FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
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. Yes ( ) No (X)
The aggregate market value of Common Stock held by non-affiliates at June
30, 2002 was $80,226,755. For purposes of this calculation, it was assumed that
all Common Stock is valued at the closing price of the stock as of June 30,
2002.
The number of shares of the registrant's Common Stock outstanding as of
March 31, 2003 was 32,941,445.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 32
Item 6. Selected Financial Data 36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations _36
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk ___ 46
Item 8. Financial Statements and Supplementary Data 47
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 47
PART III
Item 10. Directors and Executive Officers of the Registrant _ 47
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 58
Item 13. Certain Relationships and Related Transactions 60
Item 14. Controls and Procedures 61
PART IV
Item 15. Principal Accountant Fees and Services 61
Item 16. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 61
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
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. All statements other than statements of historical fact included
in this Form 10-K regarding our financial position, business strategy and plans
or objectives for future operations are forward-looking statements. Without
limiting the broader description of forward-looking statements above, we
specifically note that statements regarding potential drugs, their potential
therapeutic effect, the possibility of obtaining regulatory approval, our
ability to manufacture and sell any products, market acceptance or our ability
to earn a profit from sales or licenses of any drugs or our ability to discover
new drugs in the future are all forward-looking in nature.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors 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. We do
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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.
PART I
ITEM 1. Business.
GENERAL
We were founded in the early 1970s as a contract researcher for the
National Institutes of Health (NIH). Dr. William A. Carter, M.D., joined the
Company in 1976 and ultimately become its CEO in 1988. He has focused the
Company on exploring, understanding and mastering the mechanism of nucleic acid
technology to produce a promising new class of drugs for treating chronic viral
diseases and disorders of the immune system. In the course of almost three
decades, we have established a strong foundation of laboratory, pre-clinical and
clinical data with respect to the development of nucleic acids to enhance the
natural antiviral defense system of the human body and the development of
therapeutic products for the treatment of chronic diseases. Our strategy is to
use our proprietary drug, Ampligen(R), to treat diseases for which adequate
treatment is not available. We seek the required regulatory approvals which will
allow the progressive introduction of Ampligen(R) for Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV")
and Hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. Ampligen(R) is
currently in phase III clinical trials in the U.S. for use in treatment of
ME/CFS and is in Phase IIb clinical trials in the U.S. for the treatment of
newly emerged multi-drug resistant HIV, and for the induction of cell mediated
immunity in HIV patients that are under control using potentially toxic drug
cocktails.
In March, 2003, the Company acquired from Interferon Sciences Inc. ("ISI"),
all of ISI's raw materials, work-in-progress and finished product of Alferon N
Injection(R), together with a limited license for the production, manufacture,
use, marketing and sale of the product. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been approved by the
U.S. Food and Drug Administration ("FDA") for commercial sale for the treatment
of certain types of genital warts. We intend to market this product in the
United State through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis. This acquisition not withstanding, our primary
focus remains the development to Ampligen(R) for treating ME/CFS and HIV
diseases.
In March, 2003, we entered into an agreement with ISI subject to certain
events that would grant us global rights to sell Alferon N Injection(R) as well
as acquire certain other assets of ISI which include but are not limited to real
estate and property, plant and equipment.
We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.
AMPLIGEN(R)
Our proprietary drug technology Ampligen(R) utilizes specially configured
ribonucleic acid ("RNA") and is protected by more than 350 patents worldwide
with over 80 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new medications which have a similar mechanism of
action. The main U.S. ME/CFS treatment patent (#6130206) expires January 23,
2015. Our main patents covering HIV treatment (#4795744,#4820696, #5063209, and
#5091374) expire on August 26, 2006, September 30, 2008, August 10, 2010,
respectively; Hepatitis treatment coverage is conveyed by U.S. patent #5593973
which expires on October 15, 2014. The U.S. Ampligen(R) Trademark (#1,515,099)
expires on December 6, 2008 and can be renewed thereafter for an additional 10
years. The U.S. FDA has granted us "orphan drug status" for our nucleic
acid-derived therapeutics for ME/CFS, HIV, and renal cell carcinoma and
malignant melanoma. Orphan drug status grants the Company protection against
competition for a period of seven years following FDA approval, as well as
certain federal tax incentives, and other regulatory benefits.
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. There are two forms of nucleic acids, DNA and RNA. DNA is a group of
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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.
The Company's drug technology utilizes specially configured RNA. Our
double-stranded RNA drug product, trademarked Ampligen(R), which is administered
intravenously, is (or has been) in human clinical development for various
disease indications, including treatment for ME/CFS, HIV, renal cell carcinoma
and malignant melanoma. Further studies are planned in cancer but initiation
dates have not been set.
Based on the result of published, peer reviewed pre-clinical studies and
clinical trials, we believe that Ampligen(R) may have broad-spectrum anti-viral
and anti-cancer properties. Over 500 patients have received Ampligen(R) in
clinical trials authorized by the FDA at over twenty clinical trial sites across
the U.S., representing the administration of more than 45,000 doses of this
drug.
Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)
ME/CFS is a debilitating disease that is difficult to diagnose and for
which, at present, there is no cure. 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 low
grade fever, depression, difficulty in concentrating on tasks, and tender lymph
glands. With progression of the disease they can become bed-ridden, lose their
jobs and become dependent upon the state for support and medical care.
ME/CFS has been given official recognition by the U.S. Social Security
Administration, and some European nations, rendering ME/CFS patients eligible
for disability benefits and heightening awareness of this debilitating disease
in the medical community. Further scientific publication by independent
academicians on the accurate laboratory diagnosis of ME/CFS appeared in a
peer-reviewed journal (American Journal of Medicine) in February 2000. The U.S.
Centers of Disease Control ("CDC") reconfirmed its research commitment to ME/CFS
following an audit by the U.S. Government Accounting Office ("GAO") which was
announced July 28, 1999.
Estimates of ME/CFS patient numbers in the Unites States range from a low
of 500,000 (1995-Centers for Disease Control, Atlanta, GA) to a high of
1,000,000 (1999-DePaul University study). Estimates of patient numbers in Europe
range from 600,000 to 2,200,000 as reported in the British Medical Journal in
January 2000. It is believed worldwide patient totals may be as high as ten
million.
In 1989, we received FDA authorization to conduct a Phase II study of
Ampligen(R) for ME/CFS. In 1991, we completed a 24-week, 92 patient, randomized,
placebo-controlled, double-blinded, multi-center trial of Ampligen(R) for
treating patients with ME/CFS. The results, published in a peer review journal
in 1994, suggested enhanced physical performance, greater cognitive functions
and improved ability to perform daily living activities. Patients required
reduced hospitalization and medical care, while suffering little or no
significant adverse side effects. The FDA raised certain issues with respect to
this clinical trial which required further study. These issues were reviewed and
satisfactorily resolved.
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In February 1993, Hemispherx presented results of its Phase II study of
Ampligen(R) for ME/CFS to a FDA Advisory Committee and these results were
published in early 1994 in Clinical Infectious Diseases, a peer reviewed medical
journal, which emphasizes the understanding and potential treatment of
infectious diseases. The results suggested that patients on Ampligen(R), in
contrast to those receiving a placebo, showed significant improvement in
physical capacity as determined by performance on treadmill testing. The
Ampligen(R) treated patient group also required less pain medication than did
the placebo group.
In late 1998, we were authorized by the FDA to initiate a Phase III
multicenter, placebo-controlled, randomized, double blind clinical trial to
treat 230 patients with ME/CFS in the U.S. The objective of this Phase III,
clinical study, deemed as Amp 516, is to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. As of April 1, 2003 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 special
knowledge of ME/CFS who have recruited, prescreened and enrolled ME/CFS patients
for inclusion in the Phase III Amp 516 ME/CFS clinical trial. This clinical
trial now has over 230 ME/CFS patients participating. The patients complete a
stage I, forty week, double-blind, randomized, placebo-controlled portion of the
clinical trial and then move into the stage II or the open label treatment
portion of the clinical trial. To date there have been no serious adverse events
reported related to the study medication. Additional ME/CFS patients have been
recruited by the clinical investigators to, in effect, over enroll the program.
We expect to have in excess of the full enrollment in order to compensate for
potential patient "drop outs", i.e.; patients that discontinue the program
prematurely for various reasons. The next stage in our program is final data
collection, quality assurance of data to insure its accuracy and analysis of the
data according to regulatory guidelines to facilitate filing for commercial
approval to sell.
Human Immunodeficiency Virus (HIV)
About fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. All target the specific HIV enzymes, reverse
transcriptase ("RT") and protease. The use of various combinations of three or
more of these drugs is often referred to as Highly Active Anti-Retroviral
Therapy ("HAART"). HAART involves the utilization of several antiretrovirals
with different mechanisms of action to decrease viral loads in HIV-infected
patients. The goal of these combination treatments is to reduce the amount of
HIV in the body ("viral load") to as low as possible. Treatments include
different classes of drugs, but they all work by stopping parts of the virus so
the virus cannot reproduce. Experience has shown that using combinations of
drugs from different classes is a more effective strategy than using only one or
two drugs. HAART has provided dramatic decreases in morbidity and mortality of
HIV infection. Reduction of the viral load to undetectable levels in patients
with wild type virus (i.e., non-drug-resistant virus)is routinely possible with
the appropriate application of HAART. HIV mainly infects important immune system
cells called CD4 cells. After HIV has infected a CD4 cell, the CD4 cell becomes
damaged and is eventually destroyed. Fewer CD4 cells means more damage to the
immune system and, ultimately, results in AIDS. Originally, reduction of HIV
loads was seen as possibly allowing the reconstitution of the immune system and
led to early speculation that HIV might be eliminated by HAART.
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Subsequent experience has provided a more realistic view of HAART and the
realization that chronic HIV suppression using HAART, as currently practiced,
would require treatment for life with resulting significant cumulative
toxicities. The various reverse transcriptase and protease inhibitor drugs that
go into HAART have significantly reduced the morbidity and mortality connected
with HIV; however there has been a significant cost due to drug toxicity. It is
estimated that 50% of HIV deaths are from the toxicity of the drugs in HAART.
Current estimates suggest that it would require as many as 60 years of HAART for
elimination of HIV in the infected patient. Thus the toxicity of HAART drugs and
the enormous cost of treatment makes this goal impractical.
Although more potent second generation drugs are under development that
target the reverse transcriptase and protease genes as well as new HIV targets,
the problem of drug toxicities, the complex interactions between these drug
classes, and the likelihood of life-long therapy will remain a serious drawback
to their usage.
Failure of antiretroviral therapies over time and the demonstration of
resistance have stimulated intensive searches for appropriate combinations of
agents, or sequential use of different agents, that act upon the same or
different viral targets. This situation has created interest in our drug
technology which operates by a different mechanism.
We believe that the concept of Strategic Therapeutic Interruption ("STI")
of HAART provides a unique opportunity to minimize the current deficiencies of
HAART while retaining the HIV suppression capacities of HAART. STI is the
cessation of HAART until HIV again becomes detectable (i.e., rebounds) followed
by resumption of HAART with subsequent suppression of HIV. By re-institution of
HAART, HIV is suppressed before it can inflict damage to the immune system of
the patient. Based on recent publications (AIDS 2001,15: E19-27 and AIDS 2001,
15:1359-1368) in peer reviewed medical literature, it is expected that in just
30 days after stopping HAART approximately 80% to 90%, of the patients will
suffer a relapse evidencing detectable levels of HIV. The Company believes that
Ampligen(R) combined with the STI (strategic treatment interruption) approach
may offer a unique opportunity to retain HAART's superb ability to suppress HIV
while potentially minimizing its deficiencies. All present approved drugs block
certain steps in the life cycles of HIV. None of these drugs address the immune
system, as Ampligen(R) potentially does, although HIV is an immune-based
disease.
By using Ampligen(R) in combination with STI of HAART, we will undertake to
boost the patients' own immune system's response to help them control their HIV
when they are off of HAART. The Company's minimum expectation is that
Ampligen(R) has potential to lengthen the HAART-free time interval with a
resultant decrease in HAART-induced toxicities. The ultimate potential, which of
course requires full clinical testing to accept or reject the hypothesis, is
that Ampligen(R) may potentiate STI of HAART to the point that the cell mediated
immune system will be sufficient to eliminate requirement for HAART. We plan to
present the follow on clinical results of using our technology at several
International AIDS Scientific Forums in 2003, including the VI International
Viroteg Conference an Antiviral research in Savannah, Georgia in April 2003.
Our AMP 720 HIV Clinical Trial is being conducted with individuals infected
with HIV who are responding well to HAART at the moment. Patients in this study
are required to meet minimum immune system requirements of CD4 cell levels
greater than 400, maximum HIV infection levels of less that 50 copies/ml, and a
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HAART regimen containing at least one anti-viral drug showing therapeutic
synergy with Ampligen(R) based on recently reported ex vivo studies in
peer-reviewed scientific journals. All patients are chronically HIV infected and
will have been receiving the indicated HAART regimen prior to starting the STI.
The trial applies strategic treatment interruption of HAART based on the
hypothesis that careful management of HIV rebound following STI may have
potential to result in the development of protective immune responses to HIV in
order to achieve control of HIV replication. The Company believes that the
addition of Ampligen(R), with its potential immunomodulatory properties, may
reasonably achieve this outcome. Half of the participants in the trial are given
400 mg of Ampligen(R) twice a week and once they start the STI will remain off
of HAART until such time as their HIV rebounds. The other half of the
participants (the control group) are on STI, but they are given no Ampligen(R)
during the "control" portion of the clinical test.
The targeted enrollment in the AMP 720 Clinical Trial is 120 HIV-infected
persons who meet the criteria. We expect to have 60 people on STI with
Ampligen(R) and 60 people on STI without Ampligen(R). Presently, this study is
approximately 35% enrolled at ten medical centers around the U.S. The Company
expects enrollment in this clinical trial to accelerate as we recruit more
investigators and based on the analysis and presentation of results in Prague,
Czech Republic, Barcelona, Spain and Naples, FL (December, 2002). The length of
this stage of the trial will be determined by an analysis of the interim
results.
Hepatitis C Virus (HCV) We currently have an informal arrangement with the
California Institute of Molecular Medicine ("CIMM") to collaborate and assist
their efforts to replicate human Kupffer's cells obtained from HCV infected
patients. This proprietary CIMM approach involves the in vitro growth of hepatic
macrophages (called Kupffer's cells) from the failing liver of a patient and
reinfusion of the in vitro grown Kupffer's liver cells into the same patient.
The ability to grow HCV in long term culture that would allow the testing of,
potential anti-HCV drugs in vitro would permit us to conduct and obtain valuable
research data in using Ampligen(R) to treat HCV prior to engaging and clinical
trial. This would not raise the question of immunological incompatibility.
Testing by CIMM indicates that their process of Kupffers's cell application in
vitro is reproducible (>95% efficacy) from individual patients. CIMM is also
developing a process for maintaining and propagating Kuffer's cells reproducibly
in defined cell cultures from fine needle liver aspirates from living human
volunteers with potential as patients with failing liver due to a variety of
etiologies.
In January 2001 CIMM filed a notice of Invention with the U.S. patent
office. As a result, a patent titled "Replication of Human Kupffer's cell
obtained from HCV infected patients by Fine Needle Biopsy Technique" was issued.
This method can potentially salvage critically needed liver function without
major surgery or aggressive medical intervention.
The immediate and potential market for the Kupffer's maintenance and
propagation techniques will be more than 14,000 people in the U.S. actively
seeking a liver transplant. Additional thousands are progressing towards a
failing liver and will soon need transplantation or a successful alternative
method to restore function. Several hundred thousand who have alcoholic
cirrhosis may also benefit from the proprietary process. Medical costs of a
liver transplant are approximately $300,000 and are far beyond the financial
reserves of most families. Reimbursement of these costs by Health Insurance
carriers is problematic at best. We have a 30% equity position in CIMM, which is
located in California and recently opened a new state-of-the-art research
laboratory in Ventura, California.
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We are also evaluating potential novel clinical programs which would
involve using Ampligen(R) to treat both HCV and HIV when they coexist on the
same patient. We expect to commence these studies in collaboration with one or
more prospective corporate partners. A collaborative Clinical study in Europe,
in conjunction with Laboratorios Del Dr. Esteve S.A., is expected to commence
during the first half of 2003.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, Immunological enhancers through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% on sales of Oragen(TM), 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 for application to Chronic viral
and immunological disorders. Research and development of Oragen(TM) is on hold
at this time.
Other Diseases
An FDA authorized Phase I/II study of Ampligen(R) in cancer including
patients with renal cell carcinoma was completed in 1994. The results of this
study indicated that patients receiving high doses (200-500mg) twice weekly
experienced an increase in medium survival compared to the low dose group and as
compared to an historical control group. We received authorization from the FDA
to initiate a phase II study using Ampligen(R) to treat patients with metastatic
renal cell carcinoma. Patients with Metastatic Melanoma were included in the
Phase I/II study of Ampligen(R) in cancer. The FDA has authorized us to conduct
a Phase II clinical trial using Ampligen(R) in melanoma. We do not expect to
devote any significant resources to funding these studies in the near future.
Other Antiviral/ Immunologic Treatments
After the terrorist acts of September 11, 2001 and the resultant
International concern for bio-terrorism (including Smallpox), we filed a
regulatory application with the FDA for permission to conduct a clinical trial,
in the event of Smallpox dissemination, using Ampligen(R) therapy as a
treatment. This proposed study was based on an earlier peer reviewed laboratory
study from Yale University in Partnership with the U.S. Military Command at Fort
Detrick, the U.S. Biological defense Specialty Research Center. The result of
this study indicated Ampligen(R) to be promising in a laboratory model of
smallpox.
Based on these and other recent positive results (see below), we have
retained FDA regulatory counsel in Wash., D.C. , to advise us on a
commercialization path and to arrange relevant meetings with the FDA.
During the thirty day review period of our Clinical application by the FDA,
we became aware of a new ongoing laboratory study of Ampligen(R) in smallpox at
the Riga Medical Institute in Belgium. Our Medical Director had authorized the
Institute to use samples of Ampligen(R) for Research purposes only. The result
of this study became available in the early 2003. In the interim, we withdrew
our FDA application to review the result of the Belgium study and incorporate
such data into our Clinical study design and protocol before resubmission.
Positive new results on Ampligen(R) were thereafter reported by branches of the
U.S. government using animal models of smallpox and new guidelines on
bio-terrorism approvals were established which mandated only animal studies for
full commercialization.
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ALFERON N INJECTION(R)
Interferon is a group of proteins produced and secreted by cells to combat
diseases. Researchers have identified four major classes of human interferon:
alpha, beta, gamma and omega. The ALFERON N Injection product contains a
multi-species form of alpha interferon. The worldwide market for injectable
alpha interferon-based products has experienced rapid growth and various alpha
interferon injectable products are approved for many major medical uses
worldwide.
Alpha interferons are manufactured commercially in three ways: by genetic
engineering, by cell culture, and from human white blood cells. In the United
States, all three of these types of alpha interferon are approved for commercial
sale. Our Natural Alpha Interferon is produced from human white blood cells.
The potential advantages of Natural Alpha Interferon over recombinant
interferon may be based upon their respective molecular compositions. Natural
Interferon is composed of a family of proteins containing many molecular species
of interferon. In contrast, recombinant alpha interferon each contain only a
single species. Researchers have reported that the various species of interferon
may have differing antiviral activity depending upon the type of virus. Natural
Alpha Interferon presents a broad complement of species which the Company
believes may account for its higher efficacy in laboratory studies. Natural
Alpha Interferon is also glycosylated (partially covered with sugar molecules).
Such glycosylation is not present on the currently marketed recombinant alpha
interferons. The Company believes that the absence of glycosylation may be, in
part, responsible for the production of interferon-neutralizing antibodies seen
in patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple glycosylated alpha
interferon species, the types and relative quantity of these species are
different from the Company's Natural Alpha Interferon.
On October 10, 1989, the FDA approved ALFERON N Injection for the
intralesional (within lesions) treatment of refractory (resistant to other
treatment) or recurring external genital warts in patients 18 years of age or
older. Certain types of human papillomaviruses ("HPV") cause genital warts, a
sexually transmitted disease ("STD"). A published report estimates that
approximately eight million new and recurrent causes of genital warts occur
annually in the United States alone.
Basically, our interest in acquiring Alferon N was driven by two factors;
1) our belief that its use in combination with Ampligen(R) has the
potential to increase the positive therapeutic responses in chronic life
threatening viral diseases. Combinational therapy is evolving to the standard of
acceptable medical care based on a detailed examination of the Biochemistry of
the body's natural antiviral immune response; and
2) new knowledge about the competitive products in the Interferon arena
that we believe imply a large untapped market and potential new therapeutic
indication for Alferon N which could accelerate its revenues in the near term.
Specifically, the recombinative DNA derived alpha interferon are now reported to
have dramatically decreased effectiveness after one year, probably due to
antibody formation and other severe toxicities. These detrimental effects have
not been reported with Alferon N which could allow this product to assume a much
8
larger market share. These revenues would provide operational capital to
complete the Phase III Clinical trials of our experimental drug, Ampligen(R) in
a more cost effective, non-dilutive manner on a shareholder's equity.
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] is a
highly purified, natural-source, glycosylated, multispecies alpha interferon
product. There are essentially no antibodies observed against natural interferon
to date and the product has a relatively low side-effect profile. Alferon is the
only natural-source, multispecies alpha interferon currently sold in the U.S.
and is also approved for sale in Mexico, Germany, Singapore and Hong-Kong.
The Alferon targeted market consists of urologists, proctologists,
dermatologists, and Obstetricians/Gynecologists. These physicians normally see
patients with papilloma concondylomas (genital warts) in their practice. This
will be done in existing partnership with our strategic partners including
Gentiva Health Services, Biovail Corporation and Esteve Laboratories, all have
proven marketing expertise.
According to the NIH, there are one million new cases of venereal warts
every year.
Pipeline products (alpha interferon)
The following products, together with other assets are to be acquired upon
the closing of the second ISI agreement which is anticipated to occur in May
2003.
ALFERON N Injection(R) -Other applications
ALFERON N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] has
been approved by the U.S. FDA for the treatment of certain types of genital
warts and has been studied for the potential treatment of HIV, Hepatitis C and
other indications. ISI, the Company from which we obtained our rights to ALFERON
N Injection(R) had conducted clinical trials with regard to the use of ALFERON N
Injection(R) in the treatment of HIV and Hepatitis C. While ISI found the
results to be encouraging, in both instances, the FDA determined that additional
trials were necessary.
ALFERON N Gel(R)
ALFERON N GEL(R) is the Company's registered trademark for its topical
(dermatological) Natural Alpha Interferon preparation in a hydrophilic gel base.
This product is still in research and development.
ALFERON LDO(R)
ALFERON LDO(R) is the registered trademark for the low-dose, oral liquid
formulation of Natural Alpha Interferon. Two Phase 2 clinical trials using
ALFERON LDO for the treatment of HIV-infected patients have been completed.
There can be no assurance that any of these proposed products will be
cost-effective, safe, and effective or that the Company will be able to obtain
FDA approval for such use. Furthermore, even if such approval is obtained, there
can be no assurance that such products will be commercially successful or will
produce significant revenues or profits for the Company.
9
EUROPEAN OPERATIONS
Our European operations were setup to prepare for the introduction of
Hemispherx products and to accelerate market penetration into the European
market once full approval is obtained from the European Medicine Evaluation
Agency ("EMEA"). The EMEA is the equivalent of the United States FDA. From a
regulatory point of view the member countries of the European Economic Union
("EEU") represent a common market under the jurisdiction of the EMEA. However,
from a practical point of view, every country is different regarding developing
relations with the medical community, patient associations and obtaining
reimbursement for treatment from the equivalent of Social Security Agencies and
insurance carriers. This program will be integrated into our new commercial
asset, ALFERON N Injection, as well.
Our European operations have assisted the growth of a number of
patient/physician educational associations. The French Chronic Fatigue Syndrome
Association has grown from 10 members in the year 2000 to 800 currently. Every
major country now has an active educational association with substantial numbers
of members who regularly meet and "network". These programs have been modeled on
the successful experience in the U.S. of conducting twice a year meetings on
ME/CFS with Health and Human Services, FDA, NIH and Centers for Disease Control.
We maintain contact with the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. In early 2001,our application for "orphan" drug status for the
use of Ampligen(R) in ME/CFS was rejected because the Board found that the
prevalence of ME/CFS was significantly above the 5 person per 10,000 limit
required to grant orphan drug status in the European Union. In addition, we are
exploring various ways to accelerate the commercial availability of our products
in the various nations of the EEU, including potential appreciation of the
"foreign import" rule for accepting products already approved in the U.S.
Limited number ME/CFS patients were treated during 2002 with Ampligen(R) in
the United Kingdom, Austria and Belgium under existing regulatory procedures in
these countries which allow the therapeutic use of an experimental drug under
certain conditions. These procedures allowed us to recover the cost of
Ampligen(R) used as well as to collect additional clinical data. Corresponding
procedures are being considered in several other countries at the request of
locally based physicians.
Our European operations are considering implementing clinical trials in
Europe for the use of Ampligen(R) in the treatment of HIV/AIDS on the basis of
the new U.S. Protocols involving the use of the drug either in combination with
"cocktail" therapies or as part of a strategic interruption of the "cocktail"
therapies. We plan to present these programs at European scientific conferences
in 2003.
The Efforts of our European Operation has started to produce results. In
March 2002, our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra ("Territory") for the treatment of ME/CFS. In
addition to other terms and other projected payments, Esteve paid an initial and
non-refundable fee of 625,000 Euros (approximately $563,000) to Hemispherx S.A.
on April 24, 2002
Esteve is to pay a fee of 1,000,000 Euros after U.S. Food and Drug
Administration approval of Ampligen(R) for the treatment of ME/CFS and a fee of
10
1,000,000 Euros upon Spain's approval of the final marketing authorization for
using Ampligen(R) for the treatment of ME/CFS.
The agreement runs for the longer of 10 years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R).
The agreement is terminable by either party if Ampligen(R) is withdrawn form the
territory for a specified period due to serious adverse health or safety
reasons; bankruptcy, insolvency or related issues of one of the parties; or
material breach of the agreement. Hemispherx may transform the agreement into a
non-exclusive agreement or terminate the agreement in the event that Esteve does
not meet specified percentages of its annual minimum purchase requirements under
the agreement. Esteve may terminate the agreement in the event that Hemispherx
fails to supply Ampligen(R) to the territory for a specified period of time or
certain clinical trials being conducted by Hemispherx are not successful.
MANUFACTURING
We outsource the manufacturing of Ampligen(R) to certain contractor
facilities in the United States and South Africa while maintaining full quality
control and supervision of the process. Nucleic Acid polymers constitute the raw
material used in the production of Ampligen(R). We acquire our raw materials
from Ribotech, Ltd. ("Ribotech') located in South Africa. Ribotech, is jointly
owned by us (24.9%) and Bioclones, proprietary, Ltd (75.1%). Bioclones manages
and operates Ribotech. Two manufacturers in the United States are available to
provide the polymers if Ribotech is unable to supply our needs. Sourcing our
needs from other suppliers could result in a cost increase for our raw
materials.
Until 1999, we distributed Ampligen(R) in the form of a freeze-dried powder
to be formulated by pharmacists at the site of use. We perfected a production
process to produce ready to use liquid Ampligen(R) in a dosage form which will
mainly be used upon commercial approval of Ampligen(R). At the present time, we
have engaged the services of Schering-Plough Products to mass produce
ready-to-use Ampligen(R) doses. There are other pharmaceutical processing
companies that can supply our production needs.
Bioclones (PTY) Ltd. has also successfully completed a series of production
runs for liquid Ampligen(R) doses. This was done at Ribotech's facility in South
Africa that has inspection approval by both the US FDA and the Medicine Control
Authority of the United Kingdom. Bioclones (PTY) Ltd. Is headquartered in South
Africa and is the majority owner in Ribotech, Ltd. (the Company owns 24.9%)
which produces most of the polymers used in manufacturing Ampligen(R). The
licensing agreement with Bioclones presently includes South Africa, South
America, Ireland, New Zealand and the United Kingdom.
We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility owned by ISI. We are in the process of acquiring title to
these facilities pursuant to our second asset acquisition agreement with ISI
(see RECENT FINANCING AND ASSET ACQUISITIONS below for more details). This
facility is approved by the FDA for the manufacture of Alferon N.
11
All production facilities employ Good Manufacturing Practices.(EGMP)
Good Manufacturing Practices (GMP) require that a product be consistently
manufactured to an identical potency (strength) and purity with each lot, and
that the manufacturing facility itself and all the equipment therein, be
certified to operate within a strict set performance standards.
MARKETING/DISTRIBUTIONS
Our marketing strategy for Ampligen(R) reflects the differing health care
systems around the world, and the different marketing and distribution system
that are used to supply pharmaceutical products to those systems. In the United
States, we expect that, subject to receipt of regulatory approval, Ampligen(R)
will be utilized in three medical arenas: physicians' offices, clinics,
hospitals and the home treatment setting. We currently plan to use a service
provide in the home infusion (non-hospital) segment of the U.S. market to
execute direct marketing activities, conduct physical distribution of product
and handle billing and collections. Accordingly, we are developing marketing
plans to facilitate the product distribution and medical support for indication,
if and when they are approved, in each arena. We believe that this approach will
facilitate the generation of revenue without incurring the substantial costs
associated with a sales forces. Furthermore, management believes that the
approach will enable us to retain many options for future marketing strategies.
In February 1998, the Company and Gentiva Health Services (formerly Olstein
Heatlh services) entered into a distribution/specialty agreement for the
distribution of Ampligen(R) for the treatment of ME/CFS patients under the U.S.
treatment protocols.
In Europe, we plan to adopt a country-by-country and, in certain cases, an
indication-by-indication marketing strategy due to the heterogeneity regulation
and alternative distribution systems in these area. We also plan to adopt and
indication-by-indication strategy in Japan. Subject to receipt of regulatory
approval, we plan to seek strategic partnering arrangement with pharmaceutical
companies to facilitate introductions in these areas. The relative prevalence of
people from target indications for Ampligen(R) varies significantly by
geographic region, and we intend to adjust our clinical and marketing planning
to reflect the special of each area. In countries in South America, the United
Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain other
countries and territories, we contemplate marketing our product through our
relationship with Bioclones pursuant to the Bioclones Agreement.
Our marketing and distribution plan for Alferon N is focused on increasing
the sales of Alferon N Injection for the intralesional treatment of refractory
and recurring external genital warts in adults. We will reach out to a targeted
audience of physicians consisting of Ob/GYNSs, Urologists, Proctologists and
Dermatologists and simultaneously create product awareness in the patient
population through several media and health organizations. Different regional
meetings and seminars are scheduled during which guest speakers will explain the
therapeutic benefits and safety profile of Alferon. Additional exposure will be
created by exhibiting at several STD related conferences, expanded web presence,
mailings and publications. We also plan to engage a contact sales organization
in order to build up a nationwide network of dedicated representatives in the
U.S. and Europe. This will be done while working with our strategic partners
including Gentiva Health Services, Biovail Corporation an Esteve Laboratories.
For more information about our arrangements with Gentiva Health Services,
Bioclones, Esteve and Biovail see below."RESEARCH AND DEVELOPMENT/COLLABORATIVE
AGREEMENTS"
12
COMPETITION
Our potential competitors are among the largest pharmaceutical companies in
the world, are well known to the public and the medical community, and have
substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have.
These companies and their 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, our competitors have significantly greater experience than we in
preclinical testing and human clinical trials of pharmaceutical products and in
obtaining FDA, EMEA Health Protection Branch ("HPB") and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining FDA
EMEA 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.
The major competitors with drugs to treat HIV diseases include "Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs and Schering-Plough Corp.
("Schering"). ALFERON N Injection currently competes with a product produced by
Schering for treating genital warts. 3m Pharmaceutical also has received FDA
approval for its immune response modifier product for the treatment of genital
and perianal warts.
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 ALFERON N
products and our ongoing research and product development activities.
Ampligen(R) and the products developed from the ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, human new drug products for human are subject
to rigorous preclinical and clinical testing as a condition for 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. ALFERON N
is only approved for use in treating genital warts. Use of Alferon N for other
applications requires regulatory approval.
A "Fast-Track" designation by the FDA, while not affecting any clinical
development time per se, has the potential effect of reducing the regulatory
13
review time by 50 percent (50%)from the time that a commercial drug application
is actually submitted for final regulatory review. Regulatory agencies may apply
a "Fast Track" designation to a potential new drug to accelerate the approval
and commercialization process. Criteria for "Fast Track" include: a) a
devastating disease without adequate therapy and b) laboratory or clinical
evidence that the candidate drug may address the unmet medical need. As of March
31, 2003, we have not received a Fast-Track designation for any of our potential
therapeutic indications although we have received "Orphan Drug Designation" for
both ME/CFS and HIV/AIDS in the United States. We will continue to present data
from time to time in support of obtaining accelerated review. We have not yet
submitted any New Drug Application (NDA) for Ampligen(R) or any other drug to a
North American regulatory authority. There are no assurances that such
designation will be granted, or if granted, there are no assurances that Fast
Track designation will materially increase the prospect of a successful
commercial application. In 2000 we 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 treatments will be granted by any regulatory authority or that the
resultant treatments, if any, will support drug efficacy and safety. In 2001, we
did receive FDA authorization for two separate Phase IIb HIV treatment protocols
in which the Company's drug is combined with certain presently available
antiretroviral agents. Interim results were presented in 2002 at various
international scientific meetings.
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 our research
work. We believe that our Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all material
regulations applicable to these activities as advanced by European Union
Inspections team which conducted detailed audits in year 2000. 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 third party
facilities include manufacturing operations in San Juan, Puerto Rico; Capetown,
South Africa; Columbia, Maryland; Melbourne, Australia; and potential expansion
within the United States to new and larger facilities in 2003.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS In 1994, we entered into
a licensing agreement with Bioclones (Property) limited ("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(R) and Oragen(TM). 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. Thus far, these
Hepatitis studies have not yet commenced to a meaningful level. Bioclones has
been given the first right of refusal, subject to pricing, to manufacture that
amount of polamers utilized in the production of Ampligen(R) sufficient to
satisfy at least one-third of the worldwide sales requirement of Ampligen(R) and
other nucleic acid-derived drugs. Pursuant to this arrangement, we received
1)access to worldwide markets 2)commercial-scale manufacturing resources, 3)a $3
million cash payment in 1995 from Bioclones,4) a 24.9% ownership in Ribotech,
14
Ltd. a company set up by Bioclones to develop and manufacture RNA drug
compounds, and 5) royalties of 8% on Bioclones nucleic acid-derived drug sales
in the licensed territories. The agreement with Bioclones terminates three years
after the expiration of the last of the patents supporting the license granted
to Bioclones, subject to earlier termination by the parties for uncured defaults
under the agreement, or bankruptcy or insolvency of either party.
In August, 1998, we 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(R) in the United States.
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 assumed certain responsibilities for distribution of Ampligen(R) for
which they receive a fee. Through this arrangement, Hemispherx may mitigate the
necessity of incurring certain up-front costs. Gentiva also works with us in
connection with the Amp 511 ME/CFS cost recovery treatment program, Amp 516
ME/CFS PHASE III clinical trial and the Amp 719(combining Ampligen with other
antiviral drugs in HIV-salvage therapy and Amp 720 HIV Phase IIb clinical trials
now under way. There can be no assurances that this alliance will develop a
significant commercial position in any of its targeted chronic disease markets.
The agreement had an initial one year term from February 9, 1998 with successive
additional one (1) year terms unless either party notifies the other not less
than one hundred eighty (180) days prior to the anniversary date of its intent
to terminate the agreement. Also, the agreement may be terminated for the
uncured defaults, or bankruptcy or insolvency of either party and will
automatically terminate upon our receiving New Drug Approval for Ampligen(R)
from the FDA, at which time, a new agreement will need to be negotiated with
Gentiva or another major drug distributor.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, Immunological enhancers through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen(TM), 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 for application to Chronic viral
and immunological disorders. This agreement is to remain in effect until the
date that the last licensed patent expires unless terminated sooner by mutual
consent or default due to royalties not being paid.
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 payments
based on reaching certain regulatory milestones. The Agreement requires Biovail
to buy exclusively from us and penetrate certain market segments at specific
15
rates in order to maintain market exclusivity. The agreement terminates on
December 15, 2009, subject to successive two (2) year extensions by the parties
and subject to earlier termination by the parties for uncured defaults under the
agreement, bankruptcy or insolvency of either party, or withdrawal of our
product from Canada for a period of more than ninety (90) days for serious
adverse health or safety reasons.
In 1998, the Company invested $1,074,000 for a 3.3% equity interest in
R.E.D. Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company
for the development of diagnostic markers for Chronic Fatigue Syndrome and other
chronic immune diseases. Primarily, R.E.D.'s research and development is based
on certain technology owned by Temple University and licensed to R.E.D. We have
a research collaboration agreement with R.E.D. to assist in this development.
R.E.D. is headquartered in Belgium. The investment was recorded at cost in 1998.
During three months ended June 2002 and December 2002 respectively, we recorded
a non-cash charge of $678,000 and $396,000 respectively, to operations with
respect to our investment in R.E.D. These charges were the result of our
determination that R.E.D.'s business and financial position had deteriorated to
the point that our investment had been permanently impaired.
In May 2000, we acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. We issued 100,000 shares of common stock 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 ME/CFS. 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. The strategic alliance
agreement provides us with a royalty payment of ten per cent (10%) of all net
sales of diagnostic technology developed by Chronix for diagnosing Chronic
Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6 associated
diseases. The royalty continues for the longer of twelve years from September
15, 2000 or the life of any patent(s) issued with regard to the diagnostic
technology. The strategic alliance agreement also provides us with the right of
first refusal to acquire an exclusive worldwide license for any and all
therapeutic technology developed by Chronix on or before September 14, 2012 for
treating Chronic Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6
associated. During the quarter ended December 31, 2002, we recorded a noncash
charge of $292,000 with respect to our investment in Chronix. This impairment
reduces our carrying value to reflect a permanent decline in Chronix's market
value based on their current proposed equity offerings.
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. CIMM'S research is
focused on developing therapies for use in treating patients affected by
Hepatitis C ("HCV"). We use the equity method of accounting with respect to this
investment. During the fourth quarter of 2001 we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. This was a result of our
determination that CIMM's operations have not yet evolved to the point where the
full carrying value of our investment could be supported based on that company's
financial position and operating results. The amount represented the unamortized
balance of goodwill included as part of our investment. During 2002, we wrote
down to zero our remaining investment based on that company's continuing
operating losses. These charges are reflected in the Consolidated Statements of
16
Operations under the caption "Equity loss in unconsolidated affiliate".We still
believe CIMM will succeed in their efforts to advance therapeutic treatment of
HCV. We believe that CIMM's Hepatitis C diagnostic technology has great promise
and will fill a long-standing global void in the collective abilities to
diagnose and treat Hepatitis C infection at an early stage of the disorder.
In March 2002, our European subsidiary Hemispherx S.A. entered into a Sales
and Distribution agreement with Esteve. Pursuant to the terms of the agreement,
Esteve was granted the exclusive right to market Ampligen(R) in Spain, Portugal
and Andorra for the treatment of ME/CFS. In addition to other terms and other
projected payments, Esteve agreed to conduct certain clinical trials using
Ampligen(R) in the patient population coinfected with hepatitis C and HIV
viruses. The agreement runs for the longer of 10 years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R).
The agreement is terminable by either party if Ampligen(R) is withdrawn form the
territory for a specified period due to serious adverse health or safety
reasons; bankruptcy, insolvency or related issues of one of the parties; or
material breach of the agreement. Hemispherx may transform the agreement into a
non-exclusive agreement or terminate the agreement in the event that Esteve does
not meet specified percentages of its annual minimum purchase requirements under
the agreement. Esteve may terminate the agreement in the event that Hemispherx
fails to supply Ampligen(R) to the territory for a specified period of time or
certain clinical trials being conducted by Hemispherx are not successful.
The development of our Nucleic Acid Based 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 directly spent
approximately $16,862,000 in research and development, of which approximately
$4,946,000 was expended in the year ended December 31, 2002. These direct costs
do not include the overhead and administrative costs necessary to support the
research and development effort. Our European subsidiary has an exclusive
license on all the technology and support from us concerning Ampligen(R) for the
use of ME/CFS and other applications for all countries of the European Union
(excluding the UK where Bioclones has a marketing license) and Norway,
Switzerland, Hungary, Poland, the Balkans, Russia, Ukraine, Romania, Bulgaria,
Slovakia, Turkey, Iceland and Liechtenstein. As mentioned above, Hemispherx S.A.
entered into a Sales and distribution Agreement with Esteve. Pursuant to the
terms of this agreement, Esteve has been granted the exclusive right in Spain,
Portugal and Andorra to market Ampligen(R) for the treatment of ME/CFS. See
"EUROPEAN OPERATIONS" above for more detailed information.
HUMAN RESOURCES
As of March 31, 2003 we had 40 personnel working on the development of
Ampligen(R) consisting of 19 full time, 3 part-time employees and 18
regulatory/research medical personnel on a part-time basis. Part time parties
are paid on a per diem or monthly basis. 30 personnel are engaged in our
research, development, clinical, manufacturing effort. Ten of our personnel
perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.
17
In addition to the foregoing personnel, on March 11, 2003, pursuant to our
agreement with ISI, we added personnel from ISI to our payroll consisting of 12
part-time and 17 full-time employees.
We believe that the combination of Hemispherx and ISI Scientific employees
has 1) significantly strengthened our overall organization, 2) added expertise
to monitor and complete our ongoing clinical trials and 3) improved our data
management and system administration.
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.
RECENT FINANCING AND ASSET ACQUISITIONS
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount
of 6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe (see the discussion below). The Debentures mature on
January 31, 2005 and bear interest at 6% per annum, payable quarterly in cash
or, subject to satisfaction of certain conditions, common stock. Any shares of
common stock issued to the investors as payment of interest shall be valued at
95% of the average closing price of the common stock during the five consecutive
business days ending on the third business day immediately preceding the
applicable interest payment date. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestone.
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 per share, subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect.
The investors also received Warrants to acquire at any time through March
12, 2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a registration rights agreement with the investors in
connection with the issuance of the Debentures and the Warrants. The
registration rights agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debenture and upon exercise of the Warrants. In accordance with this agreement,
we filed a registration statement on form S-3 with the Securities and Exchange
18
Commission. If the registration statement is not declared effective within the
time period required by the agreement or, after it is declared effective and
subject to certain exceptions, sales of all shares required to be registered
thereon cannot be made pursuant thereto, then we will be required to pay to the
investors their pro rata share of $3,635 for each day any of the above
conditions exist with respect to this registration statement.
On March 11, 2003, we executed two agreements with ISI to purchase certain
assets of ISI.
In the first agreement with ISI, the Company acquired ISI's inventory of
ALFERON N Injection(R), and a limited license for the production, manufacture,
use, marketing and sale of this product. For these assets, the Company:
(i) issued 487,028 shares of its common stock; and
(ii) agreed to pay ISI 6 % of the net sales of the Product.
The Company also is required to pay ISI a service fee and pay certain of
ISI's obligations related to the product.
In the second agreement with ISI, ISI has agreed to sell to the Company all
of ISI's rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, the
Company will:
(i) issue an additional 487,028 shares of its common stock; and
(ii) continue to pay ISI 6 % of the net sales of the product.
In addition, the Company will be required to satisfy three obligations of
ISI. The Company will satisfy two of these obligations, pursuant to forbearance
agreements with The American National Red Cross and GP Strategies Corporation,
two of ISI's creditors, by issuing an aggregate of 581,761 shares of common
stock to these creditors. The third obligation is approximately $521,000 and is
secured by a lien on the property.
Pursuant to the agreements with ISI and its creditors, the Company is in
the process of registering the foregoing shares issued and to be issued to ISI
and its creditors for public sale in the registration statement on form S-3
mentioned above. Except for 125,000 of the shares issued and to be issued to
ISI, the Company has guaranteed the market value of the shares retained by ISI
and the two creditors through March 11, 2005 to be $1.59 per share. ISI and the
creditors are permitted to periodically sell certain amounts of their shares.
We will account for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
During March 2002, Hemispherx Biopharma Europe, S.A., our Luxembourg
subsidiary, was authorized to issue up to 22,000,000 Euros of seven percent (7%)
convertible preferred securities. Such securities will be guaranteed by the
Company and will be converted into a specified number of shares pursuant to the
securities agreement. Conversion is to occur on the earlier of an initial public
offering of Hemispherx S.A. on a European stock exchange or September 30, 2003.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan
19
SA, an affiliate of Esteve, in exchange for 1,000,000 Euros of convertible
preferred equity certificates of Hemispherx Biopharma Europe, S.A., owned by
Esteve, and all dividends earned and to be earned through September 30, 2003. We
agreed to register the shares issued to Provesan SA, and we are in the process
of registering these shares for public sale in the registration statement of
form S-3 mentioned above.
On March 31, 2003 we settled our outstanding claim with an insurance
company relating to reimbursement of expenses in connection with our Asensio law
suits. See Legal Proceedings for more detailed information. We have applied the
net proceeds of approximately $1,050,000 as a reduction in general and
administrative expenses in our statement of operations for the year ended
December 31, 2002.
As of December 31, 2002, we had approximately $2,811,000 in cash and short
term investments. We believe that these funds plus 1) the anticipated infusion
of approximately $4.4 million in net proceeds from the Debenture placement, 2)
projected net cash flow from the acquisition of ALFERON N and 3) the funds
received from the insurance settlement should be sufficient to meet our
operating requirements for the next 12 months.
In addition, we may raise additional funds through additional equity or
debt financing, collaborative arrangements with corporate partners, lease
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 in our commercialization process.
RISK FACTORS
The following cautionary statements identify important factors that could
cause our actual result to differ materially from those projected in the
forward-looking statements made in this Form 10-K. Among the key factors that
have a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and our
other related products is subject to a number of significant risks. Ampligen(R)
may be found to be ineffective or to have adverse side effects, fail to receive
necessary regulatory clearances, be difficult to manufacture on a commercial
scale, be uneconomical to market or be precluded from commercialization by
proprietary right of third parties. Our related 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(R) or our other related
products will be generally available for commercial sale for any indication.
Generally, only a small percentage of potential therapeutic products are
eventually approved by the U.S. Food and Drug Administration ("FDA") for
commercial sale.
ALFERON N Injection(R). Although ALFERON N Injection is approved for
marketing for the treatment of genital warts, to date it has not been approved
for other applications. We face many of the risks discussed above, with regard
to developing this product for use to treat other ailments such as multiple
sclerosis and cancer.
20
Our drug and related technologies are investigational and subject to
regulatory approval. If we are unable to obtain regulatory approval, our
operations will be significantly affected.
All of our drugs and associated technologies other than ALFERON N Injection
are investigational and must receive prior regulatory approval by appropriate
regulatory authorities for general use and are currently legally available only
through clinical trials with specified disorders. At present, ALFERON N
Injection is only approved for the treatment of genital warts. Use of ALFERON N
Injection for other applications will require regulatory approval. In this
regard, Interferon Sciences, Inc., the Company from which we obtained our rights
to ALFERON N Injection, conducted clinical trials related to use of ALFERON N
Injection for treatment of HIV and Hepatitis C. In both instances, the FDA
determined that additional studies were necessary. Our principal development
efforts are currently focused on Ampligen(R), which has not been approved for
commercial use. Our products, including Ampligen(R), are subject to extensive
regulation by numerous governmental authorities in the U.S. and other countries,
including, but not limited to, the FDA in the U.S., the Health Protection
Branch("HPB") of Canada, and the European Medical Evaluation Agency ("EMEA") in
Europe. Obtaining regulatory approvals is a rigorous and lengthy process and
requires the expenditure of substantial resources. In order to obtain final
regulatory approval of a new drug, we must demonstrate to the satisfaction of
the regulatory agency that the product is safe and effective for its intended
uses and that we are capable of manufacturing the product to the applicable
regulatory standards. We require regulatory approval in order to market
Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) 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(R) 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 we pursued
our clinical trial effort and expanded our efforts in Europe. As of December 31,
2002 our accumulated deficit was approximately $99,000,000. 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.
We may require additional financing which may not be available.
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.
21
In March 2003, we received $2,873,000 in initial net proceeds from the sale of
the Debentures and Warrants and, pursuant to the terms of these Debentures when
we close on the second Interferon Sciences asset acquisition, we will receive
additional net proceeds of $1,550,000. We anticipate receipt of revenues and
proceeds from the sales of Ampligen(R) under the Cost Recovery Clinical Programs
and, possibly, from the exercise of outstanding non-public warrants. We also
anticipate significant revenues from our recently acquired commercial product,
Alferon N. As of December 31, 2002, we had approximately $2,811,000 in cash and
short term investments. We believe that these funds plus 1) the anticipated
infusion of approximately $4.4 million in net proceeds from the Debenture
placement, 2) projected net cash flow from the acquisition of ALFERON N Business
and 3) the funds received from the Insurance settlement should be sufficient to
meet our operating requirement for the next 12 months. Anticipated sales from
the newly acquired Alferon N could significantly extend our present cash
reserves. We may need to raise 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 our
products. There can be no assurances that we will raise adequate funds from
these or other sources, which may have a material effect on our ability to
develop our products.
If we do not complete the second Interferon Sciences asset acquisition, our
ability to generate revenues from the sale of ALFERON N Injection and our
financial condition will be adversely affected.
Although we acquired Interferon Sciences' inventory of ALFERON N Injection
and a limited license for the production, manufacture, use, marketing and sale
of this product, our ability to develop additional applications for the product
and generate sustained revenues from sales of this product is dependent, among
other things, on our completing the acquisition from Interferon Sciences of the
balance of its rights to this product and other assets related to the product
including, but not limited to, Interferon Science's facility for purifying the
drug concentrate utilized in the formulation of ALFERON N Injection. In
addition, pursuant to the terms of the Debentures, $1,550,000 of the proceeds
from the sale of the Debentures have been held back and, if we do not acquire
Interferon Sciences' facility, we will not receive these funds. Accordingly, if
we do not complete the second Interferon Sciences asset acquisition, our
financial condition will be adversely affected.
The limited number of unissued and unreserved authorized shares of Common
Stock severely restricts our ability to raise funds through the sale of our
securities.
We have a limited number of shares of Common Stock authorized but not
issued or reserved for issuance upon conversion or exercise of outstanding
convertible and exercisable securities such as debentures, options and warrants.
As of March 31, 2003, only approximately 749,770 shares of our authorized shares
of Common Stock will not be issued or reserved for issuance. Unless and until we
are able to increase the number of authorized shares of Common Stock, our
ability to raise funds through the sale of Common Stock or instruments that are
convertible into or exercisable for Common Stock will be severely restricted.
Although we intend to ask our stockholders at our next annual meeting to approve
an amendment to our Certificate of Incorporation to increase the shares of
Common Stock we are authorized to issue, we cannot assure you that we will be
able to obtain this approval.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
22
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. If and when we obtain all
rights to ALFERON N Injection, we will need to preserve and acquire enforceable
patents covering its use for a particular disease too. Our success depends, in
large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and expertise. Certain of
our know-how and technology is not patentable, particularly the procedures for
the manufacture of our drug product which are carried out according to standard
operating procedure manuals. We have been issued certain patents including those
on the use of Ampligen(R) and Ampligen(R) in combination with certain other
drugs for the treatment of HIV. We also have been issued patents on the use of
Ampligen(R) 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(R) in patients with chronic fatigue syndrome.
We have not yet been issued any patents in the United States for the use of
Ampligen(R) as a sole treatment for any of the cancers which we have sought to
target. With regard to ALFERON N Injection, Interferon Sciences, Inc. has a
patent for Natural Alpha Interferon produced from human peripheral blood
leukocytes and its production process and has additional patent applications
pending. We will acquire this patent and related patent applications if and when
we close on the second Interferon Sciences asset acquisition 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 our products in combination
with various other agents, for a particular target indication prior to us. If we
cannot protect our patents covering the use of our products for a particular
disease, or obtain additional pending patents, we may not be able to
successfully market our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can be no
assurance that new patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position 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 be able to obtain necessary licenses
if we cannot enforce patent rights we may hold. In addition, the failure of
third parties from whom we currently license certain proprietary information or
may be required to obtain such licenses in the future, to adequately enforce
their rights to such proprietary information, could adversely affect the value
of such licenses to us.
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.
23
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.
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.
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,
Austria, Spain and Portugal.
We cannot assure that our domestic or our foreign marketing partners will
be able to successfully distribute our products, or that we will be able to
establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The failure to continue these arrangements or to
achieve other such arrangements on satisfactory terms could have a materially
adverse effect on us.
No Guaranteed Source Of Required Materials.
A number of essential materials are used in the production of ALFERON N
Injection, including human white blood cells, and we have a limited number of
sources from which to obtain such materials. We do not have long-term agreements
for the supply of any of such materials. There can be no assurance we can enter
into long-term supply agreements covering essential materials on commercially
reasonable terms, if at all. If we are unable to obtain the required raw
materials, we may be required to scale back our operations or stop manufacturing
ALFERON N Injection. The costs and availability of products and materials we
need for the commercial production of ALFERON N Injection and other products
which we may commercially produce are subject to fluctuation depending on a
variety of factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
24
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(R) and other 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(R) and, can, among other things, require new
clinical studies and affect orphan drug status, particularly, market exclusivity
rights , if any, under the Orphan Drug Act. The transition from limited
production of pre-clinical and clinical research quantities to production of
commercial quantities of our products will involve distinct management and
technical challenges and will require additional management and technical
personnel and capital to the extent such manufacturing is not handled by third
parties. There can be no assurance that our manufacturing will be successful or
that any given product will be determined to be safe and effective, capable of
being manufactured economically in commercial quantities or successfully
marketed.
We have limited manufacturing experience and capacity.
Ampligen(R) is currently produced only in limited quantities for use in our
clinical trials and we are dependent upon certain third party suppliers for key
components of our products and for substantially all of the production process.
The failure to continue these arrangements or to achieve other such arrangements
on satisfactory terms could have a material adverse affect on us. Also, to be
successful, our products must be manufactured in commercial quantities in
compliance with regulatory requirements and at acceptable costs. To the extent
we are involved in the production process, our current facilities 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 current Good Manufacturing Practices ("cGMP") regulations. There
can be no assurance that such facilities can be used, built, or acquired on
commercially acceptable terms, or that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
The purified drug concentrate utilized in the formulation of ALFERON N
Injection is manufactured in Interferon Science's facility and ALFERON N
Injection is formulated and packaged at a production facility operated by
Abbott. if and when we close on the second Interferon Sciences asset
acquisition, we will acquire this facility. We still will be dependent upon
Abbott Laboratories and/or another third party for product formulation and
packaging.
We may not be profitable unless we can produce Ampligen(R) or other
products in commercial quantities at costs acceptable to us.
We have never produced Ampligen(R) or any other products in large
commercial quantities. Ampligen(R) is currently produced for use in clinical
trials. We must manufacture our products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
us to be profitable. We intend to utilize third-party manufacturers and/or
facilities if and when the need arises or, if we are unable to do so, to build
or acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen(R) or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be significantly
affected.
25
Rapid technological change may render our products obsolete or non-competitive.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
than us, as well as substantial marketing, financial and managerial resources,
and represent significant competition for us. There can be no assurance that
developments by others will not render our products or technologies obsolete or
noncompetitive or that we will be able to keep pace with technological
developments.
Our products may be subject to substantial competition.
Ampligen(R) . Competitors may be developing technologies that are, or in
the future may be, the basis for competitive products. Some of these potential
products may have an entirely different approach or means of accomplishing
similar therapeutic effects to products being developed by us. These competing
products may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors have
significantly greater experience than us in 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, HPB or other regulatory product approvals more rapidly than us.
There are no drugs approved for commercial sale with respect to treating ME/CFS
and we have no knowledge of any ME/CFS drugs being developed by others. The
dominant competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs and Schering-Plough Corp.
("Shering"). These potential competitors are among the largest pharmaceutical
companies in the world, are well known to the public and the medical community,
and have substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have. Although we believe our
principal advantage is the unique mechanism action of Ampligen(R) on the immune
system, we cannot assure that we will be able to compete.
ALFERON N Injection(R). Many potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have. ALFERON
N Injection currently competes with Schering's injectable recombinant alpha
interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also received FDA approval for its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. ALFERON N Injection also competes with surgical,
chemical, and other methods of treating genital warts. We cannot assess the
impact products developed by our competitors, or advances in other methods of
the treatment of genital warts, will have on the commercial viability of ALFERON
N Injection. If and when we obtain additional approvals of uses of this product,
we expect to compete primarily on the basis of product performance. Our
potential competitors have developed or may develop products (containing either
alpha or beta interferon or other therapeutic compounds) or other treatment
modalities for those uses. In the United States, two recombinant forms of beta
interferon have been approved for the treatment of relapsing-remitting multiple
sclerosis. There can be no assurance that, if we are able to obtain regulatory
approval of ALFERON N Injection for the treatment of new indications, we will be
26
able to achieve any significant penetration into those markets. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than ALFERON N Injection. Currently, Interferon Sciences' wholesale
price on a per unit basis of ALFERON N Injection is substantially higher than
that of the competitive recombinant alpha and beta interferon products.
General. Other companies may succeed in developing products earlier than we
do, obtaining approvals for such products from the FDA more rapidly than we do,
or developing products that are more effective than those we may develop. While
we will attempt to expand our technological capabilities in order to remain
competitive, there can be no assurance that research and development by others
or other medical advances will not render our technology or products obsolete or
non-competitive or result in treatments or cures superior to any therapy we
develop.
Possible side effects from the use of Ampligen(R) or ALFERON N Injection
could adversely effect potential revenues and physician/patient acceptability of
our product.
Ampligen(R). We believe that Ampligen(R) 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 a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of "feeling hot," sweating and nausea.
The reaction is usually infusion-rate related and can generally be controlled by
slowing the infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash,
transient visual disturbances, irregular heart rate, 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. One or more of the potential side effects might
deter usage of Ampligen(R) in certain clinical situations and therefore, could
adversely effect potential revenues and physician/patient acceptability of our
product.
ALFERON N Injection(R). At present, ALFERON N Injection is only sold for
the intralesional (with in the lesion) treatment of refractory or recurring
external genital warts in adults. In clinical trials conducted for the treatment
of genital warts with ALFERON N Injection, patients did not experience serious
side effects; however, there can be no assurance that unexpected or unacceptable
side effects will not be found in the future for this use or other potential
uses of ALFERON N Injection which could threaten or limit such product's
usefulness.
We may be subject to product liability claims from the use of Ampligen(R) 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(R) 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
27
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 product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against product liability claims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.
The loss of Dr. Carter's services could hurt our chances for success.
Our success is dependent on the continued efforts of Dr. William A. Carter
because of his position as a pioneer in the field of nucleic acid drugs, his
being the co-inventor of Ampligen(R), and his knowledge of our overall
activities, including patents, clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. While we have an employment agreement with Dr. Carter, and have secured
key man life insurance in the amount of $2 million on the life of Dr. Carter,
the loss of Dr. Carter or other personnel, or the failure to recruit additional
personnel as needed could have a materially adverse effect on our ability to
achieve our objectives.
Uncertainty of health care reimbursement for our products.
Our ability to successfully commercialize our products will depend, in
part, on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and from time to time legislation is proposed, which, if
adopted, could further restrict the prices charged by and/or amounts
reimbursable to manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on us. There can be no assurance that third party insurance
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.
There are risks of liabilities associated with handling and disposing of
Hazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, we could be held liable for any damages
that result, and any such liability could be significant. We do not maintain
insurance coverage against such liabilities.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock has been and is likely to be volatile.
In addition to general economic, political and market conditions, the price and
trading volume of our stock could fluctuate widely in response to many factors,
including:
28
* announcements of the results of clinical trials by us or our competitors;
* adverse reactions to products;
* governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory agency
concerns regarding the safety or effectiveness of our products;
* changes in U.S. or foreign regulatory policy during the period of product
development;
* developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
* announcements of technological innovations by us or our competitors;
* announcements of new products or new contracts by us or our competitors;
* actual or anticipated variations in our operating results due to the
level of development expenses and other factors;
* changes in financial estimates by securities analysts and whether our
earnings meet or exceed the estimates;
* conditions and trends in the pharmaceutical and other industries;
* new accounting standards; and
* the occurrence of any of the risks described in these "Risk Factors."
Our common stock is listed for quotation on the American Stock Exchange.
For the 12-month period ended December 31, 2002, the price of our common stock
has ranged from $0.74 to $4.95. We expect the price of our common stock to
remain volatile. The average daily trading volume in our common stock varies
significantly. Our relatively low average volume and low average number of
transactions per day may affect the ability of our stockholders to sell their
shares in the public market at prevailing prices and a more active market may
never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares
are sold in the public market.
As of April 1, 2003, approximately 834,473 shares of our common stock,
constituted "restricted securities" as defined in Rule 144 under the Securities
Act of 1933. In addition, we have registered 5,967,820 shares issuable upon the
conversion of 135% of the Debentures and as payment of interest thereon. All of
these shares are being registered in the form S-3 registration statement
discussed above pursuant to agreements between us and the purchasers in our
recent private placements, requiring us to register their shares for resale
under the Securities Act. This permits the sale of registered shares of common
stock in the open market or in privately negotiated transactions without
compliance with the requirements of Rule 144. In addition, as of March 31, 2003,
we had options and warrants outstanding for the purchase of an aggregate of
approximately 9,265,914 shares of our common stock, which includes 135% of the
shares issuable upon exercise of the Warrants. To the extent the exercise price
of the options and warrants is less than the market price of the common stock,
the holders of the options and warrants are likely to exercise them and sell the
underlying shares of common stock and to the extent that the conversion price
and exercise price of these securities are adjusted pursuant to anti-dilution
protection, the securities could be exercisable or convertible for even more
29
shares of common stock. Moreover, we anticipate that we will be issuing and
registering for public resale 1,068,789 shares if and when we acquire additional
assets from Interferon Sciences, Inc. and, possibly, additional shares to raise
funding or compensate employees, consultants and/or directors We are unable to
estimate the amount, timing or nature of future sales of outstanding common
stock. Sales of substantial amounts of our common stock in the public market
could cause the market price for our common stock to decrease. Furthermore, a
decline in the price of our common stock would likely impede our ability to
raise capital through the issuance of additional shares of common stock or other
equity securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may make it
more difficult for someone to acquire control of us or for our stockholders to
remove existing management, and might discourage a third party from offering to
acquire us, even if a change in control or in management would be beneficial to
our stockholders. For example, our Certificate of Incorporation allows us to
issue shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our Board of Directors also
has the authority to issue preferred stock without further stockholder approval.
As a result, our Board of Directors could authorize the issuance of a series of
preferred stock that would grant to holders the preferred right to our assets
upon liquidation, the right to receive dividend payments before dividends are
distributed to the holders of common stock and the right to the redemption of
the shares, together with a premium, prior to the redemption of our common
stock. In this regard, in November, 2002 we adopted a shareholder rights plan
and, under the Plan, our Board of Directors declared a dividend distribution of
one Right for each outstanding share of Common Stock to stockholders of record
at the close of business on November 29, 2002. Each Right initially entitles
holders to buy one unit of preferred stock for $30.00. The Rights generally are
not transferable apart from the common stock and will not be exercisable unless
and until a person or group acquires or commences a tender or exchange offer to
acquire, beneficial ownership of 15% or more of our common stock. However, for
William A. Carter, M.D., our chief executive officer, who already beneficial
owns 11.4% of the our common stock, the Plan's threshold will be 20%, instead of
15%. The Rights will expire on November 19, 2012, and may be redeemed prior
thereto at $.01 per Right under certain circumstances.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Our research in clinical efforts
may continue for the next several years and we may continue to incur losses due
to clinical costs incurred in the development of Ampligen(R) 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
30
licensing fees and/or cost recovery treatment revenues in Europe, Canada and in
the United States.
ITEM 2. Properties.
We currently lease and occupy a total of approximately 18,850 square feet
of laboratory and office space in two states and some office space in Paris,
France. 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 research of
development, 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 2004
and possibly longer after which time it may need to increase its Rockville
facilities either through third parties or by building or acquiring
commercial-scale facilities.
We currently occupy and use the New Brunswick, New Jersey Laboratory and
Production Facility owned by ISI. We are in the process of acquiring title to
these facilities pursuant to our second asset acquisition agreement with ISI
(see Financial And Asset Acquisition in Item 1 above for more details). This
acquisition consists of two buildings located on 2.8 acres. One Building is a
two story facility consisting of a total of 31,300 square feet. This facility
has offices, laboratories production space, and shipping receiving area.
Building two has 11,670 square feet consisting of offices, laboratories and
warehouse space. The property has parking space for approximately 100 vehicles.
We also have a 24.9% interest in Ribotech, Ltd. located in South Africa.
Ribotech was established by Bioclones 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, is a result
of the marketing and manufacturing agreement executed with Bioclones in 1994.
ITEM 3. Legal Proceedings.
On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of the Asensio's false and
defamatory statements. The complaint further alleged that Asensio defamed and
disparaged us in furtherance of a manipulative, deceptive and unlawful
short-selling scheme in August and September, 1998. In 1999, Asensio filed an
answer and counterclaim alleging that in response to Asensio's strong sell
recommendation and other press releases, we made defamatory statements about
Asensio. We denied the material allegations of the counterclaim. In July 2000,
following dismissal in federal court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and a trial commenced on
January 30, 2002. A jury verdict disallowed the claims against the defendants
for defamation and disparagement and the court granted us a directed verdict on
31
the counterclaim. On July 2, 2002 the Court entered an order granting us a new
trial against Asensio for defamation and disparagement. Thereafter, Asensio
appealed the granting of a new trial. This appeal is now pending in the Superior
Court of Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and her husband filed
a claim in the Superior Court of New Jersey, Middlesex County, against us, one
of our clinical trial investigators and others alleging that she was harmed in
the ME/CFS clinical trial as a result of negligence and breach of warranties. We
believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
claim in Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian
subsidiary, and one of our clinical trial investigators alleging that she was
harmed in the Belgium ME/CFS clinical trial as a result of negligence and breach
of warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.
In July 2002, we filed suit in the United States District Court for the
Eastern District of Pennsylvania against Federal Insurance Company ("Federal")
seeking (1) a judicial order declaring our rights and the obligations of Federal
under the insurance policy Federal sold to us (2) monetary damage for breach of
contract resulting from Federal's refusal to fully defend us in connection with
the Asensio litigation (3) monetary damages to compensate us for Federal's
breach of its fiduciary duty faith and dealing and (4) monetary damages,
interest, costs, and attorneys fees to compensate us for Federal's violation of
the Pennsylvania Bad Faith Statute. On March 31, 2003 we settled our outstanding
claim with our insurance company relating to reimbursement of expenses in
connection with our Asensio law suits. The net settlement amount of
approximately $1,050,000 is recorded as a reduction in General and
Administrative expenses in our statement of operations for the year ended
December 31, 2002.
In March 2003, the law firm of Schnader, Harrison, Segal & Lewis, LLP filed
a complaint in the Court of Common Pleas of Philadelphia County against us for
alleged legal fees in the sum of $65,051. We believe the claim is without merit
and we are defending the claim.
ITEM 4. Submission of Matters to a Vote of Security Holders. No matters
were submitted to a vote of the security holders during the last quarter of the
year ended December 31, 2002.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters. In the year 2002, we acquired 27,500 shares of common stock on the open
market at an average cost of $1.82 per share. The acquisition of the shares was
authorized under a stock buy-back program authorized by the board of directors.
In fiscal 2002, we issued 11,300 new shares of common stock to warrant
holders exercising non-public warrants at an average exercise price of $3.30.
The warrants exercised were granted by us in the period covering 1993 through
1996. In addition, we issued 48,392 shares in settlement of debt of $154,000.
32
In addition, as discussed in greater detail in "RECENT FINANCING AND ASSET
ACQUISITIONS" above in Item 1. Business, we 1) issued convertible debentures and
warrants to two investors for cash, we issued shares to ISI for assets, 2)
issued shares to an affiliate of Esteve in exchange for convertible preferred
equity certificates of our Luxembourg subsidiary and 3) we plan to issue shares
of common stock to ISI and to two creditors of ISI for additional assets.
Cardinal Securities LLC was placement agent on the sale of the Debentures and
Warrants and received a placement fee equal to 7% of the proceeds from that
offering (up to 1.75% of which is payable in Company Common Stock) and common
stock purchase warrants to purchase 25,000 shares for each $1,000,000 received
by the Company.
The foregoing issuances of securities were private transactions and exempt
from registration under section 4(2) of the Securities Act and/or regulation D
rule 506 promulgated under the Securities Act.
Since October 1997 our common stock and Class A warrants have been listed
and traded on the American Stock Exchange ("AMEX") under the symbol HEB and
HEBws, respectively. The Class A Warrants expired on November 2, 2001. The
following table sets forth the high and low list prices for our Common Stock for
the last two fiscal years and the first quarter of fiscal 2003 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.
COMMON STOCK High Low
Time Period:
January 1, 2001 through March 31, 2001 $5.75 $3.01
April 1, 2001 through June 30, 2001 7.15 3.96
July 1, 2001 through September 30,
2001 6.85 3.89
October 1, 2001 through December 31, 2001 5.29 3.41
Time Period:
January 1, 2002 through March 31, 2002 4.76 3.45
April 1, 2002 through June 30, 2002 3.97 2.50
July 1, 2002 through September 30, 2002 2.63 .80
October 1, 2002 through December 31, 2002 2.86 1.40
As of March 27, 2003 there were approximately 259 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 are held in the names of various dealers and/or
clearing agencies.
33
As of April 4, 2003, the last sale price for our common stock on the AMEX
was $1.35 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.
34
The following table gives information about our Common Stock that may be issued
upon the exercise of options, warrants and rights under all of our equity
compensation plans as of December 31, 2002.
Number of Number of securities
Securities to be Remaining available
issued upon Weighted-average For future issuance
exercise of Exercise price of under equity
outstanding Outstanding compensation plans
options, warrants Options, warrants (excluding securities
Plan Category and rights And rights Reflected in column (a))
============================= ======================== ================= ============================
(a) (b) (c)
======================== ================= ============================
Equity compensation plans
approved by security
holders: 294,665 $ 3.57 258,293
Equity compensation plans
not approved by security _ _ _
holders:
=================== ============= ====================
Total 294,665 $ 3.57 258,293
=================== ============= ====================
===================================================================================================================
35
ITEM 6. Selected Financial Data (in thousands except for share and per share data).
Year Ended
December 31 1998 1999 2000 2001 2002
------ ------- ------- -------- -------
Statement of
Operations Data
Revenues and License
fee Income $ 401 $ 678 $ 788 $ 390 $ 904
Net loss (7,324) (12,298) (8,552) (9,083) (7,424)
Basic and diluted loss per
share (0.32) (0.47) (0.29) (0.29) (0.23)
Shares used in computing basic and diluted net loss per share.
22,724,913 26,380,351 29,251,846 31,433,208 32,085,776
Balance Sheet Data
Total Assets $ 16,327 $ 14,168 $ 13,067 $ 12,035 $6,040
Common Stockholders'
Equity 15,185 12,657 11,572 10,763 3,630
Other Cash Flow Data
Cash used in
operating
activities (5,751) (6,990) (8,074) (7,281) (6,409)
Capital expenditures (151) (251) (171) - -
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, 2002. This
information should be read in conjunction with Item 6 - "Selected Financial
Data" and our consolidated financial statements and related notes thereto
beginning on F-1 of this Form 10-K.
Statement of Forward-Looking Information
Certain statements in the section are "forward-looking statements". You
should read the information before Part I above, "Special Note" Regarding
Forward-Looking Statements" for more information about our presentation of
information.
Background
We have reported net income only from 1985 through 1987. Since 1987, we
have incurred, as expected, substantial operating losses due to our conducting
clinical testing. Prior to completing an Initial Public Offering ("IPO") in
36
November 1995,we financed operations primarily through the private placement of
equity and debt securities, equipment lease financing, interest income and
revenues from licensing, royalty agreements and cost recovery treatment
programs.
We have established a strong foundation of laboratory, pre-clinical data
with respect to the development of nucleic acid to enhance the natural antiviral
defense system of the human body and the development of the therapeutic products
for the treatment of chronic disease. Our strategy is to obtain the required
regulatory approval which will allow the progressive introduction of Ampligen(R)
(our proprietary drug) for treating Myalgic encephalomyelitis Chronic Syndrome
(ME/CFS"), HIV, hepatitis C ("HCV") and hepatitis B ("HBV") in the U.S., Canada,
Europe and Japan. Ampligen(R) is currently in phase III clinical trials in the
U.S. for use in treatment of ME/CFS and is in Phase IIb Clinical trials in the
U.S. for the treatment of newly emerged multi-drug resistant HIV, and for the
induction of Cell mediated immudity in HIV patients that are under control using
potentially toxic drug cocktail.
Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 350 patents worldwide.
With over 80 additional patent application pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patent apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new medication, which have a similar mechanism of
action.
In March, 2003, the Company acquired from Interferon Sciences Inc. ("ISI"),
all of ISI's raw materials, work-in-progress and finished product of Alferon N
Injection(R), together with a limited license for the production, manufacture,
use, marketing and sale of the product. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been approved by the
U.S. Food and Drug Administration ("FDA") for commercial sale for the treatment
of certain types of genital warts. We intend to market this product in the
United State through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis. This acquisition not withstanding, our primary
focus remains the development to Ampligen(R) for treating ME/CFS and HIV
diseases.
We are incorporated in Maryland in 1996 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 Pharmaceutical 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 subsidiaries include Hemispherx
Biopharma Europe N.V./S.A. established in Belgium in 1998 and Hemispherx
Biopharma Europe S.A. incorporated in Luxembourg in 2002.
37
Result of Operations Years Ended December 31, 2002 vs. 2001
Net loss
Our net loss was approximately $7,424,000 for the year ended December 31,
2002 versus a net loss of $9,083,000 in 2001. Per share losses in 2002 was 23
cents versus a per share loss of 29 cents in 2001. This year to year decrease in
losses of $1,659,000 is primarily due to higher revenues and lower costs in
2002. Revenues were up $514,000 in 2002 and total expenses were down by
$2,231,000 offset by a write down in the carrying value of our investments in
the amount of $1,366,000 for a net cost decrease of $865,000.
Revenues
Our revenues have come from our ME/CFS cost recovery treatment programs
principally underway in the U.S., Canada and Europe. These clinical programs
allow us to provide Ampligen(R) therapy at our cost to severely debilitated
ME/CFS patients. Under this program the patients pay for the cost of Ampligen(R)
doses infused. These costs total approximately $7,200 for a 24 weeks treatment
program. Revenues from cost recovery treatment programs totaled some $341,000 in
2002. In 2001, these revenues were $390,000 or 14% higher than 2002 revenues. We
expected revenues in the U.S. to decline due to the focus of our clinical
resources on conducting and completing the AMP 516 ME/CFS Phase III clinical
trial as well as the start up of the AMP 719 and AMP 720 HIV clinical trials.
The clinical data collected from treating patients under the cost recovery
treatment programs will augment and supplement the data collected in the U.S.
Phase III ME/CFS trial.
We received a licensing fee of 625,000 Euros (some $563,000) from Esteve.
Pursuant to a sales and distribution agreement, Esteve was granted the exclusive
right to market Ampligen(R) in Spain, Portugal and Andorra for the treatment of
ME/CFS in turn we provided to Esteve technical scientific and commercial
information. The agreement terms require no additional performance by us. Our
total revenues, including this licensing fee, in 2002 was $904,000 compared to
revenues of $390,000 in 2001.
Revenues for non-refundable license fees are recognized under the
performance method. This method recognizes revenue to the extent of performance
to date under a licensing agreement. In computing earned revenue, it considers
only the amount of non-refundable cash actually received to date. This method
considers future payments to be contingent and thus ignores the possibility of
future milestone payments when computing the amount of revenue earned in a
current period.
Research and Development costs
Our efforts in Research and Development are fully directed toward
conducting and completing our ongoing clinical trials, a Phase III study for the
treatment of ME/CFS an two Phase IIb studies for the treatment of HIV. Our R&D
direct costs were $4,946,000 in 2002 compared with $5,780,000 in 2001. The Phase
III study, AMP 516 for the treatment of ME/CFS is a multi center, placebo
controlled, randomized, double blind study to evaluate the efficacy and safety
of treating ME/CFS patients with Ampligen(R). As of December, 2002 the study was
fully enrolled. More than 175 patients have finished the study and we expect to
finish with the current groups by the Fourth Quarter of 2003. Expenses related
to the ME/CFS Phase III study are expected to decrease in 2003 because of fewer
patients to be treated in the cost-intensive segment of the program as the trial
nears completion. The Phase IIb Clinical Trail AMP 719 "Salvage Therapy" for the
treatment of HIV evaluates the use of Ampligen in adjunct to HAART Therapy. The
Phase IIb Clinical Trial AMP 720, "Strategic Treatment therapy" evaluates the
38
effect of Ampligen(R) during HAART treatment interruptions, or so-called drug
holidays. As of February, 2003 approximately 55 patients have been enrolled in
both studies combined and are being treated in approximately 10 different active
sites. We expect an acceleration in enrollment in the months ahead, now that
more data about the trials is known by the Medical Community. Therefore, the
lower cost of the ME/CFS program will be partially offset by an increase due to
spending related to the acceleration of our two HIV Clinical Trials. The rate of
enrollment depends on patient availability and on other products being in placed
in clinical trials for the treatment of HIV. There could be competition for the
same patient population. Overall, we expect our Research and Development costs
to be lower by over $1,000,000 in 2003 as compared to 2002.
Upon completion of the ME/CFS study, we will start analyzing the clinical
data to determine the results of the study in anticipation of submitting an
application to the FDA in early to mid 2004. The HIV trials will continue into
2004. Delays in patient recruiting for the HIV trials could delay the completion
of the clinical trial.
General and Administrative Expenses
Excluding stock compensation expense, general and administrative expenses
were approximately $1,882,000 in 2002 versus $2,741,000 in 2001. This decease in
expenses of $859,000 in 2002, is due to several factors including the recovery
of certain legal expenses of approximately $1,050,000 relating to the Asensio
lawsuit from our insurance carrier and lower overall legal expenses due to less
litigation, partially offset by higher Insurance premiums.
Stock compensation expenses was $133,000 or $538,000 lower than recorded in
the year 2001. The compensation reflects the imputed non-cash expense recorded
to reflect the cost of warrants granted to outside parties for services rendered
to the Company.
Equity Loss-Unconsolidated Affiliates
During the three months ended June 2002 and December 2002, we recorded a
non-cash charge of $678,000 and $396,000 respectively, to operations with
respect to our $1,074,000 investment in R.E.D. These charges were the result of
our determination that R.E.D.'s business and financial position had deteriorated
to the point that our investment had been permanently impaired. Please see
"RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS" in Part 1 for more details
on these transactions.
In May 2000, we acquired an equity interest in Chronix Biomedical Corp.
("CHRONIX"). for $700,000. During the quarter ended December 31, 2002, we
recorded a noncash charge of $292,000 with respect to our investment in Chronix.
This impairment reduces our carrying value to reflect a permanent decline in
Chronix's market value based on their current proposed equity offerings. Please
see "RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS" in Part 1 for more
details on these transactions.
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. During the fourth quarter
of 2001 we recorded a non-cash charge of $485,000 with respect to our investment
in CIMM. This was a result of our determination that CIMM's operations have not
yet evolved to the point where the full carrying value of our investment could
39
be supported based on that Company's financial position and operating results.
This amount represented the unamortized balance of goodwill included as part of
our investment. During 2002, we wrote down to zero our remaining investment
based on that Company's continuing operating losses. These charges are reflected
in the Consolidated Statements of Operations under the caption "Equity loss in
unconsolidated affiliate." Please see "RESEARCH AND DEVELOPMENT/ COLLABORATIVE
AGREEMENTS" in Part 1 for more details on these transactions.
Other Income/Expense
Interest and other income totaled $103,000 in 2002 compared to $284,000
recorded in 2001. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities which earned much lower interest income in 2002.
Years Ended December 31, 2001 vs. 2000
Net loss
We reported a net loss of approximately $9,083,000 for the year ended
December 31, 2001 versus a net loss of approximately $8,552,000 for the year
2000. The increase in losses of $531,000 in 2001 was basically due to lower
ME/CFS Cost Recovery Treatment Revenues and Interest Income. In addition we
recorded a non-operating, non-cash charge of $485,000 with respect to our
investments in unconsolidated affiliates. This amount represents the unamortized
balance of Goodwill included in the investments. Overall operating expenses in
2001 were $639,000 lower than operating expenses experienced in 2000. Our loss
per share was $0.29 in 2001 and 2000.
Revenues
At this time, (prior to the acquisition of Alferon N) our revenues come
from our ME/CFS cost recovery treatment programs principally underway in the
U.S., Canada and Europe. These clinical programs allow us to provide Ampligen(R)
therapy at our cost to severely debilitated ME/CFS patients. Under this program
the patients pay for the cost of Ampligen(R) doses infused. These costs total
approximately $7,200 for a 24 weeks treatment program. Revenues from cost
recovery treatment programs totaled some $788,000 in 2000. In 2001, these
revenues declined by $398,000 or 51%. We expected revenues in the U.S. to
decline due to the focus of our clinical resources on conducting and completing
the AMP516 ME/CFS Phase III clinical trial as well as the start up of the AMP
719 and AMP 720 HIV clinical trials. Revenues from the European cost recovery
treatment programs were lower than expected primarily due to our European
investigators spending a great deal of time in reviewing and analyzing the
clinical data collected in the treatment of some 150 patients in Belgium. The
clinical data collected from treating patients under the cost recovery treatment
programs will augment and supplement the data collected in the U.S. Phase III
ME/CFS trial.
Research and Development costs
As previously noted, our research and development is primarily directed at
developing our lead product, Ampligen(R), as a therapy for use in treating
various chronic illnesses as well as cancer. In 2000 and 2001, most of this
effort was directed toward conducting and supporting clinical trials involving
patients affected with ME/CFS. Our research and development direct costs were
$5,780,000 in 2001 compared to $6,136,000 spent in 2000. The lower research and
40
development costs basically reflect the net sum of less costs related to lower
cost recovery treatment revenues and lower expenses related to the ME/CFS
clinical trials offset by increased purchases of polymers and increased expenses
relating to the HIV trials initiated in 2001. As to be expected, costs related
to the cost recovery treatment programs were down approximately $275,000 due to
lower revenues recorded in 2001. Also expenses relating to the ME/CFS Phase III
clinical trial were down some $863,000 in 2001 versus 2000 due to fewer patients
being treated in the cost-intensive segment of the program as the clinical trial
nears completion. This clinical trial is a multicenter, placebo-controlled,
randomized, double blind study to evaluate the efficacy and safety of treating
230 ME/CFS patients with Ampligen(R). As of February 2002, more than 220
patients have been enrolled. These lower costs relating to our ME/CFS programs
were partially offset by an increase in polymer purchase in 2001 in the amount
of $317,000 and an increase due to spending on the new HIV clinical trials now
underway. The polymer purchase increase was needed to boost our on hand
inventory for the production of Ampligen(R). The HIV clinical trials were
initiated to evaluate the use of Ampligen(R) in concert with other antiviral
drugs in treating patients severely afflicted with AIDS. We expect levels of
these clinical trials to continue throughout 2002. Refer to part I, Item 1
(BUSINESS) for more information on our Research and Development for programs.
General and Administrative Expenses
Excluding stock compensation expense, general and administrative expenses
were approximately $2,741,000 in 2001 versus $3,298,000 in 2000. The decrease in
expense is primary due to lower professional fees in 2001. All other general and
administrative expenses were slightly less than recorded in 2000. Stock
compensation expenses were $671,000 or some $274,000 higher than recorded in the
year 2000. The compensation reflects the imputed non-cash expense recorded to
reflect the cost of warrants granted to outside parties for services rendered to
the Company.
Equity Loss-Unconsolidated Affiliates
During the fourth quarter of 2001, we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. The amount represents the
unamortized balance of goodwill included as part of our investment. This was a
result of management's determination that CIMM's operations had not yet evolved
to the point where our full carrying value of its investment could be supported
based on their financial position and operating results.
Other Income/Expense
Interest and other income of $284,000 in 2001 was lower than the $572,000
recorded in 2000. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities which earned much lower interest income in 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short term investments at December 31, 2002 were
approximately $2,811,000. Cash used for operating activities in 2002 was
$6,409,000. Additional uses of cash included expenditures of $176,000 for patent
acquisition cost, and $50,000 to acquire 27,500 shares of our stock.
41
Cash proceeds from financing activities in 2002 were approximately
$966,000. $65,000 was received from stock subscriptions and $946,000 was
received from the issuance of preferred equity certificates of our European
subsidiary.
Our net operating cash "burn rate" for the last three months of fiscal year
2002 approximated $547,000 per month or $6,564,000 on an annualized basis. All
clinical trial drug supplies produced in 2002 were fully expensed although some
costs are expected to be recovered under the expanded access cost recovery
programs authorized by FDA and regulatory bodies in other countries. Our
operating cash "burn rate" should decline in 2003 as the AMP 516 ME/CFS clinical
trial nears completion and the cost of European market development activity is
reduced.
On March 20, 2002, our European subsidiary Hemispherx Biopharma Europe,
S.A. ("Hemispherx S.A.") entered into a sales and Distribution agreement with
Laboratories Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments.,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration approval of Ampligen(R)
for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval
of the final marketing authorization for using Ampligen(R) for the treatment of
ME/CFS.
Also Esteve purchased 1,000,000 Euros of Hemispherx S.A.'s convertible
preferred equity certificates. These securities paid a 7% dividend and were to
be converted into .00114% of the outstanding common stock of Hemispherx S.A.
upon the earlier of the completion of an initial public offering ("IPO") on a
European stock exchange or September 30, 2003. However, at our request, on
January 9, 2003, Esteve agreed to convert the preferred equity certificates into
shares of our common stock and, on March 13, 2003, we issued 347,445 shares of
our common stock to Provesan SA, an affiliate of Esteve, in exchange for the
1,000,000 Euros of convertible preferred equity certificates owned by Esteve. We
agreed to registered the shares issued to Provesan SA and we have registered
these shares for public sale.
On March 12, 2003, we issued an aggregate of $5,426,000 in principal amount
of 6% Senior Convertible Debentures due March 2005 and an aggregate of $743,288
warrants to two investors in a private placement for aggregate anticipated gross
proceeds of $4,650,000. Pursuant to the terms of the Debentures, $1,550,000 of
the proceeds from the sale of the Debentures have been held back and will be
released to us if, and only if, we acquire ISI's facility with in a set
timeframe (see the discussion below). The Debentures mature on January 31, 2005
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Pursuant to the terms and conditions of the Senior
Convertible Debentures, we have pledged all of our assets, other than our
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestone.
42
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 per share, subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect.
The investors also received Warrants to acquire at any time through March
12, 2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a registration rights agreement with the investors in
connection with the issuance of the Debentures and the Warrants. The
registration rights agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debenture and upon exercise of the Warrants. In accordance with this agreement,
we filed a registration statement on form S-3 with the Securities and Exchange
Commission. The investors include Portside Growth & Opportunity Fund Ltd. and
Leonardo, L.P. the Debentures mature on March 12, 2005 and bear interest at 6%
per annum, payable quarterly in cash or common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date.
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI") ISI's
inventory of ALFERON N Injection(R), a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacturing, use, marketing and sale of this product. As partial
consideration, we issued 487,028 shares of our common stock to ISI. Pursuant to
our agreements with ISI, we are in the process of registering the foregoing
shares for public sale.
On March 11, 2003, we also entered into an agreement to purchase from ISI
all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, we
have agreed to issue to ISI an additional 487,028 shares and to issue 314,465
shares and 267,296 shares, respectively to the American National Red Cross and
GP Strategies Corporation, two creditors of ISI. The Company also will be
required to satisfy real estate taxes and utility expenses of ISI which totaled
$520,751 as of December 31, 2002 and which are secured by a lien on the real
estate to be acquired by the Company. We have guaranteed the market value of all
but 62,500 of these share on terms substantially similar to those for the
initial acquisition of the ISI assets.
As of December 31, 2002, we had approximately $2,811,000 in cash and short
term investments. We believe that these funds plus 1) the anticipated infusion
of approximately $4.4 million in net proceeds from the debenture placement, 2)
projected net cash flow from the acquisition of the ALFERON N business and 3)
the funds received from the insurance settlement should be sufficient to meet
our operating requirement during the next 12 months. Also, we have the ability
to curtail discretionary spending, including research and development
activities, if required to conserve cash.
43
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.
Contractual Obligations
(dollars in thousands)
Obligations Expiring by Period
==========================================
Total 2003 2004-2005 2006-2007
======== ======== =========== =========
Operating leases $1,063 $ 279 $ 526 $ 258
======= ======== =========== =========
Total $1,063 $ 279 $ 526 $ 258
======= ======== =========== ==========
NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued
Interpretation No. 46,, "Consolidation of Variable Interest Entities"
("Interpretation No. 46"), that clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, "to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Interpretation No. 46 is applicable immediately for variable
interest entities created after January 31, 2003. For variable interest entities
created to January 31, 2003, the provision of Interpretation No. 46 are
applicable no later than July 1, 2003. The Company does not expect this
Interpretation to have an effect on the consolidated financial statements.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"), which provides the accounting requirements
for retirement obligation associated with tangible long-lived assets. SFAS 143
requires entities to record the fair value of the liability for an asset
retirement obligation in the period in which it is incurred and is effective for
the Company's 2003 fiscal year. The adoption of SFAS 143 is not expected to have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, "
44
and the accounting and reporting provision of APB Opinion No. 30,"Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
transactions. "This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements, "to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operation to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have impact on the Company's financial position, cash
flows or results of operation for the year ended December 31, 2002.
In June 2002, the FASB issued Statement No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)" which
previously governed the accounting treatment for restructuring activities. SFAS
146 applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with disposal activity
covered by SFAS 144. Those costs include, but are not limited to, the following:
(1) termination benefits provide to current employees that are involuntarily
terminated under the terms of a benefit arrangement that, in substance, is not
an ongoing benefit arrangement or individual deferred-compensation contract,(2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidated facilities or relocated employees. SFAS 146 does not apply to costs
associated with the retirement of long-lived assets covered by SFAS 143. SFAS
146 will be applied prospectively and is effective for exit or disposal
activities after December 31, 2002.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based compensation using the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees, "but has adopted the enhance disclosure requirements of SFAS 148 (See
Note 10).
Critical Accounting Policies
Financial Reporting Release No. 60., which was recently released by the
Securities And Exchange Commission, requires all companies to include a
discussion of critical accounting policies or method used in the preparation of
financial statements. Our significant accounting policies are described in Notes
to the Consolidated Financial Statements. The significant accounting policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:
45
Revenue
Revenues for non-refundable license fees are recognized under the
performance method. This method recognizes revenue to the extent of performance
to date under a licensing agreement. In computing earned revenue, it considers
only the amount of non-refundable cash actually received to date. This method
considers future payments to be contingent and thus ignores the possibility of
future milestone payments when computing the amount of revenue earned in a
current period.
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when treatment is provided to the
patient.
Patents and Trademarks
Effective October 1, 2001, we adopted a 17 year estimated useful life for
the amortization of our patents and trademark rights in order to more accurately
reflect their useful life. Prior to October 1, 2001, we were using a ten year
estimated useful life.
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the life of the assets. 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 basis to support the realizability of its respective
capitalized cost. In addition, management's review addresses whether each patent
continues to fit into Company's strategic business plans.
Research and Developments Costs
Research and development costs are direct costs related to both future and
present products and are charged to operations as incurred. The Company
recognized research and development costs of $6,136,000 $5,780,000 and
$4,946,000 in 2000, 2001 and 2002 respectively.
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.
46
ITEM 7a. Quantitative and Qualitative Market Risk.
Market Risk
We had $2.8 million in cash, cash equivalents and short term investments at
December 31, 2002. To the extent that our cash and cash equivalents exceed our
near term funding requirements, the excess cash was invested 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.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated balance sheets as of December 31, 2001 and 2002, and our
consolidated statements of operations, changes in stockholders' equity (deficit)
and comprehensive loss and cash flows for each of the years in the three year
period ended December 31, 2002, together with the reports of BDO Seidman, LLP,
independent public accountants, are included at the end of this report.
Reference is made to the "Index to Financial Statements and Financial Statement
Schedule" on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers of the Registrant The following sets forth
biographical information about each of our directors and executive officers as
of the date of this Agreement:
Name Age Position
William A. Carter, M.D. 65 Chairman, Chief Executive Officer, and President
Robert E. Peterson 65 Chief Financial Officer
David R. Strayer, M.D. 55 Medical Director, Regulatory Affairs
Carol A. Smith, Ph.D. 51 Director of Manufacturing and Process Development
Richard C. Piani 76 Director
William M. Mitchell, M.D. 67 Director
Ransom W. Etheridge 63 Director and Secretary
Eraj Kiani 58 Director
Each director has been elected to serve until the next annual meeting of
stockholders, or until his earlier resignation, removal from office, death or
incapacity. Each executive officer serves at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.
WILLIAM A. CARTER, M.D., the co-inventor of Ampligen, joined Hemispherx in
1978, and has served as: (a) Hemispherx's Chief Scientific Officer since May
1989; (b) the Chairman of Hemispherx's Board of Directors since January 1992;
47
(c) Hemispherx's Chief Executive Officer since July 1993; (d) Hemispherx's
President since April, 1995; and (e) a director since 1987. From 1987 to 1988,
Dr. Carter served as Hemispherx's Chairman. Dr. Carter was a leading innovator
in the development of human interferon for a variety of treatment indications
including various viral diseases and cancer. Dr. Carter received the first FDA
approval to initiate clinical trials on a beta interferon product manufactured
in the U.S. under his supervision. From 1985 to October 1988, Dr. Carter served
as Hemispherx's Chief Executive Officer and Chief Scientist. He received his
M.D. degree from Duke University and underwent his post-doctoral training at the
National Institutes of Health and Johns Hopkins University. Dr. Carter also
served as Professor of Neoplastic Diseases at Hahnemann Medical University, a
position he held from 1980 to 1998. Dr. Carter served as Director of Clinical
Research for Hahnemann Medical University's Institute for Cancer and Blood
Diseases, and as a professor at Johns Hopkins School of Medicine and the State
University of New York at Buffalo. Dr. Carter is a Board certified physician and
author of more than 200 scientific articles, including the editing of various
textbooks on anti-viral and immune therapy.
ROBERT E. PETERSON has served as Chief Financial Officer of the Company
since April, 1993 and served as an Independent Financial Advisor to the Company
from 1989 to April, 1993. Also, Mr. Peterson has served as Vice President of the
Omni Group, Inc., a business consulting group based in Tulsa, Oklahoma since
1985. From 1971 to 1984, Mr. Peterson worked for PepsiCo, Inc. and served in
various financial management positions including Vice President and Chief
Financial Officer of PepsiCo Foods International and PepsiCo Transportation,
Inc. Mr. Peterson is a graduate of Eastern New Mexico University.
DAVID R. STRAYER, M.D. who served as Professor of Medicine at the Medical
College of Pennsylvania and Hahnemann University, has acted as the Medical
Director of the Company since 1986. He is Board Certified in Medical Oncology
and Internal Medicine with research interests in the fields of cancer and immune
system disorders. Dr. Strayer has served as principal investigator in studies
funded by the Leukemia Society of America, the American Cancer Society, and the
National Institutes of Health. Dr. Strayer attended the School of Medicine at
the University of California at Los Angeles where he received his M.D. in 1972.
CAROL A. SMITH, PH.D has served as the Company's Director of Manufacturing
and Process Development since April 1995, as Director of Operations since 1993
and as the Manager of Quality Control from 1991 to 1993, with responsibility for
the manufacture, control and chemistry of Ampligen(R). Dr. Smith was
Scientist/Quality Assurance Officer for Virotech International, Inc. from 1989
to 1991 and Director of the Reverse Transcriptase and Interferon Laboratories
and a Clinical Monitor for Life Sciences, Inc. from 1983 to 1989. She received
her Ph.D. from the University of South Florida College of Medicine in 1980 and
was an NIH post-doctoral fellow at the Pennsylvania State University College of
Medicine.
RICHARD C. PIANI has been a director of Hemispherx since 1995. Mr. Piani
has been employed as a principal delegate for Industry to the City of Science
and Industry, Paris, France, a billion dollar scientific and educational
complex. Mr. Piani provided consulting to Hemispherx in 1993, with respect to
general business strategies for Hemispherx's European operations and markets.
Mr. Piani served as Chairman of Industrielle du Batiment-Morin, a building
materials corporation, from 1986 to 1993. Previously Mr. Piani was a Professor
of International Strategy at Paris Dauphine University from 1984 to 1993. From
1979 to 1985, Mr. Piani served as Group Director in Charge of International and
Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 he was Chairman and
48
Chief Executive Officer of Societe "La Cellophane", the French company which
invented cellophane and several other worldwide products. Mr. Piani has a Law
degree from Faculte de Droit, Paris Sorbonne and a Business Administration
degree from Ecole des Hautes Etudes Commerciales, Paris.
RANSOM W. ETHERIDGE has been a director of Hemispherx since October 1997,
and presently serves as our Secretary. Mr. Etheridge first became associated
with Hemispherx in 1980 when he provided consulting services to Hemispherx and
participated in negotiations with respect to Hemispherx's initial private
placement through Oppenheimer & Co., Inc. Mr. Etheridge has been practicing law
since 1967, specializing in transactional law. Mr. Etheridge is a member of the
Virginia State Bar, a Judicial Remedies Award Scholar, and has served as
President of the Tidewater Arthritis Foundation. He is a graduate of Duke
University, and received his Law degree from the University of Richmond School
of Law.
WILLIAM M. MITCHELL, M.D. has been a director of Hemispherx since July
1998. Dr. Mitchell is a Professor of Pathology at Vanderbilt University School
of Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns
Hopkins University, where he served as an Intern in Internal Medicine, followed
by a Fellowship at its School of Medicine. Dr. Mitchell has published over 200
papers, reviews and abstracts dealing with viruses and anti-viral drugs. Dr.
Mitchell has worked for and with many professional societies, including the
International Society for Interferon Research, and committees, among them the
National Institutes of Health, AIDS and Related Research Review Group. Dr.
Mitchell previously served as a director of Hemispherx from 1987 to 1989.
IRAJ E. KIANI, M.B.A., PHD., was appointed to the Board of Directors on May
1, 2002. Dr. Kiani is a citizen of England and resides in Newport, California.
Dr. Kiani served in various local government position including the Governor of
Yasoi, Capital of Boyerahmand, Iran. In 1980, Dr. Kiani moved to England, where
he establish and managed several trading companies over a period of some 20
years. Dr. Kiani is a planning and logistic specialist who is now applying his
knowledge and experience to build a worldwide immunology network which will use
the Company's proprietary technology. Dr. Kiani received his Ph.D. degree from
the University of Warwick in England.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of equity
securities, to file reports with the Securities and Exchange Commission
reflecting their initial position of ownership on Form 3 and changes in
ownership on Form 4 or Form 5. Based solely on a review of the copies of such
forms received by us, we believe that, during the fiscal year ended December 31,
2002, all of our officers, directors and ten percent stockholders complied with
all applicable Section 16(a) filing requirements on a timely basis.
Audit Committee Expert
Our Audit Committee of the Board of Directors consists of Richard Piani,
Committee Chairman, William Mithcell, MD and Ransom Etheridge. Mr. Piani and Dr.
Mitchell are Independent Directors. Mr. Etheridge is Secretary of our Company
and is considered to be an insider. We do not have a financial expert on the
49
committee in the true sense of the description. However, Mr. Piani is a
Businessman and has 40 years of experience of working with budgets, analyzing
financials and dealing with financial institutions.
Code of Ethics
Our Board of Directors have not yet adopted a Code of Ethics that would
apply to the Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer. However, we are in the process of preparing a Code
of Ethics to be presented to the Board of Directors at the next meeting.
Item 11. Executive Compensation.
The summary compensation table below sets forth the aggregate compensation
paid or accrued by us for the fiscal years ended December 31, 2002, 2001 and
2000 to (i) our Chief Executive Officer and (ii) our four most highly paid
executive officers other than the CEO who were serving as executive officers at
the end of the last completed fiscal year and whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executives").
50
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary ($) Restricted Stock Warrants & All Other
Awards Options Awards Compensation
(1)
- ----------------------------- -------- ------------------ ------------------ ------------------- ---------------
William A. Carter 2002 $468,830 - (8)1,000,000 $25,747
Chairman of 2001 (4) 456,608 - (2) 386,650 22,917
the Board and CEO 2000 (4) 539,620 - (5) 100,000 17,672
Robert E. Peterson 2002 $151,055 - (8) 200,000 -
Chief 2001 146,880 - (3) 40,000 -
Financial 2000 145,944 - - -
Officer
David R. Strayer, M.D. 2002 $178,594 - (8) 50,000 -
Medical Director 2001 174,591 - (7) 10,000 -
2000 (6) 172,317 - - -
Carol A. Smith, Ph.D. 2002 $128,346 - (8) 20,000 -
Director 2001 124,800 - (7) 10,000 -
of 2000 124,800 - - -
Manufacturing
- ----------------------
(1)Consists of insurance premiums paid by Hemispherx with respect to term
life and disability insurance for the benefit of the named executive officer.
(2)Consists of 188,325 warrants to purchase common stock at $6.00 per share
and 188,325 warrants to purchase common stock at $9.00 per share. Also includes
a stock option grant of 10,000 shares exercisable at $4.03 per share.
(3)Consist of a stock option grant of 10,000 shares exercisable at $4.03
per share and 30,000 warrants to purchase common stock at $5.00 per share.
(4)Includes a bonus of $90,397 paid in 2000. Also includes funds previously
paid to Dr. Carter by Hahnemann Medical University where he served as a
professor until 1998. This compensation was continued by the Company and totaled
$79,826 in 2000 and 2001, and $82,095 in 2002.
(5)Represents warrants to purchase common stock exercisable at $6.25 per
share.
(6)Includes $98,926 paid by Hahnemann Medical University where Dr. Strayer
served as a professor until 1998. This compensation was continued by the Company
in 2000, 2001 and 2002.
51
(7)Consist of stock option grant of 10,000 shares exercisable at $4.03 per
share.
(8)Represents number of warrants to purchase shares of common stock at $2
per share.
The following table sets forth certain information regarding stock warrants
granted during 2002 to the executive officers named in the Summary Compensation
Table.
- --------------------- -------------------------------------- ------------------ ---------------- --------------------------------
INDIVIDUAL GRANTS
- --------------------- -------------------------------------- ------------------ ---------------- --------------------------------
- --------------------- ------------------- ------------------ ------------------ ---------------- --------------------------------
NAME NUMBER OF PERCENTAGE OF EXERCISE PRICE EXPIRATION DATE POTENTIAL REALIZABLE VALUE AT
TOTAL WARRANTS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN
WARRANTS GRANTED FISCAL YEAR ASSUMED RATES OF STOCK PRICE
(1) 2002(2) PER SHARE (3) APPRECIATION FOR WARRANTS TERM
- --------------------- ------------------- ------------------ ------------------ ---------------- --------------------------------
- -------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
5% (4) 10%(4)
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
Carter, W.A. 1,000,000 61.6% $2 8/13/07 $1,879,500 $1,969,000
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
Peterson, R. 200,000 12.3% $2 8/13/07 $375,900 $393,800
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
Smith, C. 20,000 1.2% $2 8/13/07 $37,590 $39,380
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
Strayer, D. 50,000 3.1% $2 8/13/07 $93,975 $98,450
- --------------------- ------------------- ------------------ ------------------ ---------------- -------------- -----------------
(1) Warrants vest over a period ranging from two to four years.
(2) Total warrants issued to employees in 2002 were 1,622,000.
(3) The exercise price is equal to the closing price of the Company's
common stock at the date of issuance.
(4) Potential realizable value is based on an assumption that the market
price of the common stock appreciates at the stated rates compounded annually,
from the date of grant until the end of the respective option term. These values
are calculated based on requirements promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
appreciation.
52
The following table sets forth certain information regarding the stock
options held as of December 31, 2002 by the individuals named in the above
Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Unexercised Value of Unexercised
Options at Fiscal Year End number In-the-Money-Options At
Fiscal Year Enddollars(1)
Name Shares Value Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized ($)
Exercise (#)
- ----------------- -------------- --------------- ------------------- --------------------- ------------------- ----------------
- ----------------- -------------- --------------- ------------------- --------------------- ------------------- ---------------
William Carter - - 3,552,044(2) 753,334(3) $209,200 $97,500
Robert Peterson - - 314,240(4) 103,334(5) 6,300 6,300
David Strayer - - 101,666(6) 28,334(7) 3,250 3,250
Carol Smith - - 28,457(8) 13,334(9) 1,300 1,300
- ----------------------------
(1)Computation based on $2.13, the December 31, 2002 closing bid price for
the common stock on the American Stock Exchange.
(2) Consist of (i) 250,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 (ii) 188,325 warrants exercisable at $6.00 per share expiring
on February 22, 2006 (iii) 188,325 warrants exercisable at $9.00 per share
expiring on February 22, 2006 (iv) 100,000 warrants exercisable at $6.25 per
share expiring on April 8, 2004 (v) 25,000 warrants exercisable at $6.50 per
share expiring on September 17, 2004 (vi) 25,000 warrants exercisable at $8.00
per share expiring on September 17, 2004 and 6,666 stock option exercisable at
$4.03 per share expiring on January 3, 2011. Also include 2,768,728 warrants and
options held in the name of Carter Investments, L.C. of which W.A. Carter in the
principal beneficiary. These securities consist of (i)340,000 warrants
exercisable at $4.00 per share expiring on January 1, 2008,(ii) 170,000 warrants
exercisable at $5.00 per share expiring on January 1, 2005,(iii) 300,000
warrants exercisable a t $6.00 per share expiring on January 1, 2005 (iv) 20,000
warrants exercisable at $4.00 per share expiring on 2008,(v) 465,000 warrants
exercisable at $1.75 expiring on June 3, 2005,(vi) 1,400,000 warrants
53
exercisable at $3.50 per share expiring on October 16, 2004 and 73,728 stock
options exercisable at $2.71 per share until exercised.
(3) Consist of (i) 750,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007, and (ii) 3,334 start options exercisable at $4.03 per share
expiring on January 3, 2011.
(4) Consist of (i) 6,666 stock options exercisable at $4.03 per share
expiring on January 3, 2011 (ii) 13,750 stock options exercisable at $3.50 per
share expiring on January 22, 2007, (iii) 13,824 stock option exercisable at
$4.34 per share expiring on July 17, 2003, (iv) 100,000 warrants exercisable at
$2.00 per share expiring on August 13, 2007, (v) 50,000 warrants exercisable at
$3.50 expiring on March 1, 2006, (vi) 100,000 warrants exercisable at $5.00 per
share expiring on April 14, 2006 and (vii) 30,000 warrants exercisable at $5.00
per share expiring on February 28, 2009.
(5) Consist of (I) 100,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and (ii) 3,334 stock options exercisable at $4.03 per share
expiring on January 3, 2011.
(6) Consist of (i) 25,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007, (ii) 50,000 warrants exercisable at $4.00 per share expiring
on February 28, 2008, (iii) 6,666 stock options exercisable at $4.08 expiring on
January 3, 2011 and (iv) 20,000 stock options exercisable at $3.50 per share
expiring on January 22, 2007.
(7) Consist of 25,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 and 3,334 stock options exercisable at $4.03 per share expiring
on August 13, 2007.
(8) Consist of (I) 10,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007, (ii) 5,000 warrants exercisable at $4.00 per share expiring
on June 7, 2008, (iii) 6,666 stock options exercisable at $4.03 per share
expiring on January 3, 2016, and (iv) 6,791 stock options exercisable at $3.50
per share expiring on January 22, 2007.
(9) Consist of 10,000 warrants exercisable at $2.00 per share and 3,334
stock options exercisable at $4.03 per share expiring on January 3, 2004.
Employment Agreements
Hemispherx entered into an amended and restated employment agreement with
its President and Chief Executive Officer, Dr. William A. Carter, dated as of
December 3, 1998, which provided for his employment until May 8, 2004 at an
initial base annual salary of $361,586, subject to annual cost of living
increases. In addition, Dr. Carter could receive an annual performance bonus of
up to 25% of his base salary, at the sole discretion of the board of directors.
Dr. Carter will not participate in any discussions concerning the determination
of his annual bonus. Dr. Carter is also entitled to an incentive bonus of 0.5%
of the gross proceeds received by Hemispherx from any joint venture or corporate
partnering arrangement, up to an aggregate maximum incentive bonus of $250,000
for all such transactions. Dr. Carter's agreement also provides that he be paid
a base salary and benefits through May 8, 2004 if he is terminated without
"cause", as that term is defined in the agreement. This agreement was extended
54
to May 8, 2008. Pursuant to his original agreement, as amended on August 8,
1991, Dr. Carter was granted options to purchase 73,728 shares of Hemispherx's
common stock at an exercise price of $2.71 per share.
Hemispherx entered into an amended and restated engagement agreement with
Robert E. Peterson dated April 1, 2001 which provides for Mr. Peterson's
employment as Hemispherx's Chief Financial Officer until December 31, 2003 at an
annual base salary of $155,988 per year, subject to annual cost of living
increases. In addition, Mr. Peterson shall receive bonus compensation upon
Federal Drug Administration approval of Ampligen based on the number of years of
his employment by Hemispherx up to the date of such approval. During 2002, Mr.
Peterson also received 200,000 warrants to purchase shares of common stock with
an exercise price of $2.00.
Compensation of Directors
The existing compensation package was put in place in 2000. Board member
compensation consists of an annual retainer to $35,000 plus $1,000 per meeting
attended. Committee chairmen each receive an additional retainer of $5,000 per
year and committee members each receive an additional retainer of $3,000 per
year. All non-employee directors received some compensation in 2001 for special
project work performed on behalf of Hemispherx. All directors have been granted
options to purchase common stock under Hemispherx's 1990 Stock Option Plan
and/or Warrants to purchase common stock. Hemispherx believes such compensation
and payments are necessary in order for Hemispherx to attract and retain
qualified outside directors.
1993 Stock Option Plan
Hemispherx's 1993 Stock Option Plan ("1993 Plan"), provides for the grant
of options for the purchase of up to an aggregate of 138,240 shares of common
stock to Hemispherx's employees, directors, consultants and others whose efforts
are important to the success of Hemispherx. The 1993 Plan is administered by the
Compensation Committee of the board of directors, which has complete discretion
to select the eligible individuals to receive and to establish the terms of
option grants. The 1993 Plan provides for the issuance of either non-qualified
options or incentive stock options, provided that incentive stock options must
be granted with an exercise price of not less than fair market value at the time
of grant and that non-qualified stock options may not be granted with an
exercise price of less than 85% of the fair market value at the time of grant.
The number of shares of common stock available for grant under the 1993 Plan is
subject to adjustment for changes in capitalization. This plan terminates as of
July 7, 2003. To date, no options have been granted under the 1993 Plan.
1992 Stock Option Plan
Hemispherx's 1992 Stock Option Plan ("1992 Plan"), provides for the grant
of options for the purchase of up to an aggregate of 92,160 shares of common
stock to Hemispherx's employees, directors, consultants and others whose efforts
are important to the success of Hemispherx. The 1992 Plan is administered by the
55
Compensation Committee of the board of directors, which has complete discretion
to select the eligible individuals to receive and to establish the terms of
option grants. The 1992 Plan provides for the issuance of either non-qualified
options or incentive stock options, provided that incentive stock options must
be granted with an exercise price of not less than fair market value at the time
of grant and that non-qualified stock options may not be granted with an
exercise price of less than 50% of the fair market value at the time of grant.
The number of shares of common stock available for grant under the 1992 Plan is
subject to adjustment for changes in capitalization. This plan expired as of
December 3, 2002. No options were granted under the 1992 Plan.
1990 Stock Option Plan
Hemispherx's 1990 Stock Option Plan, as amended ("1990 Plan"), provides for
the grant of options to employees, directors, officers, consultants and advisors
of Hemispherx for the purchase of up to an aggregate of 460,798 shares of common
stock. The 1990 plan is administered by the Compensation Committee of the board
of directors, which has complete discretion to select eligible individuals to
receive and to establish the terms of option grants. The number of shares of
common stock available for grant under the 1990 Plan is subject to adjustment
for changes in capitalization. As of December 31, 2001, options to acquire an
aggregate of 154,535 shares of the common stock were available for grants under
the 1990 plan. This plan remains in effect until terminated by the Board of
Directors or until all options are issued.
401(K) Plan
In December 1995, Hemispherx established a defined contribution plan,
effective January 1, 1995, entitled the Hemispherx Biopharma employees 401(K)
Plan and Trust Agreement. All full time employees of Hemispherx 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
Hemispherx at a rate determined annually by the board of directors. Each
participant immediately vests in his or her deferred salary contributions, while
Hemispherx contributions will vest over one year. In 2002 Hemispherx provided
matching contributions to each employee for up to 6% of annual pay for a total
of $38,000 for all employees.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2002, the members of Hemispherx's
Compensation Committee were Ransom W. Etheridge and Richard Piani. Mr. Etheridge
serves as the Company's Secretary and he is an attorney in private practice and
has rendered legal services to Hemispherx for which he received a fee. Mr. Piani
received fees for certain consulting work performed in Europe on behalf of the
Company. Refer to Item 13. "Certain Relationships and Related Transactions" for
more information.
Compensation Committee Report on Compensation
The Compensation Committee makes recommendations concerning salaries and
compensation for employees of and consultants to Hemispherx.
The following report of the compensation committee discusses our executive
56
compensation policies and the basis of the compensation paid to our executive
officers in 2002.
In general, the compensation committee seeks to link the compensation paid
to each executive officer to the experience and performance of such executive
officer. Within these parameters, the executive compensation program attempts to
provide an overall level of executive compensation that is competitive with
companies of comparable size and with similar market and operating
characteristics.
There are three elements in Hemispherx executive total compensation
program, all determined by individual and corporate performance as specified in
the various employment agreements; base salary, annual compensation, and
long-term incentives.
Base Salary
The Summary Compensation Table shows amounts earned during 2002 by our
executive officers. The base compensation of such executive officers is set by
terms of the employment agreement entered into with each such executive officer.
The Company established the base salaries for Chief Executive Officer, Dr.
William A. Carter under an employment agreement in December 3, 1998 (as amended
on August 14, 2003), which provides for a base salary of $361,586 until May 8,
2008. Also we entered into an extended employment agreement with Robert E.
Peterson, Chief Financial Officer for a base salary of $155,988 until December
31, 2003. Dr. Carter and Mr. Peterson's agreements allow for annual cost of
living increases. Dr. Carter's compensation also includes funds previously paid
to Dr. Carter by Hahneman Medical University where he served as a professor
until 1998. This compensation was continued by the Company and totaled $79,826
in each of 2000 and 2001, and $82,095 in 2002.
Annual Incentive
Our Chief Executive Officer and our Chief Financial Officer are entitled to
an annual incentive bonus as determined by the compensation committee based on
such executive officers' performance during the previous calendar year. The cash
bonus awarded to the company's Chief Executive Officer in 1999 and 2000 was
determined based on this provision of his employment agreement.
Performance Graph
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name / Index Dec98 Dec99 Dec00 Dec01 Dec02
- -------------------------------------------------------------------------------
HEMISPHERX BIOPHARMA INC 69.25 44.55 -52.20 -5.26 -52.67
S&P SMALLCAP 600 INDEX -1.31 12.40 11.80 6.54 -14.63
PEER GROUP 6.85 13.61 54.46 63.31 -7.96
INDEXED RETURNS
Base Years Ending
Period
Company Name / Index Dec97 Dec98 Dec99 Dec00 Dec01 Dec02
- ------------------------------------------------------------------------------
HEMISPHERX BIOPHARMA INC 100 169.25 244.65 116.94 110.78 52.44
S&P SMALLCAP 600 INDEX 100 98.69 110.94 124.03 132.13 112.80
PEER GROUP 100 106.85 121.39 187.50 306.22 281.85
Peer Group Companies
- ------------------------------------------------------------------------------
GILEAD SCIENCES INC
ISIS PHARMACEUTICALS INC
57
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth as of April 1, 2003 the number and
percentage of outstanding shares of common stock beneficially owned by each of
our Directors and the Named Executives, and all of our executive officers and
directors as a group. As of December 31, 2002, there were no other persons,
individually or as a group, known to the Hemispherx to be deemed the beneficial
owners of five percent or more of the issued and outstanding common stock.
58
OFFICERS, DIRECTORS AND % OF SHARES
PRINCIPAL STOCKHOLDERS SHARES BENEFICIALLY OWNED BENEFICIALLY OWNED (1)
- ------------------------- -------------------------- ----------------------
William A. Carter, M.D. 4,246,034 (2) 11.4
Robert E. Peterson 314,074 (3) *
Ransom W. Etheridge 214,316 (4) *
Richard C. Piani 196,747 (5) *
William M. Mitchell, M.D. 200,640 (6) *
David R. Strayer, M.D. 87,246 (7) *
Carol A. Smith, Ph.D 28,457 (8) *
Araj-Eghbal Kiani 12,000 (9)
All directors and
executive officers as a
group (8 persons) 5,299,514 13.7
- --------------------
* Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of common stock which such person has
the right to acquire within 60 days of April 1, 2003. For purposes of computing
the percentage of outstanding shares of common stock held by each person or
group of persons named above, any security which such person or persons has or
have the right to acquire within such date is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, Hemispherx believes
based on information supplied by such persons, that the persons named in this
table have sole voting and investment power with respect to all shares of common
stock which they beneficially own.
(2) Includes (i) an option to purchase 73,728 shares of common stock from
Hemispherx at an exercise price of $2.71 per share and expiring on August 8,
2004, (ii) Rule 701 Warrants to purchase 1,400,000 shares of common stock at a
price of $3.50 per share, originally expiring on September 30, 2002 was extended
to September 30,2007; (iii) warrants to purchase 465,000 shares of common stock
at $1.75 per share issued in connection with the 1995 Standby Financing
Agreement and expiring on June 30, 2005; (iv) 340,000 common stock warrants
exercisable at $4.00 per share and originally expiring on January 1, 2003 was
extended to January 1, 2008; (v) 170,000 common stock warrants exercisable at
$5.00 per share and expiring on January 2, 2005;(vi) 25,000 warrants to purchase
common stock at $6.50 per share and expiring on September 17, 2004;(vii) 25,000
warrants to purchase common stock at $8.00 per share and expiring on September
17, 2004;(viii) 100,000 warrants to purchase common stock at $6.25 per share and
expiring on April 8, 2004; (ix) 20,000 warrants to purchase common stock at
$4.00 per share originally expiring January 1, 2003 was extended to January 1,
2008, (x) 188,325 common stock warrants exercisable at $6.00 per share and
expiring on February 22, 2006; (xi) 188,325 common stock warrants exercisable at
$9.00 per share and expiring on February 22, 2006 (xii) 300,000 common stock
warrants granted in 1998 that are exercisable at $6.00 per share and expiring on
January 1, 2006 (xiii) options to purchase 6,666 shares of common stock at $4.03
per share and expiring on January 3, 2011 (XIV) 250,000 warrants exercisable
$2.00 per share in August 13, 2007 and 693,990 shares of common stock.
(3) Includes (i) 27,574 options to purchase common stock at an average
59
exercise price of $3.92 per share, expiring on July 17, 2003; (ii) warrants to
purchase 50,000 shares of Common stock at an exercise price of $3.50 per share,
expiring on March 1, 2006; (iii) warrants to purchase 100,000 shares of common
stock at $5.00 per share, expiring on April 14, 2006; (iv) 30,000 warrants to
purchase common stock at $5.00 per share an expiring on February 28, 2009 (v)
options to purchase 6,000 shares at $4.03 per share that expire on January 3,
2011 (VI) 200,000 warrants exercised at $2.00 per share expiring on November 13,
2007 and (v) 500 shares of common stock.
(4) Includes 20,000 warrants to purchase common stock at $4.00 per share,
originally expiring on January 1, 2003 and was extended to January 1, 2008;
25,000 warrants to purchase common stock at $6.50 per share; 25,000 warrants to
purchase common stock at $8.00 per share, all expiring on September 12, 2004;
100,000 warrants exercisable $2.00 per share expiring on August 13, 2007 and
44,316 shares of common stock.
(5) Includes (i) 20,000 warrants to purchase common stock at $4.00 per
share; (ii) warrants to purchase 25,000 shares of common stock at $6.50 per
share; (iii) 25,000 warrants to purchase common stock at $8.00 per share, all
expiring on September 17, 2004;(vi) 100,000 warrants exercisable at $2.00 per
share expiring on August 13, 2007, (vi) 8,847 shares of common stock owned by
Mr. Piani (vi) 12,900 shares of common stock owned jointly by Mr. and Mrs.
Piani; and (vii) 5000 shares of common stock owned by Mrs. Piani.
(6) Includes (I) warrants to purchase 12,000 shares of common stock at
$6.00 per share, expiring on August 25, 2003; (ii) 25,000 warrants to purchase
common stock at $6.50 per share; (iii) 25,000 warrants to purchase common stock
at $8.00 per share all expiring on September 17, 2004; (iv) 100,000 warrants
exercisable at $2.00 per share expiring in August 13, 2007 and 13,640 shares of
common stock.
(7) Includes (i) stock options to purchase 20,000 shares of common stock at
$3.50 per share; (ii) 50,000 warrants to purchase common stock at $4.00 per
share; (iii) 2,500 stock options exercisable at $4.03 per share and expiring on
January 3, 2011 and; (iv)14,746 shares of common stock.
(8) Consists of 5,000 warrants to purchase common stock at $4.00 per share
expiring June 7, 2003; 6,791 stock options exercisable at $3.50 expiring January
22, 2007 10,000 warrants exercisable at $2.00 per share expiring in August 13,
2007 and options to purchase 6,666 shares of common stock at $ 4.03 per share
expiring on January 3, 2011.
(9) Consist of 12,000 warrants exercisable at $3.86 per share expiring on
April 30, 2005.
Item 13. Certain Relationships and Related Transactions.
We have employment agreements with certain of our executive officers and
have granted such officers and directors of the Company options and warrants to
purchase common stock of the Company, as discussed under the headings, "Item 11.
Executive Compensation," and "Item 12. Security Ownership of Certain Beneficial
Owners and Management," above.
Ransom W. Etheridge, a director of the Company, is an attorney in private
practice who has rendered corporate legal services to us from time to time, for
which he has received fees. Richard Piani, a Director of the Company, lives in
Paris, France and assists our European subsidiary in their dealings with medical
institutions and the European Medical Evaluation Authority. William Mitchell,
60
M.D. a Director of the Company, works with David Strayer, M.D. (our Medical
Director) in establishing clinical trail protocols as well as performs other
scientific work for us from time to time. For these services, these Directors
were paid an aggregate of $170,150 in the year 2002. No individual Director was
paid in excess of $60,000.00.
William A. Carter, Chief Executive Officer of the Company, received an
aggregate of $12,486 in short term advances which were repaid as of December 31,
2001. All advances bear interest at 6% per annum. The Company loaned $60,000 to
Ransom W. Etheridge, a Director of the Company in November, 2001 for the purpose
of exercising 15,000 class A redeemable warrants. This loan bears interest at 6%
per annum. Dr. Carter's short term advances and Mr. Etheridge's loan was
approved by the board of Directors.
We paid $33,450 to Carter Realty for the rent of property used at various
times in 2002 by us. The property is owned by others and managed by Carter
Realty. Carter Realty is owned by Robert Carter, the brother of William A.
Carter.
ITEM 14. Controls and Procedures.
Our management, including the Chairman of the Board (serving as the
principal executive officer) and the Chief Financial Officer, have conducted an
evaluation of the effectiveness of disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. Based on that evaluation, the Chairman of the Board
and the Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this annual report has been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in other factors
that could significantly affect internal controls, subsequent to the date the
Chairman of the Board and Chief Financial Officer completed their evaluation.
ITEM 15. Principal Accounting Fees and Services.
All work to be performed by our independent accountants is put forth in
engagement letters which also includes estimates of the cost of performing the
work. All engagement letters are presented to the Audit Committee for review and
approval.
During 2002, our independent Accountants, BDO Seidman, LLP have billed us
$102,707 for services consisting of the annual audit and reviews of the
Company's quarterly financial statements and $4,435 for the review of the
Company's proxy materials, other SEC filings and other services.
We did not retain BDO Seidman, LLP for any professional services relating
to financial information system design or implementation.
PART IV
ITEM 16. 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 of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) Exhibits and Reports on Form 8K
61
During the fourth quarter 2002, we filed the following Current Reports on
Form 8-K: Report filed on March 12, 2003, concerning events that occurred on
March 11, 2003.
(c) As of the date of the filing of this Annual Report on Form 10-K 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. Except as
disclosed in the footnotes, 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:
Exhibit
No. Description
2.1 First Asset Purchase Agreement dated March 11, 2003,
by and between the Company and ISI.*
2.2 Second Asset Purchase Agreement dated March 11, 2003,
by and between the Company and ISI.*
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
4.5 Rights Agreement, dated as of November 19, 2002, between the Company
and Continental Stock Transfer & Trust Company. The Right Agreement
includes the Form of Certificate of Designation, Preferences and Rights
of the Series A Junior Participating Preferred Stock, the Form of
Rights Certificate and the Summary of the Right to Purchase Preferred
Stock.**
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
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
62
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)
10.17 Amended employment agreement by and between the Company and Robert
E. Peterson dated April 1, 2001
10.18 Forbearance Agreement dated March 11, 2003, by and between ISI, the
American National Red Cross and the Company.*
10.19 Forbearance Agreement dated March 11, 2003, by and between ISI, GP
Strategies Corporation and the Company.*
10.20 Securities Purchase Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.*
10.21 Form of 6% Convertible Debenture of the Company.*
10.22 Form of Warrant for Common Stock of the Company.*
10.23 Registration Rights Agreement, dated March 12, 2003, by and
among the Company and the Buyers named therein.*
10.24 Agreement with Esteve.
10.25 Agreement with Gentiva Health Services.
21 Subsidiaries of the Registrant
23.01 BDO Seidman, LLP consent
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 0-27072) dated March 12, 2003 and is
hereby incorporated by reference.
** Filed with the Securities and Exchange Commission on November 20, 2002
as an exhibit to the Company's Registration Statement on Form 8-A (No. 0-27072)
dated March 12, 2003 and is hereby incorporated by reference.
*** Filed herewith.
63
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
April 11, 2003
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 Chairman of the Board, Chief Executive
- ----------------------
William A. Carter, M.D. Officer and Director April 11 2003
/s/Richard Piani Director April 11 2003
- ----------------------
Richard Piani
/S/Robert E. Peterson Chief Financial Officer April 11 2003
- ----------------------
Robert E. Peterson
/S/Ransom Etheridge Secretary And Director April 11 2003
- ----------------------
Ransom Etheridge
/s/William Mitchell Director April 14 2003
- ----------------------
William Mitchell,M.D.,Ph.D.
/s/Iraj Kiani Director April 14 2003
- ----------------------
Iraj Kiani
64
CERTIFICATIONS
Certifications pursuant to Securities and Exchange Act of 1934 Rule 13a-14
as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002:
I, William A. Carter, M.D., Chief Executive Officer of Hemispherx
Biopharma, Inc. (the "Company") certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report.
/S/William A. Carter
-----------------------
William A. Carter, M.D.
Chief Executive Officer
April 11, 2003
I, Robert Peterson, Chief Financial Officer of Hemispherx Biopharma, Inc.
(the "Company") certify that:
(1) I have reviewed this annual report on Form 10-K of the Company;
(2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
(3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this annual report.
S/ Robert E. Peterson
----------------------
Robert Peterson
Chief Financial Officer
April 11, 2003
1
HEMISPHERx BIOPHARMA, INC AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants. . . . . F-2
Consolidated Balance Sheets at December 31, 2001 and 2002 . . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2002. . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive (Loss) for each of the years
in the three-year period ended December 31, 2002 . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2002 . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . .. . . . F-8
F-1
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, 2001 and 2002 the related
consolidated statements of operations, changes in stockholders' equity and
comprehensive (loss) and cash flows for each of the three years in the period
ended December 31, 2002. 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 misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hemispherx
Biopharma, Inc. and subsidiaries as of December 31, 2001 and 2002 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
March 13, 2003, except for note 12, which is as of March 31, 2003
F-2
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2002
(in thousands)
December 31,
------------------------
2001 2002
------- -------
ASSETS
Current assets:
Cash and cash equivalents. . . . . $3,107 $ 2,256
Short term investments (Note 3). . 5,310 555
Other receivables (Note 12) 8 1,507
Prepaid expenses and
other current assets . . . . . . 381 71
------- ---------
Total current assets . . . . . . 8,806 4,389
Property and equipment, net . . . . 246 155
Patent and trademark rights, net. . 1,025 995
Investments in unconsolidated affiliates 1,878 408
Other assets . . . . . . . . . 80 93
------- ---------
Total assets. . . . . . . . . . $12,035 $ 6,040
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . $ 979 $ 786
Accrued expenses (Note 4). . . . . 293 678
------- ---------
Total current liabilities . . . 1,272 1,464
------- ---------
Commitments and contingencies
(Notes 7,9, 10 and 12)
Minority Interest in subsidiary (Note)(5c) - 946
Stockholders' equity
(Note 5):
Common stock. . . . . . . . . . . 33 33
Additional paid-in capital. . . . 106,832 107,155
Accumulated other comprehensive
income (Note 2i). . . . . . . . . 17 35
Accumulated deficit . . . . . . . . (91,649) (99,073)
Treasury stock . . . . . . . . . . (4,470) (4,520)
-------- ----------
Total stockholders' equity. . . 10,763 3,630
-------- ----------
Total liabilities and
stockholders' equity . . . . . $12,035 $ 6,040
======== ==========
See accompanying notes to consolidated financial statements.
F-3
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations For each of the years
in the three-year period ended December 31, 2002
(in thousands, except share and per share data)
December 31,
---------------------------------
2000 2001 2002
------- ------- ------
Revenue: . . . . . . . . . . $788 $390 $341
License Fee income (Note9) - - 563
------- ------- ------
788 390 904
Costs and expenses:
Research and development . . . . 6,136 5,780 4,946
General and
administrative . . . . . . . 3,695 3,412 2,015
------- ------- -------
Total costs and expenses . . . 9,831 9,192 6,961
Equity loss and write offs of
investments in unconsolidated
affiliates (Note 2c) (81) (565) (1,470)
Interest and other income . . . . 572 284 103
------- ------- -------
Net loss. . . . . . . . . . . $ (8,552) $ (9,083) $(7,424)
======== ======== ========
Basic and diluted loss per share. . $(.29) $(.29) $(.23)
======= ======== =======
Weighted average shares
outstanding. . . . . . . . . . 29,251,846 31,433,208 32,085,776
========== ========== ===========
See accompanying notes to consolidated financial statements.
F-4
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive (loss)-beginning
For each of the years in the three-year period ended December 31, 2002
(in thousands except share data )
Common Common Additional
Stock Stock paid in Deferred Accumulated other
Shares .001 Par capital Compensarion Comprehensive
Value Income (loss)
---------- ------------- ------------ ------------- --------------
Balance at December 31, .. 27,974,507 $ 28 $ 87,972 $ (310) $ --
Common stock issued ...... 2,393,381 9,860 -- --
2
Purchase of equity ....... -- -- 67 -- --
investment
Treasury stock purchased . -- -- -- -- --
Treasury stock issued in -- -- 8 -- --
settlement of debt
Stock compensation and ... -- -- 87 310 --
service expense, net
Registration costs ....... -- -- (10) -- --
Net comprehensive (loss) -- -- -- -- 34
---------- ------------- ------------ ------------- --------------
Balance at December 31, .. 30,367,888 30 97,984 -- 34
Common stock issued ...... 2,155,900 3 8,072 -- --
Purchase of equity
investment ............... 12,000 -- 72 -- --
Treasury stock purchased . -- -- -- -- --
Note issued for purchase
of stock ................. -- -- (60) -- --
Stock issued in
settlement of debt ....... 21,198 -- 91 -- --
Stock and stock warrant .. 19,000 -- 673 -- --
compensation expense
Net comprehensive (loss) . -- -- -- -- (17)
---------- ------------- ------------ ------------- --------------
Balance at December 31,2001 32,575,986 33 106,832 -- 17
Common stock issued ..... -- -- 37 -- --
Treasury stock Purchased . -- -- -- -- --
Stock issued in
settlement of debt ....... 48,392 -- 154 -- --
Stock and stock warrant .. -- --
compensation expense ..... -- -- 132
Net comprehensive (loss) . -- 18
----------- ------------- ------------ ------------- --------------
Balance at December 31,2002 32,650,178 $ 33 $ 107,155 $ -- $ 35
=========== ============= ============ ============= =============
F-5a
See accompanying notes to consolidated financial statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive (loss)-continued
For each of the years in the three-year period ended December 31, 2002
(in thousands except share data )
Treasury Total
Accumulated stock Treasury stockholders'
deficit shares stock equity
----------- -------- --------- -------------
Balance at December 31, .. $(74,014) 167,935 $ (1,019) $12,657
Common stock issued ...... -- (20,000) 123 9,985
Purchase of equity ....... -- (100,000) 551 618
investment
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...... -- -- -- 397
Registration costs ....... -- -- -- (10)
Net comprehensive (loss) (8,552) -- -- (8,518)
---------- -------- --------- ------------
Balance at December 31,2000 (82,566) 395,646 (3,910) 11,572
Common stock issued ...... -- -- -- 8,075
Purchase of equity
investment ............... -- -- -- 72
Treasury stock purchased . -- 120,060 (560) (560)
Note issued for purchase
of stock ................. -- -- -- (60)
Stock issued in
settlement of debt ....... -- -- -- 91
Stock and stock warrant .. -- -- -- 673
Net comprehensive (loss) . (9,083) -- -- (9,100)
---------- -------- --------- ------------
Balance at
December 31,2001 (91,649) 515,706 (4,470) 10,763
Common stock issued ..... -- -- -- 37
Treasury stock Purchased . -- 27,500 (50) (50)
Stock issued in
settlement of debt ....... -- -- -- 154
Stock and stock warrant .. -- -- -- 132
Net comprehensive (loss) . (7,424) -- -- (7,424)
---------- -------- --------- ------------
Balance at
December 31,2002 $(99,073) 543,206 $(4,520) $3,630
========== ========= ========= ============
F-5b
See accompanying notes to consolidated financial statements
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended December 31, 2002
(in thousands)
December 31,
-----------------------------
2000 2001 2002
------ ------ ------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . $ (8,552) $(9,083) $(7,424)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . 131 127 91
Amortization of patent and
trademark rights . . . . . . . . 356 397 206
Equity loss and write offs of investments
in unconsolidated affiliates. . 81 565 1,470
Stock compensation and
service expense . . . . . . . . . 397 673 132
Changes in assets and liabilities:
Other receivables. . . . . . . . 15 52 (1,293)
Prepaid expenses
and other current assets. . . (463) 202 104
Accounts payable . . . . . . . . . 210 (271) (67)
Accrued expenses . . . . . . . . . (266) 139 385
Security deposits. . . . . . . . . 17 (82) (13)
-------- --------- --------
Net cash used in
operating activities. . . . . . (8,074) (7,281) (6,409)
--------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment . (171) - -
Additions to patent and trademark rights . (197) (218) (176)
Maturity of short term investments . 2,157 4,613 5,293
Purchase of short term investments . (4,589) (5,293) (520)
Investments in unconsolidated affiliates (411) (22) -
Other investments. . . . . . . . . . (34) - -
------- --------- --------
Net (used in) cash provided by investing
activities . . (3,245) (920) 4,597
-------- --------- --------
F-6
(CONTINUED)
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
December 31,
-----------------------------
2000 2001 2002
------ ------ ------
Cash flows from financing activities:
Proceeds from stock subscriptions and issuance
of common stock, net. . . . 2,250 72 $ 65
Proceeds from issuance of preferred stock of - - 946
subsidiary
Proceeds from exercise of
stock warrants . . . . . 9,985 8,075 -
Purchase of treasury stock . . . . . (3,591) (560) (50)
---------- --------- -------
Net cash provided by
financing activities. . . . . . 8,644 7,587 961
-------- ---------- -------
Net decrease in cash and
cash equivalents. . . . . . . . (2,675) (614) (851)
Cash and cash equivalents at
beginning of year. . . . 6,396 3,721 3,107
---------- -------- -------
Cash and cash equivalents
at end of year . . $ 3,721 $ 3,107 $2,256
========== ======== =======
Supplemental disclosures of cash flow information:
Issuance of treasury stock for
Investment . . . . . . . $ 618 $ - $ -
========== ======== =======
Issuance of common stock
for accrued expenses. . . . . . $ 34 $ 91 $ 154
========== ======== =======
Issuance of common stock
for note receivable . . . . . . $ - $ 60 $ -
========== ======== =======
See accompanying notes to consolidated financial statements.
F-7
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Hemispherx BioPharma, Inc. and subsidiaries (the Company) is a
pharmaceutical company using nucleic acid technologies to develop therapeutic
products for the treatment of viral diseases and certain cancers. The Company's
drug technology uses specially configured ribonucleic acid (RNA). The Company's
double-stranded RNA drug product, trademarked Ampligen(R) , is in human clinical
development for various therapeutic indications. The potential efficacy and
safety of Ampligen(R) 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 with
Ampligen(R) used in treating 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 1998 and Hemispherx Biopharma Europe S.A., which was
incorporated during 2002. 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 2c).
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI") ISI's
inventory of ALFERON N Injection(R), a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacturing, use, marketing and sale of this product. As partial
consideration, we issued 487,028 shares of our common stock to ISI. Pursuant to
our agreements with ISI, we are in the process of registering the foregoing
shares for public sale. Except for 62,500 of the shares issued to ISI, we have
guaranteed the market value of the shares retained by ISI through March 11, 2005
to be $1.59 per share.
On March 11, 2003, we also entered into an agreement to purchase from ISI
all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. This purchase is
contingent on us receiving appropriate Governmental approval for the real estate
transaction. For these assets, we have agreed to issue to ISI an additional
487,028 shares and to issue 314,465 shares and 267,296 shares, respectively to
two creditors of ISI. The Company will be required to satisfy other liabilities
of ISI which aggregate approximately $521,000 and which are secured by a lien on
ISI's real estate. We have guaranteed the market value of all but 62,500 of
these shares on terms substantially similar to those for the initial acquisition
of the ISI assets.
We will account for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration ("FDA") to recover the cost of Ampligen(R) from patients enrolled
in the Company's AMP-511 ME/CFS open-label treatment protocol. The cost of
Ampligen(R) to the patient is $2,100 for the first eight weeks of treatment and
$2,400 for each additional eight-week period thereafter.
In 1998, the Company initiated the recruitment of clinical investigators to
enroll ME/CFS patients in the confirmatory Phase III double blind
placebo-controlled clinical study of Ampligen(R). This clinical trial was
approved by the FDA in 1998 and is designed to test the safety and efficiency of
Ampligen(R) in treating ME/CFS.
F-8
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 150 patients have participated 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. A similar program underway in
Austria is undergoing expansion.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market certificates and overnight
repurchase agreements collateralized by money market securities with original
maturities of less than three months, with both a cost and fair value of
$2,552,000 and $1,404,000 at December 31, 2001 and 2002, respectively.
(b) 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 of $5,310,000 and $555,000 at December 31, 2001
and 2002 respectively. The unrealized gains and losses are recorded as a
component of shareholders' equity.
(c) Investments in unconsolidated affiliates
Investments in Companies in which the Company owns 20% or more and not more
than 50% are accounted for using the equity method of accounting.
Investments in Companies in which the Company owns less than 20% of and
does not exercise a significant influence are accounted for using the cost
method of accounting.
In 1998, the Company invested $1,074,000 for a 3.3% equity interest in
R.E.D. Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company
for the development of diagnostic markers for Chronic Fatigue Syndrome and other
chronic immune diseases. We have a research collaboration agreement with R.E.D.
to assist in this development. R.E.D. is headquartered in Belgium. The
investment was recorded at cost. During the three months ended June 30, 2002 and
December 31, 2002 we recorded non-cash charges of $678,000 and $396,000
respectively, to operations with respect to our investment in R.E.D. These
charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our investment had been
permanently impaired.
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000 and entered into a
research and development arrangement. CIMM'S research is focused on developing
therapies for use in treating patients affected by Hepatitis C ("HCV"). We use
the equity method of accounting with respect to this investment. During the
fourth quarter of 2001 we recorded a non-cash charge of $485,000 with respect to
our investment in CIMM. This was a result of our determination that CIMM's
operations have not yet evolved to the point where the full carrying value of
our investment could be supported based on that company's financial position and
operating results. The amount represented the unamortized balance of goodwill
F-9
included as part of our investment. During 2002, we wrote down to zero our
remaining investment based on that Company's continuing operating losses. These
charges are reflected in the Consolidated Statements of Operations under the
caption "Equity loss in unconsolidated affiliates". We still believe CIMM will
succeed in their efforts to advance therapeutic treatment of HCV. We believe
that CIMM's Hepatitis C diagnostic technology has great promise and fills a
long-standing global void in the collective abilities to diagnose and treat
Hepatitis C infection at an early stage of the disorder.
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 10. 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, 2001
and 2002. 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 was applied towards the purchase of materials during 2001.
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. During 2001 additional common stock plus cash were given
to Chronix for a total investment at $700,000. The percentage ownership in
Chronix is approximately 5.4% and is accounted for under the cost method of
accounting. During the quarter ended December 31, 2002, we recorded a noncash
charge of $292,000 with respect to our investment in Chronix. This impairment
reduces our carrying value to reflect a permanent decline in Chronix's market
value based on their current proposed investment offerings.
Pursuant to a strategic alliance agreement, the Company provided Chronix
with $250,000 during 2000 to conduct research in an effort to develop
intellectual property on potential new products for diagnosing and treating
various chronic illnesses 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.
(d) Property and Equipment (000 omitted)
December 31,
2001 2002
---- ----
Furniture, fixtures, and equipment $ 1,178 $ 760
Leasehold improvements 96 85
------- ----------
Total property and equipment 1,274 845
Less accumulated depreciation 1,028 690
------- ----------
Property and equipment, net $ 246 $ 155
======= ==========
Property and equipment consists of furniture, fixtures, office equipment,
and leasehold improvements and is 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.
F-10
Depreciation and amortization expense was $131,000, $127,000 and $91,000 for
2000, 2001 and 2002, respectively. In 2002, fully depreciated equipment in the
amount of $418,000 and fully depreciated leasehold improvements in Europe in the
amount of $12,000 were written-off due to the closing of European offices.
(e) Patent and Trademark Rights
Effective October 1, 2001, the Company adopted a 17 year estimated useful
life for amortization of its patent and trademark rights in order to more
accurately reflect their useful life. Prior to October 1, 2001, the Company was
using a 10 year estimated useful life. The adoption of the 17 year life had been
accounted for as a change in accounting estimate.
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the life of the assets. 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. Management's review addresses whether each patent continues to
fit into the Company's strategic business plans. During the years ended December
31, 2000, 2001 and 2002, the Company decided not to pursue the technology in
certain countries for strategic reasons and recorded charges of $32,000, $38,000
and $5,000, respectively. Amortization expense was $324,000, $359,000 and
$201,000 in 2000, 2001 and 2002, respectively. The accumulated amortization as
of December 31, 2001 and 2002 is $2,096,000 and $1,996,000, respectively.
(f) Revenue
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues for non-refundable license fees are recognized under the
performance method. This method recognizes revenue to the extent of performance
to date under a licensing agreement. In computing earned revenue, it considers
only the amount of non-refundable cash actually received to date. This method
considers future payments to be contingent and thus ignores the possibility of
future milestone payments when computing the amount of revenue earned in a
current period.
During the periods ending December 31, 2000, 2001 and 2002 the Company did
not receive any grant monies from local, state and or Federal Agencies.
The terms of the agreement granting the licensee marketing rights for
Ampligen(R) for the treatment of myalgic/chronic fatigue syndrome ("ME/CFS") in
Spain, Portugal and Andorra require the Company to provide the licensee with
technical, scientific and commercial information. The Company fulfilled the
requirements during the first quarter of 2002. The agreement terms required no
additional performance on the part of the Company.
The agreement also requires the licensee to pay of 1,000,000 Euros after
FDA approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000
after issuance in Spain of final marketing approval authorization for
Ampligen(R) for the treatment of ME/CFS. See Note 6 for more detailed
information.
F-11
(g) Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Equivalent
common shares, consisting of stock options and warrants, are excluded from a
calculation of diluted net loss per share since their effect is antidilutive.
(h) Accounting for Income taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and Liabilities and are measured using the enacted tax rates and laws in effect
when the differences are expected to reverse. The measurement of deferred income
tax assets is reduced, if necessary, by a valuation allowance for any tax
benefits which are not expected to be realized. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
(i) Comprehensive (loss)
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. Statement of Financial Accounting Standards (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
stockholders' equity and comprehensive (loss).
(j) 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.
(k) 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.
(l) Recent Accounting Standard and Pronouncements:
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46,, "Consolidation of Variable Interest Entities"
("Interpretation No. 46"), that clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, "to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Interpretation No. 46 is applicable immediately for variable
interest entities created after January 31, 2003. For variable interest entities
created to January 31, 2003, the provision of Interpretation No. 46 are
F-12
applicable no later than July 1, 2003. The Company does not expect this
Interpretation to have an effect on the consolidated financial statements.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"), which provides the accounting requirements
for retirement obligation associated with tangible long-lived assets. SFAS 143
requires entities to record the fair value of the liability for an asset
retirement obligation in the period in which it is incurred and is effective for
the Company's 2003 fiscal year. The adoption of SFAS 143 is not expected to have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, "
and the accounting and reporting provision of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
transactions. "This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements, "to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operation to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have impact on the Company's financial position, cash
flows or results of operation for the year ended December 31, 2002.
In June 2002, the FASB issued Statement No. 146, "Accounting for Cost
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee termination Benefits and Other Costs to Exit
and Activity (including Certain Costs Incurred in a Restructuring)" which
previously governed the accounting treatment for restructuring activities. SFAS
146 applies to costs associated with an exit activity that does not involve an
entity newly acquired in a business combination or with disposal activity
covered by SFAS 144. Those costs include, but are not limited to, the following:
(1) termination benefits provide to current employees that are involuntarily
terminated under the terms of a benefit arrangement that, in substance, is not
an ongoing benefit arrangement or individual deferred-compensation contract,(2)
costs to terminate a contract that is not a capital lease, and (3) costs to
consolidated facilities or relocated employees. SFAS 146 does not apply to costs
associated with the retirement of long-lived assets covered by SFAS 143. SFAS
146 will be applied prospectively and is effective for exit or disposal
activities after December 31, 2002.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
F-13
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based compensation using the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees, "but has adopted the enhance disclosure requirements of SFAS 148 (See
Note 10).
(m) Research and Development Costs
Research and development related to both future and present products are
charged to operation as incurred.
(n) Stock Compensation
The Company applies the intrinsic value method in accordance Accounting
Principles Bulletin (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock-based compensation of its employees and,
accordingly, no compensation cost has been recognized for stock purchase
warrants and options 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 FASB 123 the Company's net loss
would have been increased to the pro forma amounts indicated below:
(In Thousands except for per share data)
For the years ended December 31, 2000 2001 2002
---- ---- ----
Net loss-as reported $(8,552) $(9,083) $(7,424)
Add: Stock based compensation
included in net loss as reported,
net of related tax effects - - -
Deduct: Stock based compensation
determined under fair value based
method for all awards, net of
related tax effects (237) (632) (1,085)
Net loss - pro forma $(8,789) $(9,715) $(8,509)
Basic and diluted loss
per share - as reported $(.29) $(.29) $(.23)
Basic and diluted loss
per share - pro forma $(.30) $(.31) $(.27)
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 5.18%, volatility of
135.4%-294.31%, and expected lives 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 5 (ii). There were no warrants granted to employees during
2000. During 2001 the Company granted 406,650 warrants to employees. The Company
granted to employees 8,000 options in 2000 and 94,000 options in 2001. See
F-14
footnote 5(i).The fair value of stock options and warrants granted during 2001
was determined using Black Scholes Option Pricing Model with a rate of 4.23%,
volatility of 69.7% to 74.9% and expected life of three years. In 2002 1,622,000
warrants were issued to employees in recognition of services performed and
services to be performed. The fair value of the warrants granted during 2002 was
determined using Black Scholes Option Pricing model with a rate of 5.23%,
volatility of 63.17%, and expected life of 2.5 and 4 years. The weighted average
fair value of those options and warrants granted during the years ended December
31, 2002, 2001 and 2000, were estimated as $0.62, $1.57 and $1.09,respectively.
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.
(3) Short-term investments:
Securities classified as available for sale are summarized below:
(000's omitted)
December 31, 2001
---------------
Unrealized
---------------
Adjusted Carrying
cost Gains (Losses) Value
--------- ----- ------- --------
General Motors Commercial Paper $ 3,977 $ 13 $ - $ 3,990
Ford Motors commercial paper 795 1 - 796
Calamos Mutual Market 521 3 - 524
--------- ----- ------- --------
Total $ 5,293 $ 17 $ - $ 5,310
========= ===== ======= ========
December 31, 2002
---------------
Unrealized
---------------
Adjusted Carrying
cost Gains (Losses) Value
--------- ----- ------- --------
Calamos Mutual Market $ 521 $ 34 $ - $ 555
--------- ----- ------- --------
Total $ 521 $ 34 $ - $ 555
========= ===== ======= ========
F-15
(4) Accrued Expenses
Accrued expenses at December 31, 2001 and 2002 consists of the following:
(000's omitted)
December 31,
-------------
2001 2002
----- ------
Salaries . . . . . . . . . . . . . . . . . $ 85 $ 6
Other Accrued expenses . . . . . . . . . . 208 222
Fees Associated with Litigation Settlement. _ 450
------ -------
$ 293 $ 678
====== =======
(5) 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, 2001 and 2002.
(b) Common Stock and Exercise of Stock Warrants
The Company is authorized to issue 50,000,000 shares of $.001 par value
Common Stock. As of December 31, 2001 and 2002, 32,060,280 and 32,106,972
shares, net of shares held in the treasury, were outstanding, respectively.
The exercise of stock warrants generated $9,985,000 and $8,075,000 in net
proceeds to the Company in 2000 and 2001, respectively. There were no exercises
during 2002.
(c) New Equity Financing
On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution agreement with
Laboratorios del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in Spain
Portugal and Andorra for the treatment of Myalgic Encephalitis/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments,
Esteve paid an initial and non refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002 as the first part of a series of
milestone based payments.
During March 2002, Hemispherx Biopharma Europe , S.A. (Hemispherx S.A.) was
authorized to issue up to 22,000,000 Euros of seven percent (7%) convertible
preferred securities. Such securities will be guaranteed by the parent company
and will be converted into a specified number of shares of Hemispherx S.A.
pursuant to the securities agreement. Conversion is to occur on the earlier of
an initial public offering of Hemispherx S.A. on a European stock exchange or
September 30, 2003.
Esteve purchased 1,000,000 Euros of Hemispherx Biopharma Europe S.A.'s
F-16
convertible preferred equity certificates on May 23, 2002. During 2002, the
terms and conditions of these securities were changed so that these preferred
equity certificates will be converted into the common stock of Hemispherx
Biopharma, Inc. (HEB) in the event that a European IPO is not completed by
September 30, 2003. The conversion rate is to be 300 shares of Hemispherx
Biopharma, Inc.'s common shares for each 1,000 Euro convertible preferred
certificate. As a result the Company recorded approximately $946,000 as minority
interest in subsidiary on its balance sheet.
On December 18, 2002, we proposed that Esteve convert their convertible
preferred equity certificates into Hemispherx common stock pursuant to the terms
of the agreement and all unpaid dividends at the market price on that conversion
date. On January 9, 2003, Esteve accepted our proposal. We are in the process of
registering these shares for public sale.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan
SA, an affiliate of Esteve S.A., in exchange for 1,000,000 Euros of convertible
preferred equity certificates and any unpaid dividends. As a result of the
exchange, the minority interest in subsidiary was transfered to stockholders'
equity on such date.
The contingent conversion price was more than the then market value of the
parent company's or subsidiaries' common stock at each of that respective
measurement dates. As a result and in accordance with Emerging Issues Task Force
(EITF) No. 00-27 "Application of Issue No. 98-5 (Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios) to Certain Convertible Instruments", the Company did not
ascribe any value to any contingent conversion feature.
(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-17
Information regarding the options approved by the Board of Directors under
the 1990 Stock Option Plan is summarized below:
___________2000___________ ___________2001___________ ________2002________
Weighted Weighted Weighted
Average Option Average Average
Option Exercise Price Exercise Option Exercise
Shares Price Price Shares Price Shares Price Price
------- ------- ------- ------ ------ -------- ------- ------ -------
Outstanding,
beginning of
year 294,000 $1.06-6.00 $3.60 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58
Granted 8,000 $3.00-6.81 $ 4.88 94,000 $4.03 $4.03 - - -
Canceled (76,677) $3.50-4.34 $ 4.09 (6,304) $4.34-6.81 $5.91 (11,598) $3.00-4.34 $3.71
Exercised (6,756) $1.06-3.50 $ 2.75 - - - - -
------- ------ -------
Outstanding, end of
year 218,567 $1.06-6.81 $ 3.45 306,263 $1.06-4.34 $3.58 294,665 $1.06-434 $3.57
======= ====== =======
Exercisable 198,717 $1.06-6.81 $ 3.48 234,263 $1.06-4.34 $4.67 252,746 $1.06-4.34 $3.50
======= ====== =======
Weighted average
remaining
contractual life
(years) 3.83 years 3.57 years 3.68 years
======= ====== =======
Exercised in
current and prior
years (37,791) (37,791) (37,791)
Available for
future grants 204,440 116,744 170,261
======= ======= =======
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.
The 1993 Purchase Plan is administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees are eligible
to participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price for such shares is
equal to the lower of 85% of the fair market value of such shares on the date of
grant or 85% of its fair market value of such shares on the date such right is
exercised. There have been no offerings under the 1993 Purchase Plan to date and
no shares of Common Stock have been issued thereunder.
F-18
(ii) Stock warrants
Number of warrants exercisable into shares of common stock
___________2000___________ ___________2001__________ _______2002_______
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
-------- -------- --------- ---------- --------- --------- ----------- -------- --------
Outstanding, .
beginning of
year 14,058,010 $1.75-10.85 $3.90 11,624,168 $1.75-12 00 $4.05 6,927,110 $1.75-16.00 $4.77
Granted 293,800 $6.00-12.00 6.40 856,650 $5.00-16,00 $9.89 1,802,000 $2.00-600 $2.07
Canceled (341,017) $2.00-10.85 6.01 (3,396,508) $2.50-4.00 $3.89 (750,000) $3.50-6.00 $3.72
Exercised (2,386,625) $1.75-4.00 4.19 (2,157,200) $1.75-4.00 $3.75 (11,300) $1.75-7.50 $3.30
--------- ---------- --------
Outstanding, end of .
year 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16 00 $4.77 7,967,810 $1.75-16.00 $3.18
========= ========== =========
Exercisable 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77 6,345,810 $1.75-16.00 $3.48
========= ========== =========
Weighted average
remaining
contractual life
(years) 2.66 years 4.05 years 4.03 years
========== ========== ==========
Years exercisable 2001-2006 2002-2006 2003-2008
========== ========== ==========
Certain of the stock warrants outstanding are subject to adjustments for stock
splits and dividends.
Warrants issued to stockholders
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. In
2001, 73,000 were converted to common stock. At December 31, 2001 there were
232,160 warrants remaining. In 2002, 10,000 were converted to common stock. At
December 31, 2002 there were 222,160 warrants remaining. These warrants have an
exercise price of $3.50 per share and expire in October 2004.
Other stock warrants
In addition, the Company has other issued warrants outstanding - totaling
7,745,650 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. In 1999 235,000 warrants were exercised and
5,000 warrants were exercised in 2000. At December 31, 2000, there were
1,840,000 Rule 701 warrants remaining. In 2001 20,000 of these warrants expired,
leaving a balance of 1,820,000 in warrants outstanding at December 31, 2001.
During 2002, 420,000 warrants expired and the Company extended the expiration
F-19
date of the remaining balance of 1,400,000 for a period of five years to now
expire on September 30, 2007. These stock warrants have an exercise price of
$3.50. In accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, no compensation expense was
recognized as the exercise price at the extension date exceeded the fair value
of the underlying common stock.
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 1999, 290,000, in 2000, 216,500, in 2001,
200,000 and in 2002, 1,300 of these warrants were exercised, leaving a balance
of these warrants of 1,450,200. These warrants expire June 30, 2005.
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
1999, and 34,333 were exercised in 2000. The remaining 28,400 warrants expired
December 31, 2001.
In the years 2000, 2001 and 2002 the Company issued 293,800, 450,000 and
25,000 warrants, respectively, to investment banking firms for services
performed on behalf of the Company. Accordingly, the company recorded stock
compensation expense of $397,000, $673,000 and $133,000 for the years 2000, 2001
and 2002 respectively. These warrants have various vesting dates and exercise
prices ranging from $4.00 to $16.00 per share. In 2000, 75,000 of these warrants
were exercised. 1,193,800 warrants were outstanding at December 31, 2002. These
warrants are exercisable in five years from the date of issuance.
In 2000 2001 and 2002 the Company had non-public warrants outstanding of
2,633,000 2,254,650 and 3,701,650 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. During 2002,
the Company granted 1,777,000 warrants to employees for services performed.
These warrants have a weighted average exercise price of $2.07 per share, and
have been included in the pro-forma loss calculation in note 2(n). During 2001,
370,000 of the non public warrants were exercised and 415,000 expired without
being exercised. 2,254,650 of the non-public warrants were outstanding at
December 31, 2001. During 2002, none of these warrants were exercised and
750,000 expired. 3,701,650 of the non-public warrants were outstanding at
December 31, 2002. During 2002 the Company also extended the expiration date of
322,000 of these warrants for a period of five years to now expire in the years
ending 2007 and 2008. These stock warrants have exercise prices ranging from
$3.50 to $4.00 In accordance FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, no compensation expense was
recognized as the exercise price at the extension date exceeded the fair value
of the underlying common stock.
(e) 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. 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
F-20
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."
(f) Rights offering
On November 19, 2002, the Board of Directors of Hemispherx Biopharma, Inc.
(the "Company") declared a dividend distribution of one Right for each
outstanding share of Common Stock to stockholders of record at the close of
business on November 29, 2002 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company a unit consisting of one
one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred
Stock, par value $.01 per share (the "Series A Preferred Stock") at a Purchase
Price of $30.00 per Unit, subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and Continental Stock Transfer & Trust Company, as Rights Agent.
Initially, the Rights are attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. Subject to certain exceptions specified in the Rights Agreement,
the Rights will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more (or 20% or more for William A.
Carter, M.D.) of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or (ii) 10
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after the Record Date will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate. Pursuant to the Rights Agreement, the Company reserves the right to
require prior to the occurrence of a Triggering Event (as defined below) that,
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Preferred Stock will be issued.
(6) Segment and Related Information
The Company operates in one segment, which is the performance of research
and development activities related to Ampligen(R) and other drugs under
development.
F-21
The following table present revenues by country based on the location of the use
of the product services.
(000's omitted)
------------------------------------
2000 2001 2002
----- ------ -----
United States $506 $274 $237
Belgium 272 107 74
Other 10 9 30
----- ------ ------
$788 $ 390 $341
===== ====== ======
In addition, the Company recorded License Fee Income in the amount of
$563,000 from a Company located in Europe. The Company employs an insignificant
amount of net property and equipment in its foreign operations.
(7) Research, Consulting and Supply Agreements
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 subjects 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' products. Biovail agrees to work
with the Company in preparing and filing of a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested $2.25 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 years
or on an as-needed monthly basis. During the year ending December 31, 2000, 2001
and 2002 the Company incurred approximately $924,000, $595,000 and $395,000
respectively, of consulting service fees under these agreements. These costs are
charged to research and development expense as incurred.
(8) 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'
F-22
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 2000,
2001 and 2002 the Company provided matching contributions to each employee for
up to 6% of annual pay aggregating $48,000, $48,000 and $38,000 respectively.
(9) 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(R), 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(R) 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 judgment 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 judgment 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.
The Company has contractual agreements with two of its officers. The
aggregate annual base compensation under these contractual agreements for 2000,
2001 and 2002 was $686,000, $603,000 and $620,000 respectively. 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
2000, 2001 and 2002 no performance bonuses were granted. In 2001, Certain
officers were granted warrants and options to purchase 426,650 shares of Common
Stock at $4.01 per share. In 2002, certain officers were granted warrants and
option to purchase 1,220,000 shares of common stock at $2.00 - $4.03 per share.
One of the employment agreements provides for bonuses based on gross proceeds
received by the Company from any joint venture or corporate partnering
agreement.
In October 1994, the Company entered into a licensing agreement with
Bioclones (Propriety) Limited (SAB/Bioclones) with respect to co-development of
various RNA drugs, including Ampligen(R) , 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
F-23
produces raw material components of Ampligen(R) 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(R), excluding SAB/Bioclones
related sales. In addition, SAB/Bioclones will have the right of first refusal
for oral vaccines in the licensed territory. In 2000, the Company paid to
Ribotech a total of $500,000 for the current and future purchases and delivery
of polymers. Of the $500,000 advanced in 2000, a balance of $390,000 was
included in other assets in 2000 and was used for purchases of polymers in 2001.
In 2002, $262,000 was paid to Ribotech for delivery at 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.
On March 20, 2002, our European subsidiary Hemispherx Biopharma Europe,
S.A. ("Hemispherx S.A.") entered into a sales and Distribution agreement with
Laboratories Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments.,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration approval of Ampligen(R)
for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval
of the final marketing authorization for using Ampligen(R) for the treatment of
ME/CFS.
In connection with the two agreements entered into with ISI (See Note 1),
the Company is obligated to pay ISI a 6% royalty on the net sales of the Alferon
N Injection product.
(10) 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
----------- ---------
2003. . . . . . . . . . . . . . . . . . . . $ 279
2004. . . . . . . . . . . . . . . . . . . . 286
2005. . . . . . . . . . . . . . . . . . . . 240
2006. . . . . . . . . . . . . . . . . . . . 193
2007. . . . . . . . . . . . . . . . . . . . 65
----------
Total minimum lease payments. . . . . . . . $ 1,063
==========
F-24
Rent expense charged to operations for the years ended December 31, 2000,
2001 and 2002 amounted to approximately $347,000, $294,000 and $307,000
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.
(11) Income Taxes
As of December 31, 2002, the Company has approximately $66,000,000 of
federal net operating loss carryforwards (expiring in the years 2004 through
2022) available to offset future federal taxable income. The Company also has
approximately $15,000,000 of state net operating loss carryforwards (expiring in
the years 2003 through 2007) 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.
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 realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2001 and 2002.
The components of the net deferred tax asset of December 31, 2001 and 2002
consists of the following:
(000,s omitted)
Deferred tax assets: 2001 2002
------ ------
Net operating losses $20,790 $22,440
Accrued Expenses and Other 21 (16)
Capitalized Research and
development costs 4,634 3,763
------ ------
25,445 26,187
Less: Valuation Allowance 25,445 26,187
------ ------
Balance $ -0- $ -0-
====== ======
F-25
(12) Contingencies
On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The action included claims of
defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of the Asensio's false and
defamatory statements. The complaint further alleged that Asensio defamed and
disparaged us in furtherance of a manipulative, deceptive and unlawful
short-selling scheme in August and September, 1998. In 1999, Asensio filed an
answer and counterclaim alleging that in response to Asensio's strong sell
recommendation and other press releases, we made defamatory statements about
Asensio. We denied the material allegations of the counterclaim. In July 2000,
following dismissal in federal court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and a trial commenced on
January 30, 2002. A jury verdict disallowed the claims against the defendants
for defamation and disparagement and the court granted us a directed verdict on
the counterclaim. On July 2, 2002 the Court entered an order granting us a new
trial against Asensio for defamation and disparagement. Thereafter, Asensio
appealed the granting of a new trial. This appeal is now pending in the Superior
Court of Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and her husband filed
a claim in the Superior Court of New Jersey, Middlesex County, against us, one
of our clinical trial investigators and others alleging that she was harmed in
the ME/CFS clinical trial as a result of negligence and breach of warranties. We
believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
claim in Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian
subsidiary, and one of our clinical trial investigators alleging that she was
harmed in the Belgium ME/CFS clinical trial as a result of negligence and breach
of warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.
In July 2002, we filed suit in the United States District Court for the
Eastern District of Pennsylvania against our insurance company seeking (1) a
judicial order declaring our rights and the obligations of our insurance carrier
under the insurance policy our insurance carrier sold to us (2) monetary damage
for breach of contract resulting from our insurance carrier refusal to fully
defend us in connection with the Asensio litigation (3) monetary damages to
compensate us for our insurance carrier breach of its fiduciary duty faith and
dealing and (4) monetary damages, interest, cost, and attorneys fees to
compensate us for violation of the Pennsylvania Bad Faith Statute. On March 31,
2003 we settled our outstanding claim with our insurance carrier for $1,500,000
relating to reimbursement of expenses in connection with our Asensio law suits.
We expect to realize approximately $1,050,000 of this amount after payment of
expenses related to the settlement. Such amount was recorded during the fourth
quarter 2002 as a reduction in General and Administrative expenses in our
statement of operations.
In March 2003, one of our former law firms filed a complaint in the Court
of Common Pleas of Philadelphia County against us for alleged legal fees in the
sum of $65,051. We believe the claim is without merit and are defending the
matter.
(13) Related Party Transactions
We have employment agreements with certain of our executive officers and
have granted such officers and directors of the Company options and warrants to
purchase common stock of the Company, as discussed in Notes 2(n) and 9.
F-26
A director of the Company, is an attorney in private practice, who has
rendered corporate legal services to us from time to time, for which he has
received fees. A Director of the Company, lives in Paris, France and assists our
European subsidiaries in their dealings with medical institutions and the
European Medical Evaluation Authority. A Director of the Company, assists us in
establishing clinical trail protocols as well as performs other scientific work
for us from time to time. For these services, these Directors were paid an
aggregate of $173,500, $144,955 and $170,150 for the years ending December 31,
2000, 2001 and 2002 respectively.
William A. Carter, Chief Executive Officer of the Company, received an
aggregate of $12,486 in short term advances which were repaid as of December 31,
2001. All advances bare interest at 6% per annum. The Company loaned $60,000 to,
a Director of the Company in November, 2001 for the purpose of exercising 15,000
class A redeemable warrants. This loan bears interest at 6% per annum.
We paid $42,775, $57,750 and $33,450 for the years ending December 31,
2000, 2001 and 2002, respectively to Carter Realty for the rent of property used
at various times in 2002 by us. The property is owned by others and managed by
Carter Realty. Carter Realty is owned by Robert Carter, the brother of William
A. Carter.
(14) 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-28
(15) Quarterly Results of Operation (unaudited)
(in thousand except per share data)
2001
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenue 127 $ 101 $ 76 $ 86 $ 390
Costs and expenses 2,676 2,504 2,262 1,750 9,192
Net loss (2,480) (2,343) (2,145) (2,115) (9,083)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.08) $(.08) $(.07) $(.07) $(.29)
------- -------- ------- -------- -------
2002 (1)
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenues and license
fee income $ 613 $ 134 $ 79 $ 78 $ 904
Costs and expenses 2,121 2,097 1,961 782 6,961
Net loss (1,488) (2,634) (1,891) (1,411) (7,424)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.05) $(.08) $(.06) $(.04) $(.23)
------- -------- ------- -------- -------
(1) During the fourth quarter of 2002, the Company recorded write offs of
certain investments in unconsolidated affiliates of approximately $688,000. (See
note 2(c)). Additionally, during the fourth quarter of 2002, the Company
recorded, as a reduction of general and administrative expenses, an amount of
$1,050,000 representing the net settlement with its insurance carrier. (See Note
12)
(16) Debenture Financing
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount
of 6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe. The Debentures mature on January 31, 2005 and bear
interest at 6% per annum, payable quarterly in cash or, subject to satisfaction
of certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive business days ending on
the third business day immediately preceding the applicable interest payment
date. Pursuant to the terms and conditions of the Senior Convertible Debentures,
we have pledged all of our assets as collateral and are subject to comply with
certain financial and negative covenants, which include but are not limited to
the repayment of principal balances upon achieving certain revenue milestone.
F-28
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 per share, subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect.
The investors also received Warrants to acquire at any time through March
12, 2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a registration rights agreement with the investors in
connection with the issuance of the Debentures and the Warrants. The
registration rights agreement requires that we register the shares of common
stock issuable upon conversion of the Debentures, as interest shares under the
Debenture and upon exercise of the Warrants. In accordance with this agreement,
we filed a registration statement on form S-3 with the Securities and Exchange
Commission. If the registration statement is not declared effective within the
time period required by the agreement or, after it is declared effective and
subject to certain exceptions, sales of all shares required to be registered
thereon cannot be made pursuant thereto, then we will be required to pay to the
investors their pro rata share of $3,635 for each day any of the above
conditions exist with respect to this registration statement.
F-29
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William A. Carter, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations of the
Company.
/S/ William A. Carter
------------------------
William A. Carter
Chief Executive Officer
April 15, 2003
F-30
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2002 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert Peterson, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of operations of the
Company.
/S/ Robert Peterson
----------------------
Robert Peterson
Chief Financial Officer
April 15, 2003
F-31