our said
attorneys, to any and all such reports (including any Amendments thereto) and
other documents in connection therewith.
Pursuant to the requirements of Section 13 or (d) of the Securities Exchange
of 1934, as amended, this report has been signed below by the following
persons on behalf of this Registrant and in the capacities and on the dates
indicated.
/S/ William A. Carter March 30,2001
- ----------------------- Chairman of the Board, Chief
William A. Carter, M.D. Executive Officer and Director
/S/ Richard Piani March 26,2001
- -----------------------
Richard Piani Director
/S/ Robert E. Peterson March 26,2001
- -----------------------
Robert E. Peterson Chief Financial Officer
/S/ Ransom Etheridge March 29,2001
- -----------------------
Ransom Etheridge Secretary And Director
/S/ William Mitchell
- ------------------------ March 26,2000
William Mitchell,M.D.,Ph.D. Director
/S/ Josephine Dolhancryk March 27,2001
- ------------------------ Assistant Secretary and
Josephine Dolhancryk Treasurer
F-1
HEMISPHERx BIOPHARMA, INC AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Reports of Independent Certified Public Accountants:
BDO Seidman, LLP . . . . . . . . . . . . . . . . . . . . . . F-2
KPMG LLP. . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets at December 31, 1999 and 2000 . . F-4
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2000. . . . . . . F-5
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive Income (Loss) for each of the years
in the three-year period ended December 31, 2000 . . . . . . F-6
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000 . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . .. . . . F-9
F-2
Report of Independent Certified Public Accountants
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, 2000, and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive loss and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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
audit provides 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, 2000, and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States
of America.
/s/ BDO SEIDMAN, LLP
February 23, 2001,
Philadelphia, Pennsylvania
F-3
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 (as
restated for 1999), and the related consolidated statements of operations,
changes in stockholders' equity and comprehensive loss and cash flows for each
of the years then ended (as restated for 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 auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. 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
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in note 1 to the consolidated financial statements,
the Company has restated its financial statements as of December 31, 1999 and
for the year then ended.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 19, 2000, except as to the seventh paragraph of note 15, which
is as of March 6, 2000 and as to note 1, which is as of March 30, 2001.
F-4
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 2000
(in thousands)
December 31,
------------------------
1999 2000
------- -------
ASSETS (RESTATED)
Current assets:
Cash and cash equivalents. . . . . $6,396 $ 3,721
Short term investments (Note 4). . 2,153 4,657
Accounts receivable 75 60
Stock subscription receivable (Note 7c) 2,250 -
Prepaid expenses and
other current assets . . . . . . 144 607
------- ---------
Total current assets . . . . . . 11,018 9,045
Property and equipment, net . . . . 333 373
Patent and trademark rights, net. . 1,363 1,204
Investments in unconsolidated affiliates 1,413 2,421
Others assets . . . . . . . . . 41 24
------- ---------
Total assets. . . . . . . . . . $14,168 $ 13,067
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . $ 1,091 $ 1,341
Accrued expenses (Note 6). . . . . 420 154
------- ---------
Total current liabilities . . . 1,511 1,495
------- ---------
Commitments and contingencies
(Notes 7, 10, 12, 13 and 15)
Stockholders' equity
(Notes 7 and 8):
Preferred stock. . . . . . . . . - -
Common stock. . . . . . . . . . . 28 30
Additional paid-in capital. . . . 87,972 97,984
Deferred compensation . . . . . . (310) -
Accumulated other comprehensive
income (Note 3j). . . . . . . . . - 34
Accumulated deficit . . . . . . . . (74,014) (82,566)
Treasury stock . . . . . . . . . . (1,019) (3,910)
-------- ----------
Total stockholders' equity. . . 12,657 11,572
-------- ----------
Total liabilities and
stockholders' equity . . . . . $14,168 $ 13,067
======== ==========
See accompanying notes to consolidated financial statements.
F-5
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 2000
(in thousands, except share and per share data)
December 31,
---------------------------------
1998 1999 2000
------- ------- ------
(RESTATED)
Revenue: . . . . . . . . . . $401 $678 $788
------- ------- ------
Costs and expenses:
Research and development . . . . 4,562 4,737 6,136
General and
administrative . . . . . . . 3,753 8,721 3,695
------- ------- -------
Total costs and expenses . . . 8,315 13,458 9,831
Equity loss in unconsolidated affiliate - - ( 81)
Interest and other income . . . . 590 482 572
------- ------- -------
Net loss. . . . . . . . . . . $(7,324) $(12,298) $(8,552)
======== ======== ========
Basic and diluted loss per share. . $(.32) $(.47) $(.29)
======= ======== ========
Weighted average shares
outstanding. . . . . . . . . . 22,724,913 26,380,351 29,251,846
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-6A
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (Loss)
For each of the years in the three-year period ended December 31, 2000
(in thousands except share data )
Preferred
stock shares Preferred stock Common Common Additional
stock Stock paid-in
shares .001 ParValue capital
------------ --------------- ------------ ------------ ----------
Balance at
December 31, 1997 3,650 $37 21,042,606 $21 $65,256
Common stock issued - - 3,294,434 3 11,059
Preferred stock
converted (3,650) (37) 1,825,000 2 (2)
Stock issue costs - - - - (16)
Payout of stock
guarantees - - - - (80)
Stock compensation
expense, net - - - - 1,842
Net comprehensive loss - - - - -
------------ --------------- ------------ ------------ ----------
Balance at
December 31, 1998 - - 26,162,040 26 78,059
Purchase of
treasury stock - - - - -
Common stock
issued - - 1,812,467 2 6,267
Purchase of
public warrants - - - - (98)
Stock compensation and
services expense, net - - - - 3,744
Net comprehensive loss, as
restated - - - - -
------------ --------------- ------------ ------------ ----------
Balance at
December 31, 1999,
as restated - - 27,974,507 28 87,972
Common stock
issued - - 2,393,381 2 9,860
Purchase of
equity investment - - - - 67
Treasury stock purchased - - - - -
Treasury stock issued in
settlement of debt - - - - 8
Stock compensation and
service expense, net - - - - 87
Registration costs - - - - (10)
Net comprehensive loss - - - - -
------------ --------------- ------------ ------------ ----------
Balance at
December 31, 2000 - - 30,367,888 $30 $97,984
============ =============== ============ ============ ==========
F-6B
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (Loss)- Continued
For each of the years in the three-year period ended December 31, 2000
(in thousands except share data )
Deferred Accumulated other Treasury Treasury Total
compensation Comprehensive Accumulated stock Stock stockholders
Income (Loss) deficit shares equity
------------ ------------- ----------- ------ ------- -------------
Balance at
December 31, 1997 $(137) $(2) $(54,392) - - $10,746
Common stock issued - - - - - 11,062
Preferred stock
converted - - - - - -
Stock issue costs - - - - - (16)
Payout of stock
guarantees - - - - - (80)
Stock compensation
expense, net (1,047) - - - - 795
Net comprehensive loss - 3 (7,324) - - (7,321)
---------- ------------ ----------- --------- --------- ----------
Balance at
December 31, 1998 (1,184) 1 (61,716) - - 15,186
Purchase of
treasury stock - - - 290,811 (1,967) (1,967)
Common stock issued - - - (122,876) 948 7,217
Purchase of
public warrants - - - - - (98)
Stock compensation and
services expense, net 874 - - - - 4,618
Net comprehensive loss, as
restated - (1) (12,298) - - (12,299)
---------- ------------ ----------- --------- --------- ----------
Balance at
December 31, 1999,
as restated (310) - (74,014) 167,935 (1,019) 12,657
Common stock issued - - - (20,000) 123 9,985
Purchase of
equity investment - - - (100,000) 551 618
Treasury stock purchased - - - 350,800 (3,591) (3,591)
Treasury stock issued in
settlement of debt - - - (3,089) 26 34
Stock compensation and
service expense, net 310 - - - - 397
Registration costs - - - - - (10)
Net comprehensive loss - 34 (8,552) - - (8,518)
---------- ------------ ----------- --------- --------- ----------
Balance at
December 31, 2000 $- $34 $ (82,566) 395,646 $ (3,910) $ 11,572
========== ============ =========== ========= ========= ==========
See accompanying notes to consolidated financial statements
F-7
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 2000
(in thousands)
December 31,
-----------------------------
1998 1999 2000
------ ------ ------
(RESTATED)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . $(7,324) $(12,298) $(8,552)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . 39 99 131
Amortization of patent and
trademark rights . . . . . . . . 310 220 356
Equity in loss of
unconsolidated affiliate. . . . - - 81
Stock compensation and
service expense . . . . . . . . . 795 4,618 397
Stock issued in settlement of debt. - 126 -
Changes in assets and liabilities:
Accounts receivable. . . . . . . . (24) (18) 15
Prepaid expenses
and other current assets. . . 10 (88) (463)
Accounts payable . . . . . . . . . 337 289 210
Accrued expenses . . . . . . . . . 7 80 (266)
Security deposits. . . . . . . . . (3) (18) 17
-------- --------- --------
Net cash used in
operating activities. . . . . . (5,853) (6,990) (8,074)
-------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment . (151) (251) (171)
Additions to patent and trademark rights . (278) (227) (197)
Maturity of short term investments . 1,004 1,591 2,157
Purchase of short term investments . (1,591) (2,153) (4,589)
Investments in unconsolidated affiliates (1,038) (375) (411)
Other investments. . . . . . . . . . - - (34)
------- --------- --------
Net cash used in investing
activities . . $(2,054) $(1,415) $(3,245)
-------- --------- --------
(CONTINUED)
F-8
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
December 31,
--------------------------------
1998 1999 2000
------ ------ ------
(RESTATED)
Cash flows from financing activities:
Proceeds from stock subscriptions and issuance
of common stock, net. . . . 2,234 1,969 2,250
Repayment of stock guarantee . . . . (80) - -
Proceeds from exercise of
stock warrants . . . . . 8,812 1,923 9,985
Purchase of treasury stock . . . . . - (1,966) (3,591)
Sale of treasury stock . . . . . . . - 948 -
Purchase of public warrants. . . . . - (98) -
---------- -------- -------
Net cash provided by
financing activities. . . . . . 10,966 2,776 8,644
---------- -------- -------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . 3,059 (5,629) (2,675)
Cash and cash equivalents at
beginning of year. . . . 8,966 12,025 6,396
---------- -------- -------
Cash and cash equivalents
at end of year . . $ 12,025 $ 6,396 $ 3,721
========== ======== =======
Supplemental disclosures of
cash flow information:
Issuance of treasury stock for
Investment . . . . . . . $ - $ - $ 618
========== ======== =======
Issuance of common stock
for accrued expenses. . . . . . $ - $ 126 $ 34
========== ======== =======
See accompanying notes to consolidated financial statements.
F-9
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Restatement of Financial Statements
The Company is restating its financial statements as of and for the year ended
December 31, 1999, and for the first quarter of 1999. The restated financial
statements now reflect a non-cash charge for the extension of the lives of
certain Section 701 warrants on February 19, 1999, as described in note 7 to
the consolidated financial statements.
The effect of the restatement on the accompanying consolidated financial
statements from amounts previously reported in 1999 Annual Report on
Form 10-K are summarized as follows:
(OOO's omitted)
As Filed Adjustment As Restated
--------- ----------- ----------
Revenue $678 - $678
--------- ---------
Research and development 4,737 - 4,737
General and administrative 5,624 3,097 8,721
--------- --------- ---------
Total costs 10,361 3,097 13,458
Net loss $(9,201) 3,097 $(12,298)
========= ========= =========
Basic and diluted loss per share $(.35) $(.47)
========= =========
Weighted average outstanding shares 26,380,351 26,380,351
========= =========
The restatement did not effect the December 31, 1999 reported assets and
liabilities. The effect on stockholders' equity is shown below.
Preferred Stock - - -
Common Stock 28 28
Additional Paid-in Capital 84,875 3,097 87,972
Deferred Compensation (310) - (310)
Accumulated Other Comprehensive Income - - -
Accumulated Deficit (70,917) (3,097) (74,014)
Treasury Stock (1,019) - (1,019)
-------- -------
Total Stockholders' Equity $12,657 $12,657
======== =======
(2) 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 (HIV) associated disorders, and chronic
hepatitis C (HVC) virus infection. The Company also has clinical experience
F-10
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 are inactive, and Hemispherx Biopharma-Europe N.V./S.A.
which was incorporated in August 1998. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company also has
investments in unconsolidated affiliates which are accounted for on the equity
or cost method of accounting (see note 3d).
On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration ("FDA") to recover costs from ME/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 100 ME/CFS patients
have been treated under this protocol at various clinical centers in the U.S as
of February 13, 2001.
In 1998, the Company initiated the recruitment of clinical investigators to
enroll ME/CFS patients in the confirmatory Phase III placebo-controlled clinical
study of Ampligen in the treatment of patients severely suffering from ME/CFS.
The Company is presently enrolling patients in this study. This clinical trial
was approved by the FDA in 1998 and is designed to test the safety and
efficiency of Ampligen in treating ME/CFS.
The ME/CFS Cost Recovery Treatment Program in Belgium was started in 1994 with
the approval of the Belgian Regulatory authorities. Since its inception, over
100 patients have enrolled in this program. Clinical data collected in the
treatment of these ME/CFS patients will be used to support the Company's
European Medical Evaluation Agency ("EMEA") Drug Approval Application and in
applications in other regulatory jurisdictions. This program is being extended
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.
(3) Summary of Significant Accounting Policies
(a) Reclassification
Prior years amounts have been reclassified to conform to current year
presentation.
(b) 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 $6,396,000 and
$2,895,000 at December 31, 1999 and 2000, respectively.
11
(c) Short-term Investments
Investments with original maturities of more than three months and marketable
equity securities are considered available for sale. The investments classified
as available for sale include debt securities and equity securities carried at
estimated fair value with unrealized gains and losses recorded as a component
of shareholders' equity.
(d) Investments in unconsolidated affiliates
In 1998, the Company acquired 3.3% of the issued and outstanding common stock of
R.E.D. Laboratories at a cost of $1,074,000. R.E.D. Laboratories is developing
a diagnostic test for the ME/CFS disease. This investment is accounted for
under the cost method of accounting.
In 1999, the Company acquired 15% of the stock of the California Institute of
Molecular Medicine ("CIMM") for $375,000. During 2000, the Company acquired an
additional 15% of the stock of CIMM for $375,000. CIMM is conducting research
toward a treatment for Hepatitis C virus. This investment is accounted forunder
the equity method of accounting beginning in 2000 because the Company's
ownership increased beyond the 20% threshold. The Company's net investment of
$669,000 at December 31, 2000 includes unamortized goodwill of approximately
$521,000. The goodwill is being amortized over its estimated usefull life of
15 years.
The Company's investment in Ribotech, Ltd. is also accounted for using the
equity method of accounting. The Company received 24.9% of Ribotech, Ltd. as
partial compensation under the license agreement described in note 12. Ribotech,
Ltd. has incurred net losses since inception. The Company does not share in
those losses in accordance with the licensing agreement and is not obligated to
fund such losses. The net investment in Ribotech is zero as of December 31,
1999 and 2000. During 2000, the Company prepaid $500,000 to Ribotech, Ltd.
for raw material purchases. $110,000 of materials were delivered in 2000 and
the balance of $390,000 is recorded in prepaid and other current assets in the
accompanying balance sheet at December 31, 2000.
Investments in unconsolidated affiliates also includes an equity investment in
Chronix Biomedical ("Chronix"). Chronix focuses upon the development of
diagnostics for chronic diseases. The initial investment was made in May 31,
2000 through the issuance of 50,000 shares of Hemispherx Biopharma, Inc.
common stock from the treasury. On October 12, 2000 an additional 50,000
shares of common stock were issued from the treasury for a total investment of
approximately $678,000. The percentage ownership in Chronix is approximately
5.4% and is accounted for under the cost method of accounting.
Pursuant to a strategic alliance agreement, the Company provided Chronix with
$250,000 to conduct research in an effort to develop intellectual property on
potential new products for diagnosing and treating various chronic illnesses
including chronic fatigue syndrome. The strategic alliance agreement provides
the Company certain royalty rights with respect to certain diagnostic technology
developed from this research and a right of first refusal to license certain
therapeutic technology developed from this research. The payment of
$250,000 was charged to research and development expense during 2000.
12
(e) Property and Equipment (000 omitted)
December 31,
1999 2000
---- ----
Furniture, fixtures, and equipment $ 1,018 $ 1,178
Leasehold improvements 85 96
------- ----------
Total property and equipment 1,103 1,274
Less accumulated depreciation 770 901
------- ----------
Property and equipment, net $ 333 $ 373
======= ==========
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. Depreciation expense was
$39,000, $99,000 and $131,000 for 1998, 1999 and 2000, respectively.
(f) Patent and Trademark Rights
Patents and trademarks 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 trademark rights 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 each patent
continues to fit into the Company's strategic business plans. During the years
ended December 31, 1998, 1999 and 2000, the Company decided not to pursue the
technology in certain countries for strategic reasons and wrote down $120,000,
$59,000 and $32,000, respectively of these patents to research and development.
Amortization expense was $190,000, $161,000 and $324,000 in 1998, 1999 and 2000,
respectively. Accumulated amortization as of December 31, 1999 and 2000 is
$1,377,000 and $1,699,000, respectively.
(g) Revenue
Revenue is recognized immediately for nonrefundable license fees, if any, 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 is recognized when such product is invoiced
to the patient.
(h) Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Equivalent
F-13
common shares consist of stock options and warrants, using the treasury stock
method, and are excluded from a calculation of diluted net loss per share since
their effect is antidilutive.
(i) 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 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.
(j) Comprehensive Income
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.
(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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those estimates.
(l) Foreign currency translations
Assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates as of balance sheet date.
Revenues and expenses are translated at average exchange rates during each
period. Transaction gains and losses that arise from exchange rate fluctuations
are included in the results of operations as incurred. The resulting translation
adjustments are immaterial for all years presented.
(m) Recent Accounting Standard and Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."SFAS No.133"
requires companies to recognize all derivative contracts at their fair values,
as either assets or liabilities on the balance sheet. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective of
which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (1) the changes in the fair value of the
14
hedged asset or liability that are attributable to the hedged risk, or (2) the
earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for
all fiscal years beginning after January 1, 2001. Historically, the Company has
not entered into derivative contracts either to hedge existing risks or for
speculative purpose. Accordingly, the Company does not expect adoption of the
new standard to affect its financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),"Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of
Accounting Principle Board ("APB") Opinion No. 25."FIN 44" clarifies the
application of APB No. 25 for (a) the definition of employee for purposes of
applying APB 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 became
effective July 1, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The Company adopted FIN 44
in fiscal 2000 and it did not have a material effect on the Company's
financial statements.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting bulletin is effective for 2000. The
initial adoption of this guidance did not have a material impact on the
Company's results of operations or financial position.
F-15
(4) Short-term investments:
Securities classified as available for sale are summarized below.
(000's omitted)
December 31, 1999
--------------
Unrealized
Adjusted -------------- Carrying
Cost Gains (Losses) Value
------- ----- ------ -------
Federal Home Loan Bank Note $ 681 - - $ 681
General Electric Note 980 - - 980
CPML & Co. Note 492 - - 492
-------- ------ ------- -------
Total $ 2,153 - - $ 2,153
======== ====== ======= =======
December 31, 2000
---------------
Unrealized
---------------
Adjusted Carrying
cost Gains (Losses) Value
--------- ----- ------- --------
Federal Home Loan Bank Note $ 970 $ 20 $ - $ 990
Federal Home Loan Bank Notes 1,309 25 - 1,334
Calamos Mutual Market 51 - (1) 50
General Electric Commercial Paper 2,259 - - 2,259
Daxor Corp. 34 - (10) 24
----- ----- ------- --------
Total $ 4,623 45 (11) $ 4,657
===== ===== ======= ========
(5) Stock-Based Compensation
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 under FAS 123 the fair value of the stock purchase warrants granted
during the year was determined using a 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. The fair value of the stock purchase warrants granted during
1999 was also determined using the Black-Scholes option pricing model with a
rate of 5.81%, volatility of 135.4% - 294.31%, and expected life of 2 years.
These warrants are included in the 2,633,000 non-public warrants outstanding as
of December 31, 2000 as described in footnote 6(ii). There were no warrants
granted to employees during 2000. The Company granted to employees 8,000 options
in 2000. See footnote 7(i).
The Company applies the intrinsic value method in accordance APB Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for stock-based
F-16
compensation of its employees and, accordingly, no compensation cost has been
recognized for stock purchase warrants issued to employees. Had the Company
determined compensation cost based on the fair value at the grant date for its
stock-based compensation of its employees in accordance with FAS 123 the
Company's net loss would have been increased to the pro forma amounts indicated
below:
(000's omitted)
1998 1999 2000
---- ---- ----
Net loss- as reported $(7,324) $(12,298) $ (8,552)
Pro forma (8,200) (13,635) (8,789)
Net loss per share- as reported $(.32) $(.47) $(.29)
Pro forma (.36) (.52) (.30)
For stock 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 period of service.
The exercise price of all stock warrants granted was equal to the fair market
value of the underlying common stock as defined by APB 25 on the date of the
grant.
(6) Accrued Expenses
Accrued expenses at December 31, 1999 and 2000 consists of the following:
(000's omitted)
December 31,
-------------
1999 2000
----- ------
Accrued Professional Fees. . . . . . . . . 182 -
Other Accrued expenses . . . . . . . . . . 238 154
------ -------
$ 420 $ 154
====== =======
(7) Stockholders' Equity
(a) Preferred Stock
The Company is authorized to issue 5,000,000 shares of $.01 per value preferred
stock with such designations, rights and preferences as may be determined by the
board of directors. There were no preferred shares issued and outstanding at
December 31, 1999 and 2000.
(b) Common Stock
The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. As of December 31, 1999 and 2000, 27,806,572 and 29,972,242 shares,
net of shares held in the treasury, were issued and outstanding, respectively.
F-17
(c) New Equity Financing
New equity financing in 1999 included the private placement of common stock for
an aggregate of $4,219,000 in net proceeds, of which $2,250,000 was received in
2000. In addition, the exercise of stock warrants generated an additional
$1,923,000 and $9,985,000 in net proceeds to the Company in 1999 and 2000,
respectively.
(d) Common Stock Options and Warrants
(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.
F-18
Information regarding the options approved by the Board of Directors under
the 1990
Stock Option Plan is summarized below:
1998 1999 2000
-------------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Option Average Option Average Option Average
Shares Price Exercise Shares Price Exercise Shares Price Exercise
Price Price Price
Outstanding,
beginning of
year 291,256 $1.06-4.34 $3.35 294,609 $1.06-4.34 $3.56 294,000 $1.06-6.00 $3.60
Granted 20,000 $3.50-6.00 $3.50 - - 8,000 $3.00-6.81 $4.88
Canceled (4,482) $3.50 $3.50 (609) $3.50 $3.50 (76,677) $3.50-4.34 $4.09
Exercised (12,165)$1.06-3.50 $2.93 - (6,756) $1.06-3.50 $2.75
-------- -------- --------
Outstanding,
end of year 294,609 $1.06-6.00 $3.56 294,000 $1.06-6.00 $3.60 218,567 $1.06-6.81 $ 3.45
======== ======== ========
Exercisable 229,523 $1.06-6.00 $3.48 250,915 $1.06-6.00 $3.55 198,717 $1.06-6.81 $ 3.48
======== ======== ========
Weighted average
remaining
contractual life
(years) 3.81 years 3.81 years 3.83 years
======== ======== ========
Exercised in
current and prior
years (31,035) (31,035) (37,791)
======== ======== ========
Available for future
grants 135,154 135,763 204,440
======= ======== ========
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.
19
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
usedto 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) Stock warrants
Number of warrants exercisable into shares of common stock
1998 1999 2000
-------------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Option Average Option Average Option Average
Shares Price Exercise Shares Price Exercise Shares Price Exercise
Price Price Price
-------- -------- --------- ------- ------- ------- ------ ------ --------
Outstanding,
beginning $1.75 $1.75 $1.75
of year 15,630,934 -10.85 $3.57 14,999,910 -10.85 $3.71 14,058,010 -10.85 $3.90
$3.00 $6.00 $6.00
Granted 1,838,000 -10.00 4.69 575,000 -10.00 7.00 293,800 -12.00 6.40
$2.00
Canceled (341,017) -10.85 6.01
$1.75 $1.75 $1.75
Exercised (2,469,024) -5.78 3.56 (1,516,900) -4.00 3.12 (2,386,625) -4.00 4.19
----------- ----------- -----------
Outstanding, $1.75 $1.75 $1.75
end of year 14,999,910 -10.85 $3.71 14,058,010 -10.85 $3.90 11,624,168 -12.00 $4.05
=========== =========== ===========
$1.75 $1.75 $1.75
Exercisable 14,999,910 -10.85 $3.71 14,058,010 -10.85 $3.90 11,624,168 -12.00 $4.05
=========== =========== ===========
Weighted average
remaining
contractual life
(years) 4.34 years 3.45 years 2.66 years
=========== =========== ==========
Years
exercisable 1999-2006 2000-2006 2001-2006
=========== =========== ==========
Warrants issued to stockholders
Certain of the stock warrants outstanding at December 31, 2000 are related to
the issuance of stockholder notes payable. These warrants are subject to
adjustments for stock splits and dividends. At December 31, 1998 and 1999
601,967 of these warrants were outstanding. In 2000, 149,807 warrants expired
and 147,000 warrants were converted to common stock. At December 31, 2000,
there were 305,160 warrants remaining. These warrants have an exercise price of
$3.50 per share and expire in October 2004
F-20
Other stock warrants
In addition, the Company has other issued warrants outstanding - totaling
11,319,008 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. This extension
resulted in a non-cash charge of approximately $3,097,000, see
note 1. 235,000 warrants were exercised in 1999 and 5,000 warrants were
exercised in 2000. At December 31, 2000, there were 1,840,000
Rule 701 warrants remaining.
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, in 1999, 290,000 and in 2000,
216,500 of these warrants were exercised, leaving a balance of these warrants of
1,651,500. These warrants expire June 30, 2005.
In June 1995, the Company entered into an agreement with The Sage Group
whereby, in return for identifying certain distribution partners, The Sage Group
received certain percentages of the proceeds from the first distribution
agreement arising from such identification. The Company paid to The Sage Group
a monthly retainer and provided 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 2000, 180,000
warrants were exercised and 191,210 warrants expired, leaving a balance of
68,790 which will expire May 15, 2001.
In connection with the IPO completed on November 7, 1995, the Company sold
6,313,000 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 warrants during 1997, 664,090 during 1998, 168,500 in 1999, and
1,613,792 in 2000. 3,866,518 warrants were outstanding at December 31, 2000.
These warrants will expire on November 2, 2001.
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 will
expire on November 2, 2001.
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, 173,300 were exercised in
21
1999, and 34,333 were exercised in 2000. The remaining 28,400 warrants will
expire December 31, 2001.
In the years 1998, 1999, and 2000 the Company issued 350,000, 350,000 and
293,800 warrants, respectively, to investment banking firms for services
performed on behalf of the Company. Accordingly, the company recorded stock
compensation expense of $795,000, $1,521,000 and $397,000 for the years 1998,
1999 and 2000, respectively. These warrants have various vesting dates and
exercise prices ranging from $4.00 to $10.00 per share. In 1999, 150,000 of
these warrants were exercised, and 75,000 were exercised in 2000. 768,800
warrants were outstanding at December 31, 2000. These warrants are exercisable
in five years from the date of issuance.
In 1998, 1999, and 2000 the Company had non-public warrants outstanding of
2,898,100, 2,748,000 and 2,633,000, respectively. These warrants are exercisable
at rates of $2.50 to $10.00 per share of common stock. The exercise price was
equal to the fair market value of the stock on the date of grant. Of the
2,633,000 outstanding warrants at December 31, 2000, 421,000 warrants were
granted to employees for services performed. These warrants granted to
employees, with a weighted average exercise price of $7.14 per share, have been
included in the pro-forma loss calculation in note 5.
(8) Registration Statements
The Company filed a Registration Statement with the SEC which became effective
as of October 1, 1999. This filing registered 2,125,000 warrants to purchase
common stock as well as 304,165 shares of common stock to be used by the Company
for various business matters. If the warrantholders exercised all warrants, the
Company expects to realize approximately $ 6,900,000 in proceeds.
On October 18, 2000 the Company filed a Registration Statement with the SEC
which became effective on that date. This filing registered 755,000 warrants to
purchase the related underlying shares of common stock.
In addition, the Company registered 500,000 shares of common stock to be
used for general corporate purposes.
(9) Segment and Related Information
The Company operates in one segment, which is the performance of research
and development activities related to Ampligen and other drugs under
development.
22
The following table presents revenues by country based on the location of the
use of the product services.
(000's omitted)
-----------------
1998 1999 2000
---- ---- -----
United States $195 $391 $506
Belgium 179 259 272
Other 27 28 10
---- ---- ----
$401 $678 $ 788
==== ==== =====
The Company employs an insignificant amount of net property and equipment
in its foreign operations.
(10) 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 year ended December 31, 1998,
the Company incurred approximately $179,000 of research fees under an agreement
with Hahnemann Medical University in Philadelphia. Such costs were expensed as
incurred. No such costs were incurred in 1999 or 2000.
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. Biovail agrees to work
with the Company in preparing and filing of a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested $2.250 million 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
F-23
years or on an as-needed monthly basis. During the years ending December 31,
1998, 1999 and 2000, the Company incurred approximately $269,000, $664,000 and
$924,000, respectively of consulting service fees under these agreements.
These costs are charged to research and development expense as incurred.
(11) 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). 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 1998, 1999, and
2000, the Company provided matching contributions to each employee for up to 6%
of annual pay aggregating $37,000, $47,000 and $48,000, respectively.
(12) 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.
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
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.
F-24
The Company had 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 1998, 1999, 2000 is $623,000, $815,000 and $682,000,
respectively. The 1999 amount 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 to one officer. In 1999 and 2000 no performance bonuses were
granted. Pursuant to the employment agreements, certain officers were granted
Rule 701 Warrants to purchase 2,080,000 shares of Common Stock at $3.50 per
share, see note 1. 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 co-development 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 received during the year ended December 31, 1995; (b) the
formation and issuance to the Company of 24.9% of the capital stock of Ribotech,
Ltd., a company which developed and operates a new manufacturing facility that
produces raw material components of Ampligen 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 the years ending 1998, 1999 and 2000 the Company paid to Ribotech
a total of $282,000, $156,000 and $500,000, respectively, for the current and
future purchase and delivery of polymers. Of the $500,000 advanced in 2000 a
balance of $390,000 is included in other assets and will be used for future
purchases 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/Bioclones licensing agreement, a fee of .75% of
gross proceeds in the event that SAB Bioclones 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
Bioclones. 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
F-25
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.
(13) 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:
(000's omitted)
Year ending Operating
December 31, leases
----------- ---------
2001. . . . . . . . . . . . . . . . . . . . $ 299
2002. . . . . . . . . . . . . . . . . . . . 289
2003. . . . . . . . . . . . . . . . . . . . 279
2004. . . . . . . . . . . . . . . . . . . . 286
2005. . . . . . . . . . . . . . . . . . . . 240
2006 and later. . . . . . . . . . . . . . . 258
----------
Total minimum lease payments. . . . . . . . $ 1,651
==========
Rent expense charged to operations for the years ended December 31, 1998,
1999 and 2000 amounted to approximately $308,000, $341,000 and $347,000
respectively. The term of the lease for the Rockville, Maryland facility is
through June, 2005 with an average rent of $8,000 per month, plus applicable
taxes and charges. The term of the lease for the Philadelphia, Pennsylvania
offices is through April, 2007 with an average rent of $15,000 per month, plus
applicable taxes and charges.
(14) Income Taxes
As of December 31, 2000, the Company has approximately $57,000,000 of federal
net operating loss carryforwards (expiring in the years 2003 through 2020)
available to offset future federal taxable income. The Company also has
approximately $8,000,000 of state net operating loss carryforwards
(expiring in the years 2006 through 2010) available to offset future state
taxable income. The utilization of certain state net operating loss
carryforwards may be subject to annual limitations.
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.
F-26
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
uponthe 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, 1999 and 2000.
The components of the net deferred tax asset of December 31, 1999 and 2000
consists of the following:
(000,s omitted)
Deferred tax assets: 1999 2000
----- ----
Net Operating Losses $18,608 $19,520
Accrued Expenses and Other 41 86
Capitalized Research and
Development Costs 3,722 4,837
------ ------
22,371 24,443
Less: Valuation Allowance 22,371 24,443
------ ------
Balance $ 0 $ 0
====== ======
(15) Contingencies
In September, 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. In October 1998, and August 1999,
the Company amended the complaint to add additional counts and to add
Asensio.com, Inc. (formerly known as Asensio Holdings, Inc.), the holding
company of defendant Asensio Company Inc. The action presently includes 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, Manuel P. Asensio Asensio & Company, Inc.,and others 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 the Company and its officers
and directors, the Company made defamatory statements about defendants,
including statements 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. The action is presently listed
for trial in August 2001.
F-27
On May 30, 2000, the Company received notice of a claim by Manuel P. Asensio and
Asensio & Company, Inc.,in the Supreme Court of the State of New York against
the Company, the Chairman, and Chief Executive Officer, William A. Carter, and
the Company's predecessor auditor, (the "first New York Action") in which they
allege that defendants defamed them in oral and written communications made in
March 2000. The allegations of Manuel P. Asensio and Asensio & Company, Inc., in
the first New York Action are similar in substance to the alleged defamations
which are the subject of the counterclaims filed by them in the action presently
pending in Pennsylvania state court.
On June 26, 2000, Manuel P. Asensio, Asensio & Company, Inc. and Asensio.com
Inc., filed a second action against the Company its Chairman and Chief
Executive Officer in the Supreme Court of the State of New York.
(the "second New York Action"). On September 25, 2000, the Company was served
with a complaint in this action. The second New York Action purports to seek a
declaratory judgment that Asensio's statements regarding the Company constituted
protected speech, and that they did not engage in any actionable interference
with our existing or prospective business relations. We intend to vigorously
defend against the claims asserted in both the First and Second New York
Actions.
These litigations could subject the Company to significant liability for damage
and, could be time-consuming and expensive to pursue, and could result in the
diversion of management time and attention.
In October, 1998, the Company contacted the Securities and Exchange Commission
("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 July, 1999, the Company was advised by the
SEC of a private investigation authorized by the SEC on April 1, 1999 into
various allegations of misrepresentations by the Company and its officers. In
general, 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" which the Company
considers defamatory and for which the Company has sued Asensio and his company.
In October 2000, the SEC brought forth certain specific concerns with respect to
certain alleged omissions in the Company's public statements to which the
Company replied in November. The Company has had no further contact with the
SEC on this matter.
On March 6, 2000, Cook Imaging Corp. et. al, filed a complaint against us in
the United States District Court for the Eastern District of Pennsylvania. Cook
Imaging Corp. asserts that the Company refused to pay for certain Ampligen
manufacturing efforts by Cook. The Company has responded to the complaint
and asserted a counterclaim seeking damages in excess of the claim by Cook. The
Company maintains that Cook Imaging Corp. did not perform as required by
the contract under Good Maintenance Practices ("GMP") conditions. On
December 22, 2000, the Court denied plaintiff's motion for summary judgement and
trial is presently scheduled for late April 2001.
F28
The Company is unable to form an opinion as to the ultimate outcomes of the
preceding suits and SEC investigation and is unable to estimate the potential
impact, if any, on its financial condition , results of operations or liquidity.
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 onthe financial position or results of operations of the Company.
(16) Related Party Transactions
Certain directors performed professional services for the Company for which they
were compensated over the amount paid for directors' fees. An officer of the
Company received an aggregate of $65,000 in short term advances, of which
the outstanding balance was repaid as of March 2, 2001. All advances bear
interest at 6% per annum.
(17) 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.
The Company's repurchases of shares of common stock are recorded as "Treasury
Stock" and result in a reduction of "Stockholders' equity." When treasury
shares are reissued, the Company uses a first-in, first-out method and the
excess of repurchase cost over reissuance price is treated as a reduction of
"Additional paid-in capital."
(18) Concentrations of credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash. The Company places its cash with
high-quality financial institutions. At times, such amount may be in excess of
Federal Deposit Insurance Corporation insurance limits of $100,000.
F-29
First quarter 1999 was restated to reflect the $3.1 million non-cash
charge as noted in note 1.
(19) Quarterly Results of Operation (unaudited)
(000's omitted)
1999
----------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
(RESTATED)
Revenues $ 132 $ 155 $ 168 $ 223 $ 678
Costs and expenses 6,276 2,817 2,165 2,200 13,458
Net loss $(5,997) $(2,554) $(1,879) $(1,868) $(12,298)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.28) $(.10) $(.07) $(.07) $(.47)
------- -------- ------- -------- -------
2000
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenues $ 210 $ 215 $ 225 $ 138 $ 788
Costs and expenses 2,334 2,409 2,413 2,675 9,831
Net loss (1,972) (2,059) (2,066) (2,455) (8,552)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.07) $(.07) $(.07) $(.08) $(.29)
------- -------- ------- -------- -------