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, 2004
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. 1-13441
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Philadelphia, Pennsylvania 19103
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(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. ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes (X) No ()
The aggregate market value of Common Stock held by non-affiliates at June 30,
2004, the last business day of the registrant's most recently completed second
fiscal quarter, was $171,234,810. For purposes of this calculation, it was
assumed that all Common Stock is valued at the closing price as of such date of
$3.44 per share.
The number of shares of the registrant's Common Stock outstanding as of March
11, 2005 was 49,849,325.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 39
Item 3. Legal Proceedings 39
Item 4. Submission of Matters to a Vote of Security Holders 41
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 41
Item 6. Selected Financial Data 43
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 44
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 59
Item 8. Financial Statements and Supplementary Data 59
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 59
Item 9A. Controls and Procedures 59
Item 9B. Other Information 61
PART III
Item 10. Directors and Executive Officers of the Registrant 62
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 76
Item 13. Certain Relationships and Related Transactions 79
Item 14. Principal Accountant Fees and Services 80
PART IV
Item 15. Exhibits, Financial Statement Schedules 81
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (the "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 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 are a biopharmaceutical company engaged in the manufacture and
clinical development of new drugs for the treatment of viral and immune based
chronic disorders. We were founded in the early 1970s, as a contract researcher
for the National Institutes of Health. After almost 30 years, 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 to aid the development of
therapeutic products for the treatment of chronic diseases. We own a
manufacturing facility in New Jersey, and have corporate offices in
Philadelphia, PA.
Our flagship products include Ampligen and Alferon. Ampligen is an
experimental drug undergoing clinical trials for the treatment of: Myalgic
Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS), HIV, and HIV/Hepatitis C
co-infection. In August 2004, we completed a Phase III clinical trial treating
over 230 ME/CFS patients with Ampligen and are in the process of preparing a new
drug application to be filed with the FDA. Alferon N Injection is the registered
trademark for our injectable formulation of Natural Alpha Interferon, which is
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approved by the U.S. Food and Drug Administration ("FDA") for the treatment of
genital warts. Alferon N is also in clinical development for treating Hepatitis
C ("HEP-C"), Multiple Sclerosis, Human Immunodeficiency Virus (HIV), West Nile
Virus ("WNV") and Severe Acute Respiratory Syndrome (SARS).
We have over 170 patents worldwide with 14 additional patents pending
comprising our core intellectual property, a fully commercialized product
(Alferon), and a GMP (good manufacturing practice) certified manufacturing
facility.
In March 2003, we began the step by step acquisition from Interferon
Sciences, Inc. ("ISI") of ISI's commercial assets, inventory concerning Alferon
N, including a limited license for the production, manufacture, use, marketing
and sale of Alferon N. Alferon N is a natural alpha interferon that has been
approved by the FDA for commercial sale for the intra-lesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. The acquisition was completed in Spring 2004 with the acquisition of all
world wide commercial rights, the FDA approval, acquisition of 43,000 square
feet of manufacturing space in New Jersey and acquisition of all intellectual
property related to Alferon.
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.
Since the completion of our AMP 516 ME/CFS Phase III clinical trial for use
of Ampligen(R) in the treatment of ME/CFS we have received inquiries from and,
under confidentiality agreements, are having dialogue with other companies
regarding marketing opportunities. No proposal or agreements have resulted from
the dialogue, nor can we be assured that any proposals or agreements will result
from these inquiries.
OUR PRODUCTS
Our primary products consist of our experimental compound, Ampligen,
our FDA approved natural interferon product, Alferon N Injection and our
experimental liquid natural interferon LDO.
Ampligen(R)
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 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.
Our 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 treatment but initiation dates
have not been set.
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Our proprietary development drug technology Ampligen(R) utilizes
specially configured ribonucleic acid ("RNA") and currently is protected by more
than 170 patents worldwide with 14 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. During 2004, we reviewed our patents and patent applications. As a
result, various patents and patent applications were elected not to be renewed.
The non-renewed patents consisted mostly of international origin or were not
conducive to oral application.
The main U.S. ME/CFS treatment patent (#6130206) expires October 10,
2017. Our main patents covering HIV treatment (#4795744, #4820696, #5063209, and
#5091374) expire on January 3, 2006, April 11, 2006, November 5, 2008, and
February 25, 2009, respectively; Hepatitis treatment coverage is conveyed by
U.S. patent #5593973 which expires on January 14, 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 us protection against
competition for a period of seven years following FDA approval, as well as
certain federal tax incentives, and other regulatory benefits.
Based on the results 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.
Alferon N Injection(R)
Interferons are 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(R) 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. All
three of these types of alpha interferon are or were approved for commercial
sale in the U.S. 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
alpha 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
interferons may have differing antiviral activity depending upon the type of
virus. Natural alpha interferon presents a broad complement of species, which we
believe may account for its higher activity in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently U.S. marketed recombinant alpha
interferons. We believe 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
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interferon species, the types and relative quantity of these species are
different from our natural alpha interferon.
The FDA approved ALFERON N Injection(R) in 1989 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.
The U.S. Alferon(R) Patents expire February 10, 2012 (5,503,828 and
5,676,942) and December 22, 2017 (5,989,441).
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)]
is a highly purified, natural-source, glycosylated, multi-species 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, multi-species alpha interferon currently
sold in the U.S.
The recombinant DNA derived alpha interferon are now reported to have
decreased effectiveness after one year, probably due to antibody formation and
other severe toxicities. These detrimental effects have not been reported with
the use of Alferon N Injection(R) which could allow this product to assume a
much larger market share.
It is our belief that the use of Alferon N 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 response.
Alferon LDO
ALFERON LDO is an experimental low-dose, oral liquid formulation of
Natural Alpha Interferon. It is an experimental immunotherapeutic believed to
work by stimulating an immune cascade response in the cells of the mouth and
throat, enabling it to bolster an immune response through the entire body
orally. Oral interferon would be much more economically feasible for patients
and logistically manageable in development programs in third-world countries
primarily affected by HIV and other emerging viruses (SARS, Ebola, bird flu,
etc.). Oral administration of Alferon N(R), with its affordability, low
toxicity, no production of antibodies, and broad range of potential bio
activity, could be a breakthrough treatment for viral diseases.
RESEARCH AND DEVELOPMENT
Our focus is on developing drugs for use in treating viral and immune
based chronic disorders and diseases including ME/CFS, HIV, HEP-C, HPV, SARS and
West Nile Virus. Our current clinical trial projects target treatment therapies
for ME/CFS, HIV, HPV and HEP-C and other diseases.
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Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)
Chronic Fatigue Syndrome (CFS), also known as Chronic Immune
Dysfunction Syndrome (CFIDS) and, myalgic encephalomyelitis (ME) is a serious
and debilitating chronic illness and a major public health problem. Long
misunderstood, under-recognized, and under-diagnosed, ME/CFS is now recognized
by both the government and private sector as a major health problem, including
the National Institutes of Health, U.S. Centers for Disease Control and
Prevention (CDC), Food and Drug Administration and Social Security
Administration, which recognizes CFS as one of the most common chronic illnesses
of our time. The CDC listed ME/CFS as a priority disease, causing severe health
and financial problems for the patients, their family, and the community. ME/CFS
is endemic in the population, but occasionally seen in clusters suggesting an
infectious basis. A variety of immunological, endocrine, autonomic nervous
system, and metabolic abnormalities have been documented. A groundbreaking,
community-based study of ME/CFS by Dr. Leonard Jason was published in the
Archives of Internal Medicine in 1999 and showed a prevalence rate of 422 of
every 100,000 Americans. As many as 800,000 people nationwide suffer from CFS,
twice the number previously estimated by the Centers for Disease Control and
Prevention. Furthermore, 90% of the patients with the illness are struggling
without the benefit of medical diagnosis or treatment. While ME/CFS strikes
people of all age, racial, ethnic, and socioeconomic groups, it is most
prevalent amongst women. Research has shown that ME/CFS is about three times as
common in women (522/100,000) as men, a rate similar to that of many autoimmune
diseases, such as multiple sclerosis and lupus. To put this into perspective,
ME/CFS is over four times more common than HIV infection in women (125/100,000),
and the rate of ME/CFS in women is considerably higher than a woman's lifetime
risk of getting lung cancer (63/100,000) as published by the CFIDS Association
of America.
The most common symptom of ME/CFS is incapacitating fatigue, which does
not subside with rest. Many severe ME/CFS patients become completely disabled or
totally bedridden and are afflicted with severe pain and mental confusion even
at rest. This debilitating tiredness is associated with flu-like symptoms such
as chills, fever, headache, sore throat, painful lymph nodes, muscle aches,
weakness and joint pain. Diagnosis of ME/CFS is a time-consuming and difficult
process which is generally arrived at by excluding other illnesses with similar
symptoms and comparing a patient's symptoms with the case definition.
Overlapping symptoms can occur with several diseases, such as fibromyalgia, Gulf
War Illnesses, and multiple chemical sensitivities. Many diseases have similar
symptoms including Lupus and Lyme disease which so closely mimic ME/CFS that
they need to be considered when making a diagnosis to rule them out.
The case definition for ME/CFS criteria calls for certain symptoms to
be present along with fatigue that interferes with physical, mental, social, and
educational activities. Both the fatigue and symptoms must have occurred for (at
least) a six month period. People with ME/CFS may experience many more than the
symptoms named in the case definition, so knowledgeable physicians will take
this fact into consideration when making a diagnosis (after other possible
reasons for symptoms have been ruled out).
The leading model of CFS pathogenesis is thought to be rooted in
abnormalities in the immune system and brain (central nervous system), both of
which affects and alters the function of the other. Because some cases of
chronic fatigue begin with a flu-like infection, several viruses have been
6
studied as possible causes because all are relatively common in the general
population, including Human Herpesvirus (HHV) 6 and 7, Retroviruses,
Epstein-Barr Virus, Enteroviruses, , as well as, Mycoplasmas, etc.. Whilst, the
etiology is likely to be caused by a collection of factors, including viral,
hormonal, stress, and other triggers for the illness in genetically,
environmentally or otherwise susceptible individuals and continues to be a
subject of discussion.
Most ME/CFS patients are treated symptomatically with traditional
treatments geared toward treating symptoms of the disease, such as improving
quality of sleep, reducing pain and treatment of depression. Clinically, a
number of different therapeutic approaches have been pursued, but with no
significant clinical success.
In 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, denoted as Amp 516, was to evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. Over the course of the study, we engaged
the services of 12 clinical investigators at Medical Centers in California, New
Jersey, Florida, North Carolina, Wisconsin, Pennsylvania, Nevada, Illinois, Utah
and Connecticut. These clinical investigators were 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 enrolled and randomized over 230 ME/CFS patients. We completed drug dosing
in this trial in August 2004. A preliminary review of the data collected during
this trial indicated that Ampligen improved exercise treadmill performance by
19.3% versus 4.1% in the placebo group, or more than twice the minimum
considered medically significant (6.5%), a statistically significant increase
(p=0.037). The major significance is the ability to safely obtain medical
benefits (increased physical performance) which have largely eluded others.
Also, Ampligen significantly improved important secondary endpoints associated
with Quality of Life. There was no significant difference in the number of
serious adverse events, suggesting that the drug was generally well tolerated.
Given that the FDA has already granted Ampligen Treatment Protocol Status and
Orphan Drug Status based on earlier studies, we believe these medically and
statistically significant results, when finalized, will facilitate FDA review
and approval.
Human Immunodeficiency Virus (HIV)
The Human Immunodeficiency Virus (HIV) is the cause of Acquired Immune
Deficiency Syndrome (AIDS). HIV has high rates of viral replication and
mutation, there by developing drug resistance. Resistance is least likely to
develop if treatment is based on a combination of drugs. With this approach,
resistance takes longer to develop because a virus strain resistant to one drug
could still be sensitive to another. To overcome the action of two or more drugs
simultaneously, the virus has to acquire multiple mutations. Its chances of
getting multiple mutations in the right combination to resist a number of drugs
are much smaller than its chance of acquiring a single mutation that enables it
to resist just one drug. Therefore, properly sequencing HIV drug treatment
allows for the maximum number of options and alternatives to be available for
long term.
Over fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. Most target the specific HIV enzymes, reverse
7
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.
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. Some 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 make this goal impractical.
Although more potent second generation drugs are under development,
which target the reverse transcriptase and protease genes as well as new HIV
targets, such as, HIV integrase and HIV fusion inhibitors, 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 may be suppressed before it can inflict damage to
the immune system of the patient. Based on recent publications (AIDS 2001,15:
F19-27 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. We
believe that Ampligen(R) combined with the STI 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.
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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. Our 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. Clinical
results of using our technology has been presented at several International AIDS
Scientific Forums in 2003, including the XVI International Conference on
Antiviral Research in Savannah, Georgia in April 2003 and the 2nd IAS Conference
on HIV Pathogenesis and Treatment in Paris, France in July 2003.
Our AMP 720 HIV clinical trial is being conducted by treating
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 HAART regimen containing at least one anti-viral drug
showing therapeutic synergy with Ampligen(R) based on recently reported ex vivo
study in a peer-reviewed scientific journal (Reference: Robinson W. McDougall B
and Essay R. Mixed Dose Effect Analysis of a Biological Response Modifier
(Ampligen) with 14 FDA-approved anti-HIV Agents. Antiviral Res, 46:A48, No. 46,
2000). 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. We believe 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 enroll 60 people on STI
with Ampligen(R) and 60 people on STI without Ampligen(R). Presently, this study
is approximately 35% enrolled at approximately ten medical centers around the
U.S.
Human Papilloma Virus (HPV)
Human papillomavirus (HPV) is one of the most common causes of sexually
transmitted infection in the world. Experts estimate that there are more cases
of genital HPV infection than of any other sexually transmitted disease (STD) in
the United States. Overall, in the United States, an estimated 20 million people
(15% of the population) are currently infected with HPV, 50-75% of which is with
high-risk types, and about 5.5 million people are infected every year. It has
been estimated that a least 50% of sexually active men and women acquire genital
HPV infection at some point in their lives: a recent estimate suggests that 80%
of women will have acquired genital HPV by age 50. An estimated 9.2 million
sexually active adolescents and young adults 15 to 24 years of age are currently
infected with HPV.
Treating genital warts does not cure a HPV infection. The virus remains
in the body in an inactive state after warts are removed. A person treated for
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genital warts may still be able to transmit the infection. Common methods for
removing genital warts involve surgically removing them. Cryotherapy is a method
that entails freezing off the wart with liquid nitrogen and is relatively
inexpensive, safe and effective. The downside to this procedure beyond the pain
factor is it must be performed by a trained health care provider. Laser therapy
(using an intense light to destroy the warts) or surgery (cutting off the warts)
has the advantage of getting rid of warts in a single office visit. However,
treatment can be expensive and the operator must be well-trained in these
methods. In addition, surgery will most likely cause scarring over the afflicted
area.
There are additionally a number of topical creams and solutions
available to treat genital warts. Bloodroot paste is made from naturally
occurring substances, but its effects on treating genital warts are not
conclusively supportive. Condylox (also called podophyllin) is a brown liquid
that causes a burning sensation as it dries, but it must be washed off by 4 to 6
hours otherwise it may be dangerous. Condylox can be quite expensive as well.
Condysil is an additional cream that may be applied. It consists of "all
natural" ingredients and its producers claim it produces no scarring. The
current leading treatment of genital warts is the topical cream Aldara, but in
fact there may be a reoccurrence rate of up to 40% when this drug is used.
Treatment for genital warts may also come in the form of injections. Intron A is
a substance that must be injected 3 times weekly and Alferon N, which is the
only natural source, multi-species alpha interferon currently sold in the US for
HPV treatment, is injected twice weekly.
Hepatitis C Virus
We are 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., was initiated in December
2004.
This clinical program is a randomized pilot study in Phase II to
evaluate the antiretroviral effect of Ampligen in the treatment of HIV infected
patients co-infected with HCV. At present, no single drug or biological product
has bee deemed by internationally recognized regulatory agencies as being
effective against both viruses when coexisting in patents.
Severe Acute Respiratory Syndrome (SARS)
A clinical study has been approved by the Clinical Research Ethics
Committee of the Kowloon West Cluster at the Princess Margaret Hospital in Hong
Kong to evaluate the use of Alferon(R) LDO (Low Dose Oral Interferon Alfa-N3,
Human Leukocyte Derived) in normal volunteers and/or asymptomatic subjects with
exposure to a person known to have Severe Acute Respiratory Syndrome (SARS).
SARS (Severe Acute Respiratory Syndrome) is one of a group of
"emerging" infectious disease that recently attracted the intense scrutiny of
public health officials due to the severity of disease in epidemics based in
Asia, but also involving Europe and North America as well. An international
effort to limit its spread and to identify the infectious agent has been
spectacularly successful and of major significance in the prevention of a
pandemic. A replicating virus of classic coronavirus morphology was identified
initially by electron microscopy. This identification of the virus family
10
allowed the rapid identification of a new human coronavirus (SARS-CoV) as the
etiological agent of SARS. Recently it has been observed that the US FDA
approved antiviral drug, Alferon(R) (i.e.-natural interferon) has significant
activity against SARS-CoV in vitro as indicated by reduction in cytopathic
effect (CPE). This protocol is designed to respond to the anticipated
reemergence of SARS with a prophylaxis trial at epidemic sites to be conducted
to evaluate the activity of Alferon LDO (low dose oral) to prevent symptomatic
infection by SARS-CoV. Gene microarray analysis of infection by SARS-CoV and the
effect of Alferon LDO are used in the design and conduct of this clinical trial.
Differential cellular gene responses to infection and the response to Alferon
may predict clinical outcomes.
The trial methodology may have implications for treating other emerging
viruses such as avian influenza (bird flu). Present production methods for
vaccines involve the use of millions of chicken eggs and would be slow to
respond to an outbreak according to a recently convened World Health
Organization (WHO) expert panel in November 2004. Health officials are also
concerned that bird flu could mutate to cause the next pandemic and render
present vaccines under development ineffective. We have prepared more than
300,000 doses of Alferon LDO for appropriate clinical programs.
Other Diseases
In June 2004 we initiated a clinical trial in collaboration with the infectious
disease section, New York Hospital at Queens and The Medical College of Cornell
University to conduct a clinical trial for treating West Nile Virus
(WNV)infected patients with Alferon N injection. The approved clinical protocol
is entitled "Double Blinded, Placebo Controlled Trial of Alpha-Interferon
(Alferon) Therapy for West Nile Meningo Encephalitis (Protocol WN-102). As of
December 31, 2004 three patients have been enrolled in this protocol. While the
population of patients affected by WNV is relatively small, there is an ever
increasing rate of new infections each year. Forty states reported over 2,000
WNV infected people in 2004.
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.
We have acquired a series of patents on Oragen(TM), potentially a set
of oral broad spectrum antivirals, immunological enhancers through a licensing
agreement with Temple University in Philadelphia, PA. 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 laboratories for application
to chronic viral and immunological disorders.
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EUROPEAN OPERATIONS
We executed a Memorandum of Understanding (MOU) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOU required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
responded to subsequent inquiries for additional information. The option period
was to end 12 weeks after the later of Fuji's review of the full report on the
results of our Amp 516 clinical trial and Fuji's meeting with three of the
trial's principal investigators. We received an initial fee of 400,000 Euros
(approximately $497,000 US). If we did not provide them with the full report by
December 31, 2004 and Fuji did not wish to exercise its option, we would be
required to refund the entire fee. On November 9, 2004, we and Fuji terminated
the MOU by mutual agreement. We did not agree on the process to be utilized in
certain European Territories for obtaining commercial approval for the sale of
Ampligen(R) in the treatment of patients suffering from Chronic Fatigue Syndrome
(CFS). Instead of a centralized procedure, and in order to obtain an earlier
commercial approval of Ampligen(R) in Europe, we have determined to follow a
decentralized filing procedure which was not anticipated in the MOU. We believe
that it now is in the best interest of our stockholders to potentially
accelerate entry into selected European markets whereas the original MOU
specified a centralized registration procedure. Pursuant to mutual agreement of
the parties we refunded 200,000 Euros to Fuji in 2004.
In April 2004 we entered into an agreement with the World Foundation
AIDS Research and Prevention headquarters in Paris, France to provide Alferon
LDO and some funding in support of a clinical trial to be conducted in the Ivory
Coast area of Africa. The purpose of this clinical trial was to test the use of
Alferon N LDO (low dose oral) in treating young children of HIV infected
mothers. Unfortunately, the political unrest in that country has caused the
World Foundation to postpone the clinical trial. Efforts are underway by the
World Foundation to locate another African country in which to initiate and
conduct this trial. Dr. Luc Montagnier is President of the World Foundation AIDS
Research and Prevention and also serves as a member of our Scientific Advisory
Board.
In December 2004, Laboratorios Del Dr. Esteve S.A. ("Esteve") initiated
clinical trials in Spain to evaluate the use of Ampligen in the treatment of
patients infected by HIV/HEP-C ("co-infection"). This trial plans to recruit and
treat patients in a double-blind, randomized, Phase II B study. Patients
affected with HIV/HEP-C suffer disproportionately high death rates and,
currently, there is limited treatment available.
We continue to contact the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. Although no applications are on file currently with the EEU, 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.
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MANUFACTURING
Historically, we outsourced 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 had
acquired 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. There are a limited
number of manufacturers in the United States available to provide the polymers.
At present, we do not have any agreements with third parties for the supply of
any of such materials. In order to obtain Ampligen(R) raw materials of higher
quality (GMP certified) and on a more regular production basis, we are
implementing the consolidation and transfer of manufacturing operations into our
New Brunswick facility, as well as continuing to search for additional contract
manufacturers for the manufacture of the polymers. This consolidation and
transfer of manufacturing operations has been implemented in response to a
recent inspection of the Ribotech facility in South Africa, our previous
supplier of polymers. This facility is not, at present, suitable for the
commercial manufacture of polymers used to make Ampligen(R). This transfer of
polymer manufacturing to our own facilities, and/or to another contract
manufacturer may delay certain steps in commercialization process, specifically,
an NDA filing.
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). We had
engaged the services of Schering-Plough ("Shering") to mass produce ready-to-use
Ampligen(R) doses; however, in connection with settling various manufacturing
infractions previously noted by the FDA, Schering entered into a "Consent
Decree" with the FDA whereby, among other things, it agreed to discontinue
various contract (third party) manufacturing activities at various facilities
including its San Juan, Puerto Rico, plant. Ampligen(R) (which was not involved
in any of the cited infractions) was produced at this Puerto Rico plant from
year 2000-2004. Operating under instructions from the Consent Decree, Schering
has advised us that it would no longer manufacture Ampligen(R) in this facility
at the end of the applicable term (which was 4th quarter, 2004) and would assist
us in an orderly transfer of said activities to other non Schering facilities.
Accordingly, we have entered into a Confidentiality Agreement with Mayne Pharma
Pty, Ltd ("Mayne") to lead to reinitiation and expansion of its Ampligen(R)
manufacturing program. We are currently in discussion with Mayne to provide us
with proposals on manufacturing Ampligen(R) at their facility. Mayne (formerly
known as Faulding Pharma) has already successfully manufactured Ampligen(R)
several times for research and development conducted by Bioclones, and maintains
a fully GMP compliant facility. Simultaneously, we expect to qualify at least
one other GMP facility to maintain a minimum of two independent production
sites. If we are unable to engage Mayne and/or additional manufacturers in a
timely manner, our plans to file an NDA for Ampligen(R) and, eventually, to
market and sell Ampligen(R) will be delayed. There are other pharmaceutical
processing companies that can supply our production needs.
Bioclones (PTY) Ltd. is the majority owner in Ribotech, Ltd. (we own
24.9%) which produced most of the polymers used to date in manufacturing
Ampligen(R). The licensing agreement with Bioclones presently includes South
Africa, South America, Ireland, Australia, New Zealand and the United Kingdom.
The agreement imposes certain clinical trial requirements on Ribotech, as well
as, certain GMP standards on their facilities. Bioclones has conducted limited
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clinical studies in patients with ME/CFS in Australia and South Africa. On
December 27, 2004, we initiated a lawsuit in Federal Court identifying a
conspiratorial group seeking to illegally manipulate our stock for purposes of
bringing about a hostile takeover of Hemispherx. This conspiratorial group
includes Bioclones. This legal action may adversely affect our relationship and
collaborative agreement with Bioclones.
We currently occupy and use the New Brunswick, New Jersey laboratory
and production facility that we acquired from ISI. This facility is approved by
the FDA for the manufacture of Alferon N Injection(R).
MARKETING/DISTRIBUTION
Our marketing strategy for Ampligen(R) reflects the differing health
care systems around the world, and the different marketing and distribution
systems that are used to supply pharmaceutical products to those systems. In the
U.S., we expect that, subject to receipt of regulatory approval, Ampligen(R)
will be utilized in four medical arenas: physicians' offices, clinics, hospitals
and the home treatment setting. We currently plan to use a service provided in
the home infusion (non-hospital) segment of the U.S. market to execute direct
marketing activities, conduct physical distribution of the 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 force. Furthermore, management believes that the
approach will enable us to retain many options for future marketing strategies.
In February 1998, we and Accredo Health Services (formerly Gentiva Health
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 areas. We also plan to
adopt an indication-by-indication strategy in Japan. Subject to receipt of
regulatory approval, we plan to seek strategic partnering arrangements 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 specialty of each area. We have a marketing
arrangement with Bioclones that covers South America, the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories. In Spain, Portugal and Andorra we have entered into a Sales
Distribution Agreement with Esteve.
On December 27, 2004 we initiated a lawsuit in Federal Court
identifying a conspiratorial group seeking to illegally manipulate our stock for
purposes of bringing about a hostile takeover of Hemispherx. This conspiratorial
group includes Bioclones. This legal action may adversely affect our
relationship and collaborative agreement with Bioclones.
Our sales and marketing agreement with Engitech, LLC. to distribute
Alferon N on a nationwide basis did not produce the desired result. Sales have
not increased as planned and we are currently expanding our in house sales and
marketing effort. After much consideration, we are establishing an internal
marketing and sales infrastructure to support the sales of Alferon N Injection
in the United States, including marketing and sales support professionals based
at our headquarters in Philadelphia, Pennsylvania. We have hired and trained our
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regional sales managers and are aggressively hiring and training more expertise
in this field. We are targeting sales representatives with an average of 6-8
years of experience. Our sales force will promote Alferon to OB GYN's,
dermatologists, physicians and particularly STD Clinics, who are involved in the
treatment of patients with indications of refractory or reoccurring external
genital warts, as well as educate physicians about the growing problem and the
risks of HPV. In addition to marketing and sales personnel, we have hired The
Schwartz Group, a telemarketing group.
The Schwartz Group is a marketing partner organization that works
exclusively with companies selling products or services to Physicians,
Hospitals, and Retail Pharmacies. They perform telemarketing campaigns that are
designed to assist their clients and expand their reach and market share. We
expect to use their leads to assist our sales force in making sales calls.
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 do in
pre-clinical 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, Glaxo Smithkline, Merck and
Schering-Plough Corp. ("Schering"). ALFERON N Injection(R) 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, new human drug products for humans are subject
to rigorous preclinical and clinical testing as a condition for clearance 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
15
licensees to obtain, or any delay in obtaining, regulatory approvals could
materially adversely affect the marketing of any products developed by us and
our 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
Injection(R) is only approved for use in intralesional treatment of refractory
or recurring external genital warts in patients 18 years of age or older. Use of
Alferon N Injection(R) 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
review time by fifty 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 this date, 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 U.S. 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. 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 our drug is combined with certain
presently available antiretroviral agents. Interim results were presented in
2002 and 2003 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. The laboratory and production facility in New Brunswick, New
Jersey, which we acquired from ISI, is approved for the manufacture of Alferon N
Injection(R) and we believe it is in substantial compliance with all material
regulations. 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.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
In 1994, we entered into a licensing agreement with Bioclones
(Proprietory) 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 polymers utilized in the production of
Ampligen(R) sufficient to satisfy at least one-third of the worldwide sales
16
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, Ltd., a company set up by
Bioclones to develop and manufacture RNA drug compounds, and 5) royalties of 6%
to 8% on Bioclones nucleic acid-derived drug sales in the licensed territories,
after the first $50 million of sales. 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. The last patent expires on December 22, 2012. On December 27, 2004, we
initiated a lawsuit in Federal Court identifying a conspiratorial group seeking
to illegally manipulate our stock for purposes of bringing about a hostile
takeover of Hemispherx. This conspiratorial group includes Bioclones. This legal
action may adversely affect our relationship and collaborative agreement with
Bioclones.
In 1998, we entered into a strategic alliance with Accredo to develop
certain marketing and distribution capacities for Ampligen(R) in the United
States. Accredo is one of the nation's largest home health care companies with
over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Accredo assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, Hemispherx
may mitigate the necessity of incurring certain up-front costs. Accredo has also
worked 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 year terms unless either party
notifies the other not less than 180 days prior to the anniversary date of its
intent to terminate the agreement. Also, the agreement may be terminated for
uncured defaults, or bankruptcy, or insolvency of either party and will
automatically terminate upon our receiving an NDA for Ampligen(R) from the FDA,
at which time, a new agreement will need to be negotiated with Accredo or
another major drug distributor. There were no initial fees.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, immunological enhancer 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. There were no initial fees
and we currently pay minimum royalties of $30,000 per year to Temple. These
compounds have been evaluated in various academic 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. The last
Oragen(TM) patent expires on June 1, 2018.
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
17
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 at the appropriate time. Biovail invested $2,250,000 in Hemispherx
equity at prices above the then current market price and agreed to make an
additional investment of $1,750,000 based on receiving approval to market
Ampligen(R) in Canada from the appropriate regulatory authorities in Canada. The
agreement requires Biovail to buy exclusively from us and penetrate certain
market segments at specific rates in order to maintain market exclusivity. The
agreement terminates on December 15, 2009, subject to successive two-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 days
for serious adverse health or safety reasons.
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 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 12 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 diseases. During
the quarter ended December 31, 2002 and September 30, 2004 we recorded a noncash
charge of $292,000 and $373,000, respectively, 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 its then proposed equity offerings.
In 1998, we 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 an
informal collaboration arrangement with R.E.D. to assist in this development. We
have supplied scientific data with respect to ME/CFS and engaged R.E.D. to
conduct certain blood tests for our ME/CFS clinical trials. We have no other
obligations to R.E.D. R.E.D. is headquartered in Belgium. The investment was
recorded at cost in 1998. During the 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.
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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. During 2002, CIMM continued to suffer
significant losses resulting in a deterioration of its financial condition. The
$485,000 written off during 2001 represented the unamortized balance of goodwill
included as part of our investment. Additionally, during 2001 we reduced our
investment in CIMM based on our percentage interest in CIMM's continued
operating losses. Our remaining investment at December 31, 2001 in CIMM,
representing our 30% interest in CIMM's equity at such date, was not deemed to
be permanently impaired, but was completely written off during 2002. Such amount
was not material. These charges are reflected in the Consolidated Statements of
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 HCV and HIV
viruses. The Agreement runs for the longer of ten 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)
following regulatory approval. Esteve initiated the HIV/HCV clinical trials in
Spain in late 2004. The agreement is terminable by either party if Ampligen(R)
is withdrawn from 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 last patent with respect to this agreement
expires on June 5, 2012.
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 $11,938,000 in research and development, of which
approximately $3,842,000 was expended in the year ended December 31, 2004. 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
19
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 January 31, 2005, we had 54 personnel consisting of 37 full time
employees, 17 regulatory/research medical personnel on a part-time basis. Part
time personnel are paid on a per diem or monthly basis. 35 personnel are engaged
in our research, development, clinical, and manufacturing effort. 19 of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions. We have no union
employees and we believe our relationship with our employees is good.
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 we will be able to attract
or retain the necessary qualified employees and/or consultants in the future.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board consists of individuals who we believe
have particular scientific and medical expertise in Virology, Cancer,
Immunology, Biochemistry and related fields. These individuals will advise us
about current and long term scientific planning including research and
development. The Scientific Advisory Board will hold periodic meetings as needed
by the clinical studies in progress by us. In addition, individual Scientific
Advisory Board Members sometimes will consult with, and meet informally with our
employees. All members of the Scientific Advisory are employed by others and may
have commitments to and/or consulting agreements with other entities, including
our potential competitors. Members of the Scientific Advisory Board are
compensated at the rate of $1,000 per meeting attended or per day devoted to our
affairs.
In January 2004 a meeting was held in Philadelphia where certain
Scientific Advisory Board members from Cornell University, University of
Virginia and the Pasteur Institute gathered to review and make suggestions
pertaining to our clinical and research programs in 2004. A member of our Board
of Directors, Dr. William Mitchell of Vanderbilt University, also attended the
meeting.
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 2005 (the "March
Debentures") and an aggregate of 743,288 warrants to two investors in a private
placement for aggregate gross proceeds of $4,650,000. The March Debentures were
to mature on January 31, 2005 and bore 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
20
were 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 March Debentures, we pledged all of our assets, other than our
intellectual property, as collateral and were subject to comply with certain
financial and negative covenants, which include but were not limited to the
repayment of principal balances upon achieving certain revenue milestones.
The March Debentures were 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 March Debentures was 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.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the March 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
Debentures and upon exercise of the Warrants. In accordance with this agreement,
we have registered these shares for public sale.
As of December 31, 2003, the investors had converted the total
$5,426,000 principal of the March Debentures into 3,716,438 shares of our common
stock. The total interest on these debenture was $111,711 of which $17,290 was
paid in cash and $94,421 was paid by the issuance of shares of our common stock.
The investor exercised all 743,288 warrants in July 2003 which produced proceeds
in the amount of $1,248,724.
On July 10, 2003, we issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due July 31, 2005 (the "July 2003
Debentures") and an aggregate of 507,102 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March Debentures, in a private placement
for aggregate proceeds of $4,650,000. Pursuant to the terms of the July 2003
Debentures, $1,550,000 of the proceeds from the sale of the July 2003 Debentures
were to have been held back and released to us if, and only if, we acquired
ISI's facility with in a set timeframe. These funds were released to us in
October 2003 although we had not acquired ISI's facility at that time. The July
2003 Debentures mature on July 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.
The July 2003 Debentures are convertible at the option of the investors
at any time through July 31, 2005 into shares of our common stock. The
conversion price under the July 2003 Debentures was fixed at $2.14 per share;
however, as part of the subsequent debenture placement closed on October 29,
2003 (see below), the conversion price under the July 2003 Debentures was
lowered to $1.89 per share. The conversion price is 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
21
in effect. In addition, in the event that we do not pay the redemption price at
maturity, the Debenture holders, at their option, may convert the balance due at
the lower of (a) the conversion price then in effect and (b) 95% of the lowest
closing sale price of our common stock during the three trading days ending on
and including the conversion date.
The July 2008 Warrants received by the investors, as amended, were an
aggregate of 507,102 shares of common stock at a price of $2.46 per share. These
Warrants were exercised in July 2004 which produced gross proceeds in the amount
of $1,247,470.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture
holders warrants to acquire at any time through June 25, 2008 an aggregate of
1,000,000 shares of common stock at a price of $2.40 per share (the "June 2008
Warrants"). These warrants were issued as incentive for the Debenture holders to
exercise prior warrant issuances. This issuance resulted in an additional debt
discount to the March debentures of $2,640,000. Pursuant to our agreement with
the Debenture holders, we have registered the shares issuable upon exercise of
these June 2008 Warrants for public sale. These warrants were exercised in May
2004 and we received gross proceeds of $2,400,000.
As of December 31, 2004, the investors had converted all of the
$5,426,000 principal of the July Debentures into 2,870,900 shares of common
stock.
On October 29, 2003, we issued an aggregate of $4,142,357 in principal
amount of 6% Senior Convertible Debentures due October 31, 2005 (the "October
2003 Debentures") and an aggregate of 410,134 Warrants (the "October 2008
Warrants") in a private placement for aggregate gross proceeds of $3,550,000.
Pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the October 2003 Debentures were held back and were to be
released to us if, and only if, we acquired ISI's facility within 90 days of
January 26, 2004 and provide a mortgage on the facility as further security for
the October 2003 Debentures. In March 2004, we acquired the facility and we
subsequently provided the mortgage of the facility to the Debenture holders. The
October 2003 Debentures mature on October 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.
Upon completing the sale of the October 2003 Debentures, we received
$3,275,000 in net proceeds consisting of $1,725,000 from the October 2003
Debentures and $1,550,000 that had been withheld from the July 2003 Debentures.
As noted above, pursuant to the terms of the October 2003 Debentures, $1,550,000
of the proceeds from the sale of the October 2003 Debentures had been held back.
However, these proceeds were released to us in April 2004. As required by the
Debentures, we have provided a mortgage on the ISI facility as further security
for the Debentures.
The October 2003 Debentures are convertible at the option of the
investors at any time through October 31, 2005 into shares of our common stock.
The conversion price under the October 2003 Debentures is fixed at $2.02 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. In addition, in the event that we
22
do not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors were
to acquire an aggregate of 410,134 shares of common stock at a price of $2.32
per share. These Warrants were exercised in July 2004 which produced gross
proceeds in the amount of $951,510.
As of December 31, 2004, the investors had converted $2,071,178
principal amount of the Debenture into 1,025,336 shares of common stock.
On January 26, 2004, we issued an aggregate of $4,000,000 in principal
amount of 6% Senior Convertible Debentures due January 31, 2006 (the "January
2004 Debentures"), an aggregate of 790,514 warrants (the "July 2009 Warrants")
and 158,103 shares of common stock, and Additional Investment Rights (to
purchase up to an additional $2,000,000 principal amount of January 2004
Debentures commencing in six months) in a private placement for aggregate net
proceeds of $3,695,000. The January 2004 Debentures mature on January 31, 2006
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. Commencing July 26, 2004, we are required to start
repaying the then outstanding principal amount under the January 2004 Debentures
in monthly installments amortized over 18 months in cash or, at our option, in
shares of common stock. After one installment payment of $111,111 in our common
stock, one debenture holder exercised their right to waive further installment
payments on their note. Any shares of common stock issued to the investors as
installment payments shall be valued at 95% of the average closing price of the
common stock during the 10-day trading period commencing on and including the
eleventh trading day immediately preceding the date that the installment is due.
The January 2004 Debentures are convertible at the option of the
investors at any time through January 31, 2006 into shares of our common stock.
The conversion price under the January 2004 Debentures was fixed at $2.53 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. In addition, in the event that we
do not pay the redemption price at maturity, the Debenture holders, at their
option, may convert the balance due at the lower of (a) the conversion price
then in effect and (b) 95% of the lowest closing sale price of our common stock
during the three trading days ending on and including the conversion date. Upon
completion of the August 2004 Private Placement (see below), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the remaining
principal on these debentures was $3,083,073. The investors converted $139,150
principal amount of the January 2004 Debenture into 55,000 shares of our common
stock. In addition, installment payments of $777,777 were made to our investors
amounting to 358,932 shares of our common stock.
There are two classes of July 2009 Warrants received by the Investors:
Class A and Class B. The Class A warrants are to acquire any time from July 26,
2004 through July 26, 2009 an aggregate of up to 395,257 shares of common stock
at a price of $3.29 per share. The Class B warrants are to acquire any time from
July 26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of
23
common stock at a price of $5.06 per share. On January 27, 2005, the exercise
price of these July 2009 Class A and Class B Warrants was to reset to the lesser
of their respective exercise price then in effect or a price equal to the
average of the daily price of the common stock between January 27, 2004 and
January 26, 2005. The exercise price (and the reset price) under the July 2009
Warrants also is subject to similar adjustments for anti-dilution protection.
Notwithstanding the foregoing, the exercise prices as reset or adjusted for
anti-dilution, will in no event be less than $2.58 per share. Upon completion of
the August 2004 Private Placement (see below), the exercise price was lowered to
$2.58 per share.
We also issued to the investors Additional Investment Rights pursuant
to which the investors have the right to acquire up to an additional $2,000,000
principal amount of January 2004 Debentures (the July 2004 Debentures") from us.
The July 2004 Debentures are identical to the January 2004 Debentures except
that the conversion price is $2.58. The investors exercised the Additional
Investment Rights on July 13, 2004 and we received net proceeds of 1,860,000.
Upon completion of the August 2004 Private Placement (see below), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the Debenture
holders had not converted any portion of this debenture.
Pursuant to the terms and conditions of all of the outstanding
Debentures (collectively, the "Debentures"), we have pledged all of our assets,
other than our intellectual property, as collateral, and we are subject to
comply with certain financial and negative covenants.
On May 14, 2004, in consideration for the Debenture holders' exercise
of all of the June 2008 Warrants, we issued to the holders warrants (the "May
2009 Warrants") to purchase an aggregate of 1,300,000 shares of our common
stock. As a result, the warrants were valued at $2,355,000 which was recorded as
additional debt discount. We issued 1,000,000 shares of common stock and
received gross proceeds of $2,400,000 from the exercise of the June 2008
Warrants.
The May 2009 Warrants are to acquire at any time commencing on November
14, 2004 through April 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $4.50 per share. On May 14, 2005, the exercise price of these May
2009 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 May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004. Upon completion of the
August 2004 Private Placement (see below), the exercise price was lowered to
$4.008 per share.
We entered into Registration Rights Agreements with the investors in
connection with the issuance of (i) the Debentures; (ii) the June 2008, July
2008, October 2008, July 2009, and May 2009 Warrants (collectively, the
"Warrants"); and (iii) the shares issued in January 2004. Pursuant to the
Registration Rights Agreements we have registered on behalf of the investors the
shares issued to them in January 2004 and 135% of the shares issuable upon
conversion of the Debentures and upon exercise of all of the Warrants. If,
subject to certain exceptions, sales of all shares so registered cannot be made
pursuant to the registration statements, then we will be required to pay to the
24
investors their pro rata share of $.00067 times the outstanding principal amount
of the relevant Debentures for each day the above condition exists.
Section 713 of the American Stock Exchange ("AMEX") Company Guide
provides that we must obtain stockholder approval before issuance, at a price
per share below market value, of common stock, or securities convertible into
common stock, equal to 20% or more of our outstanding common stock (the
"Exchange Cap"). The Debentures (including the July 2004 Debentures) and
Warrants have provisions that require us to pay cash in lieu of issuing shares
upon conversion of the Debentures or exercise of the Warrants if we are
prevented from issuing such shares because of the Exchange Cap. In May 2004, the
Debenture holders agreed to amend the provisions of these Debentures and
Warrants to limit the maximum amount of funds that the holders could receive in
lieu of shares upon conversion of the Debentures and/or exercise of the Warrants
in the event that the Exchange Cap was reached to 119.9% of the conversion price
of the relevant Debentures and 19.9% of the relevant Warrant exercise price.
As of December 31, 2004, the investors have converted $13,062,329
principal amount of debt from the Debentures issued in March, July and October
2003 and January 2004 into 8,026,606 shares of our common stock. $777,777 of
principal was repaid with the issuance of 358,932 shares of stock. The March and
July Debentures have been fully converted. The remaining principal balance on
the outstanding Debentures is convertible into shares of our stock at the option
of the investors at any time, through the maturity date. In addition, we have
paid $1,300,000 into the debenture cash collateral account as required by the
terms of the October 2003 Debentures. The amounts paid through December 31, 2004
have been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of December 31, 2004. The cash collateral account
provides partial security for repayment of the outstanding Debentures in the
event of default.
By agreement with Cardinal Securities, LLC, for general financial
advisory services and in conjunction with the private debenture placements in
July and October 2003 and in January, May and July 2004, we paid Cardinal
Securities, LLC an investment banking fee equal to 7% of the investments made by
the two Debenture holders and issued to Cardinal the following common stock
purchase warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500
exercisable at $2.42 per share; and (iii) 100,000 exercisable at $3.04 per
share. The $2.57 warrants expire on July 10, 2008, the $2.42 warrants expire on
October 29, 2008 and the $3.04 warrants expire on January 5, 2009. With regard
to the exercise of the June 2008 Warrants and issuance of the May 2009 Warrants,
Cardinal received an investment banking fee of 7%, half in cash and half in
shares. With regard to the exercise of the Additional Investment Rights, the
July 2008 and October 2008 Warrants and issuance of the July 2009 Warrants,
Cardinal received an investment banking fee of 7%, 146,980 in cash and 22,703 in
shares as well as 50,000 warrants exercisable at $4.07 expiring on July 12,
2009. By agreement with Cardinal, we have registered all of the foregoing shares
and shares issuable upon exercise of the above mentioned warrants for public
sale and we have agreed to register the balance. As a result of all of the
transactions discussed above, we recorded $1,430,000 as additional debt
discount.
Section 713 of the American Stock Exchange ("AMEX") Company Guide
provides that we must obtain stockholder approval before issuance, at a price
per share below market value, of common stock, or securities convertible into
common stock, equal to 20% or more of our outstanding common stock (the
"Exchange Cap"). Taken separately, the July 2003, October 2003 and January 2004
Debenture transactions do not trigger Section 713. However, the AMEX took the
25
position that the three transactions should be aggregated and, as such,
stockholder approval was required for the issuance of common stock for a portion
of the potential exercise of the warrants and conversion of the Debentures in
connection with the January 2004 Debentures. The amount of potential shares that
we could exceed the Exchange Cap amounted to approximately 1,299,000. In
accordance with EITF 00-19, Accounting For Derivative Financial Instruments
Indexed to and Potentially Settled in a Company's Own Stock, we recorded on
January 26, 2004, a redemption obligation of approximately $1,244,000. This
liability represented the fair market value of the warrants and beneficial
conversion feature related to the 1,299,000 shares.
In addition, in accordance with EITF 00-19, we revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. We recorded an additional redemption obligation and finance
charge of $947,000 as a result of this revaluation. Upon stockholder approval,
our redemption obligation was recorded as additional paid in capital as of the
date approval was received.
The requisite stockholder approval was obtained at our Annual Meeting
of Stockholders on June 23, 2004. In accordance with EITF 00-19, we revalued
this redemption obligation associated with the beneficial conversion feature and
warrants as of June 23, 2004. We recorded a reduction in the value of the
redemption obligation and financing charge of $260,000 as a result of this
revaluation. In addition, upon receiving the requisite stockholder approval,
this redemption obligation was reclassified as additional paid in capital as of
the date the approval was received or June 23, 2004.
On July 13, 2004, the Debenture holders exercised all of the July 2003
and October 2003 Warrants and the Additional Investment Rights amounting to
approximately $4,198,980 in gross proceeds to us. We issued to these holders
warrants (the "June 2009 Warrants") to purchase an aggregate of 1,300,000 shares
of common stock. The issuance of these warrants resulted in an additional debt
discount to the note of 1,320,000 as explained below and a financing charge of
$2,351,000.
The June 2009 Warrants are to acquire at any time commencing on January
13, 2005 through June 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $3.75 per share. On July 13, 2005, the exercise price of these
June 2009 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
July 14, 2004 and July 12, 2005. The exercise price (and the reset price) under
the June 2009 Warrants also is subject to adjustments for anti-dilution
protection similar to those in the other Warrants. Notwithstanding the
foregoing, the exercise price as reset or adjusted for anti-dilution, will in no
event be less than $3.33 per share. Upon completion of the August 2004 Private
Placement (see below), the exercise price was lowered to $3.33 per share. This
transaction was subject to a non-cash financing charge of $1,320,000 to be
amortized over the remaining life of the October 2003 Debentures. We agreed to
register the shares issuable upon exercise of the June 2009 Warrants pursuant to
substantially the same terms as the registration rights agreements between us
and the holders. Pursuant to this obligation, we have registered the shares.
On August 5, 2004, we closed a private placement with select
institutional investors of approximately 3,617,300 shares of our Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
26
it received a fee and Common Stock Purchase Warrants. We raised approximately
$7,524,000 ($6,984,000, net) in gross cash proceeds from this private offering.
The Warrant issued to each purchaser is exercisable for up to 30% of
the number of shares of Common Stock purchased by such Purchaser, at an exercise
price equal to $2.86 per share. Each Warrant has a term of five years and is
fully exercisable from the date of issuance.
Pursuant to the Registration Rights Agreement, made and entered into as
of August 5, 2004 (the "Rights Agreement"), we have registered the resales of
the shares issued to the Purchasers and shares issuable upon the exercise of the
Warrants.
Closing of the August 2004 Private Placement triggered the
anti-dilution provisions of the January 2004 Debentures and the July 2004
Debentures and the July 2009 Warrants and the June 2009 Warrants. The conversion
price adjustment for the Debentures noted above resulted in an adjustment of
$1,320,000 in the third quarter 2004 to the Debenture discount and additional
paid-in-capital. Any adjustment to the Debenture discount will be amortized over
the remaining life of the Debentures. The exercise price adjustment for the
above warrants resulted in a non-cash financing adjustment in the third quarter
2004 upon revaluing the warrants at the new anti-dilution pricing using the
Black-Scholes Method.
As of December 31, 2004, the Company was in violation of one minor debt
covenant contained within its debenture agreement. Subsequently, the Company
obtained a letter of waiver from the debenture holders with respect with this
matter.
In connection with the Debenture agreements, we have outstanding
letters of credit of $1 million as additional collateral.
Prior to our annual meeting of stockholders in September 2003, we had a
limited number of shares of Common Stock authorized but not issued or reserved
for issuance upon conversion or exercise or outstanding convertible and
exercisable securities such as debentures, options and warrants. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
and for Dr. Carter's entering into a $250,000 letter of credit benefiting the
Debenture holders in the event of a default, we agreed to compensate Dr. Carter
with 1,450,000 warrants to purchase common stock at $2.20 per share. This
resulted in compensation expense of $1,769,000 which was charged to operations.
On March 11, 2003, we acquired from ISI, ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, 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
registered these shares for public sale and ISI has reported that it has sold
all of these shares. We also agreed to pay ISI 6% of the net sales of ALFERON N
Injection(R).
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
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
27
Strategies Corporation, two creditors of ISI. We guaranteed the market value of
all but 62,500 of these shares to be $1.59 per share on the termination date. As
discussed below, we issued all of these shares and ISI, GP Strategies and the
American National Red Cross have reported that they have sold all of their
shares.
We also agreed to satisfy other liabilities of ISI which were past due
and secured by a lien on ISI's real estate and to pay ISI 6% of the net sales of
products containing natural alpha interferon.
On May 30, 2003, we issued the shares to GP Strategies and the American
National Red Cross. Pursuant to our agreements with ISI and these two creditors,
we registered the foregoing shares for public sale. We guaranteed the market
value all but 62,500 of these shares to be $1.59 per share. As a result at
December 31, 2003 the guaranteed value of these shares ($491,000), which had not
been sold by these two creditors, were reclassified to redeemable common stock.
At December 31, 2004 all shares had been sold by these two creditors and the
redeemable common stock was reclassified to equity.
On November 6, 2003, we acquired, and subsequently paid the outstanding
ISI property tax lien certificates in the aggregate amount of $457,000 from
certain investors. These tax liens were issued for property taxes and utilities
due for 2000, 2001 and 2002.
In March 2004, we issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well its
production facility in New Brunswick, New Jersey. ISI has sold all of its
shares.
The aggregated cost of the land and buildings in New Brunswick, New
Jersey was approximately $3,316,000. The cost of the land and buildings was
allocated as follows:
Land $ 423,000
Buildings 2,893,000
---------
Total cost $ 3,316,000
===========
We accounted for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
On March 13, 2003, we issued 347,445 shares of our common stock to
Provesan 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 have
registered these shares for public sale.
As of December 31, 2004, we had approximately $16,737,000 in cash and
short term investments. These funds should be sufficient to meet our operating
cash requirements including debt service for the near term. However, 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 including the commercializing of Ampligen(R)
products. There can be no assurances that we will raise adequate funds from
28
these or other sources, which may have a material adverse effect on our ability
to develop our products. Also, we have the ability to curtail discretionary
spending, including some research and development activities, if required to
conserve cash.
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.
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 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, if ever, Ampligen(R) or our other
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(R) is approved for
marketing in the United States for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. 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.
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(R)
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(R) is only approved for the intralesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older. Use of
ALFERON N Injection(R) for other indications will require regulatory approval.
29
In this regard, Interferon Sciences, Inc. ("ISI"), the company from which we
obtained our rights to ALFERON N Injection(R), conducted clinical trials related
to use of ALFERON N Injection(R) for treatment of HIV and Hepatitis C. In both
instances, the FDA determined that additional studies were necessary in order to
fully evaluate the efficacy of ALFERON N Injection(R) in the treatment of HIV
and Hepatitis C diseases. We have no obligation or immediate plans to conduct
these additional studies at this time.
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 most
likely will be materially adversely affected.
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, 2004 our accumulated deficit was approximately $137,983,000. 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
be profitable.
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.
As of December 31, 2004, we had approximately $16,737,000 in cash and cash
equivalents and short-term investments. We believe that these funds should be
sufficient to meet our operating cash requirements including debt service during
the next 24 months. 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 Ampligen(R) products. There can be no assurances that we will
30
raise adequate funds from these or other sources, which may have a material
adverse effect on our ability to develop our products.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
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. We obtained all rights to
ALFERON N Injection(R), and we plan to preserve and acquire enforceable patents
covering its use for existing and potentially new diseases. 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(R), we have acquired from ISI its
patents for natural alpha interferon produced from human peripheral blood
leukocytes and its production process. We cannot assure that our competitors
will not seek and obtain patents regarding the use of similar products in
combination with various other agents, for a particular target indication prior
to our doing such. If we cannot protect our patents covering the use of our
products for a particular disease, or obtain additional 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 that 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 from
whom we 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.
31
If we cannot enforce the patent rights we currently hold we may be
required to obtain licenses from others to develop, manufacture or market our
products. There can be no assurance that we would be able to obtain any such
licenses on commercially reasonable terms, if at all. We currently license
certain proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information developed.
No assurances can be given that such third parties will adequately enforce any
rights they may have or that the rights, if any, retained by the government will
not adversely affect the value of our license.
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 products successfully, we may not generate
significant revenues or become profitable.
We have limited marketing and sales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, 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 Accredo offers the potential to provide some
marketing and distribution capacity in the United States while agreements with
Bioclones (Proprietary), Ltd, Biovail Corporation and Laboratorios Del Dr.
Esteve S.A. may provide a sales force in South America, Africa, United Kingdom,
Australia and New Zealand, Canada, Spain and Portugal. On December 27, 2004, we
initiated a lawsuit in Federal Court identifying a conspiratorial group seeking
to illegally manipulate our stock for purposes of bringing about the hostile
takeover of Hemispherx. This conspiratorial group includes Bioclones and the
potential legal action may adversely effect our agreement with Bioclones and the
potential for marketing and distribution capacity in South America, Africa,
United Kingdom, Australia and New Zealand.
We cannot assure that our domestic or 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.
There are no long-term agreements with suppliers of required materials. 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 and/or
Ampligen(R).
A number of essential materials are used in the production of ALFERON N
Injection(R), including human white blood cells. We do not have long-term
agreements for the supply of any of such materials. There can be no assurance we
32
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all.
At present, we do not have any agreements with third parties for the supply of
any polymers for use in manufacturing Ampligen. We are consolidating relevant
manufacturing operations into our New Brunswick, New Jersey facility for the
production of Ampligen raw materials. This consolidation and transfer of
manufacturing operations has been implemented as an inspection of the Ribotech
facility in South Africa, our previous supplier of Ampligen(R) raw materials,
indicated that it did not, at present, meet the necessary GMP standards for a
fully certified commercial process. The transfer of Ampligen(R) raw materials
manufacture to our own facilities, while having obvious advantages with respect
to regulatory compliance (other parts of the 43,000 sq. ft. wholly owned
facility are already in compliance for Alferon N manufacture), may delay certain
steps in the commercialization process, specifically a targeted NDA filing.
If we are unable to obtain the required raw materials, we may be required to
scale back our operations or stop manufacturing. The costs and availability of
products and materials we need for the production of Ampligen(R) and the
commercial production of ALFERON N Injection(R) 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.
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) has been only produced 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
33
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.
In connection with settling various manufacturing infractions
previously noted by the FDA, Schering-Plough ("Schering") entered into a
"Consent Decree" with the FDA whereby, among other things, it agreed to
discontinue various contract (third party) manufacturing activities at various
facilities including its San Juan, Puerto Rico, plant. Ampligen(R) (which was
not involved in any of the cited infractions) was produced at this Puerto Rico
plant from year 2000-2004. Operating under instructions from the Consent Decree,
Schering has advised us that it would no longer manufacture Ampligen(R) in this
facility beyond 2004 and would assist us in an orderly transfer of said
activities to other non Schering facilities. Accordingly, we have entered into a
Confidentiality Agreement with Mayne Pharma Pty, Ltd ("Mayne") to lead to
reinitiation and expansion of its Ampligen(R) manufacturing program. We are
currently in discussions with Mayne to provide us with proposals on
manufacturing Ampligen(R) at their facility. Mayne (formerly known as Faulding
Pharma) has already successfully manufactured Ampligen(R) several times for
ongoing clinical trials, and maintains a fully GMP compliant facility.
Simultaneously, we expect to qualify at least one other GMP facility to maintain
a minimum of two independent production sites. If we are unable to engage Mayne
and/or additional manufacturers in a timely manner, our plans to file an NDA for
Ampligen(R) and, eventually, to market and sell Ampligen(R) will be delayed.
The purified drug concentrate utilized in the formulation of ALFERON N
Injection(R) is manufactured in our New Brunswick, New Jersey facility and
ALFERON N Injection(R) is formulated and packaged at a production facility
operated by Abbott Laboratories located in Kansas. We are 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. 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. Also, each production lots of Alferon N Injection(R) is
subject to FDA review and approval prior to releasing the lots to be sold. This
review and approval process could take considerable time, which would delay our
having product in inventory to sell. Alferon N Injection(R) presently has a
shelf life of 18 months after having been bottled. Studies are being conducted
to possibly extend the shelf life to 24 months.
34
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 in the United States. The dominant competitors
with drugs to treat HIV diseases include Gilead Pharmaceutical, Pfizer,
Bristol-Myers, Abbott Labs, Glaxo Smithkline, Merck and Schering-Plough Corp.
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 of 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(R) 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(R) 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(R). 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, three 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(R) for the treatment of new indications, we will
35
be 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(R). Currently, our wholesale price on a per
unit basis of ALFERON N Injection(R) is 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(R)
could adversely affect 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, slow or irregular heart rate,
decreases 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 affect potential revenues and physician/patient
acceptability of our product.
ALFERON N Injection(R). At present, ALFERON N Injection(R) is only approved for
the intralesional (within 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(R), 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(R) 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 affected from the litigation costs, settlement expenses and lost
36
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 Ampligen and/or Alferon N Injection product liability
claims. A successful product liability claim against us in excess of Ampligen's
$1,000,000 in insurance coverage; $3,000,000 in aggregate, or in excess of
Alferon's $5,000,000 in insurance coverage; $5,000,000 in aggregate; or for
which coverage is not provided could have a negative effect on our business and
financial condition.
The loss of Dr. William A. 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 and clinical trials. The loss of Dr. Carter's
services could have a material adverse effect on our operations and chances for
success. We have secured key man life insurance in the amount of $2,000,000 on
the life of Dr. Carter and we have an employment agreement with Dr. Carter that,
as amended, runs until May 8, 2008. However, Dr. Carter has the right to
terminate his employment upon not less than 30 days prior written notice. 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.
37
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:
oannouncements of the results of clinical trials by us or our competitors;
o adverse reactions to products;
o 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;
o changes in U.S. or foreign regulatory policy during the period of
product development;
o developments in patent or other proprietary rights, including any
third party challenges of our intellectual property rights;
o announcements of technological innovations by us or our competitors;
o announcements of new products or new contracts by us or our competitors;
o actual or anticipated variations in our operating results due to the
level of development expenses and other factors; o changes in financial
estimates by securities analysts and whether our earnings meet or exceed the
estimates;
o conditions and trends in the pharmaceutical and other industries;
new accounting standards; and
o 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, 2004, the price of our
common stock has ranged from $1.50 to $5.40 per share. We expect the price of
our common stock to remain volatile. The average daily trading volume of 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 February 15, 2005, approximately 4,178,454 shares of our common
stock, constituted "restricted securities" as defined in Rule 144 under the
Securities Act of 1933. 4,050,566 of these shares have been registered pursuant
to agreements between us and the holders of these shares. In addition, we have
registered 9,754,392 shares issuable (i) upon conversion of approximately 135%
of the January 2004 Debentures, the October 2003 Debentures, the July 2003
Debentures and the July 2004 Debentures; (ii) as payment of 135% of the interest
on all of the Debentures; (iii) upon exercise of 135% of the July 2009 Warrants
issued in conjunction with the January 2004 Debentures, the May 2009 Warrants
and the June 2009 Warrants; and (iv) upon exercise of certain other warrants.
38
Registration of the shares permits the sale of the shares in the open market or
in privately negotiated transactions without compliance with the requirements of
Rule 144. To the extent the exercise price of the warrants is less than the
market price of the common stock, the holders of the 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 shares of common stock. We also may issue shares to be
used to meet our capital requirements or use shares to 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
stockholder 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 Dr. Carter, our chief executive officer, who already
beneficially owns 10.9% of 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
39
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
licensing fees and/or cost recovery treatment revenues in Europe, Canada and in
the United States.
ITEM 2. Properties.
We currently lease our headquarters 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 and development, our pharmacy, packaging, quality
assurance and quality control laboratories, as well as additional office space.
We also currently occupy and use the New Brunswick, New Jersey laboratory and
production facility that we acquired from ISI. These facilities consist 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 and
production space and shipping and receiving areas. Building Two has 11,670
square feet consisting of offices, laboratories and warehouse space. The
property has parking space for approximately 100 vehicles.
Our lease on the Rockville facility expires in June 2005 and we are in
the process of moving our laboratory and equipment to our New Brunswick
facility. Consolidation of this laboratory with our existing laboratory in New
Brunswick will provide economical benefit. We believe that when the
consolidation is completed the consolidated facility will enable us to meet our
requirements for planned clinical trials and treatment protocols for the
foreseeable future.
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. Raw materials production at the pilot facility commenced
in 1996. The pilot facility was shut down in 2004 and Ribotech has started
construction on a new production facility. At this time we have no assurance
that this facility will be completed. We have 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 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
40
defamation and disparagement. Thereafter, Asensio appealed the granting of a new
trial to the Superior Court of Pennsylvania. The Superior Court of Pennsylvania
has denied Asensio's appeal. Asensio has now petitioned the Supreme Court of
Pennsylvania for allowance of an appeal. We have opposed Asensio's petition for
allowance of appeal and the matter is now pending before the Supreme 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.
On June 25, 2004 all claims against us were dismissed with prejudice. The former
ME/CFS clinical trial patient and her husband have now appealed the dismissal of
their claims to the New Jersey Superior Court, Apellate Division, where the
matter is now pending.
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 June 2004, One Penn Associates, L.P. filed a claim in the
Philadelphia Municipal Court for the Commonwealth of Pennsylvania seeking
$44,242.68 for alleged unpaid rent and charges related to our offices in One
Penn Center in Philadelphia. We believe this claim is without merit and are
defending same pursuant to the terms of our lease as we were damaged and
deprived of the use of a portion of the offices due to water from the landlord's
faulty sprinkler system.
In December, 2004 we filed a multicount complaint in federal court
(Southern District of Florida) against a conspiratorial group seeking to
illegally manipulate our stock for purposes of bringing about a hosile takeover
of Hemispherx. The lawsuit alleges that the conspiratorial group commenced with
a plan to seize control of our cash and proprietary assets by an illegal
campaign to drive down our stock price and publish disparaging reports on our
management and current fiduciaries. The lawsuit seeks monetary damages from each
member of the conspiratorial group as well as injunctions preventing further
recurrences of their misconduct. The conspiratorial group includes Bioclones, a
privately held South African Biopharmaceutical company that collaborated with
us, and Johannesburg Consolidated Investments, a South African corporation,
Cyril Donninger, R. B. Kebble, H. C. Buitendag, Bart Goemaere, and John Doe(s).
On January 10, 2005, we initiated a multicount lawsuit in the United
States District Court for the Eastern District of Pennsylvania seeking
injunctive relief and damages against a conspiratorial group, many of whom are
foreign nationals or companies located outside the United States alleging that
the conspiratorial group has engaged in secret meetings, market manipulations,
fraudulent misrepresentations, utilization of foreign accounts and foreign
secrecy laws all in furtherance of an illegal scheme to take over Hemispherx and
enrich themselves at the expense of Hemispherx's public shareholders. On
February 18, 2005 we filed an amended complaint in the same lawsuit joining
Redlabs, USA, Inc. as a defendant with the existing defendants R.E.D.
Laboratories, N.V./S.A., Bart Goemaere, Jan Goemaere, Dr. Kenny De Meirleir,
Kenneth Schepmans, Johan Goossens, Lieven Vansacker and John Does.
41
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, 2004.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Between October 1, 2004 and March 1, 2005, we issued 524,528 shares of
common stock consisting of 1) 470,807 shares for debt repayment, and interest
payments related to the 6% Convertible Debentures. and 2) 53,721 shares in
payment of services rendered.
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. These securities
have been or will be registered with the SEC.
Since October 1997 our common stock has been listed and traded on the
American Stock Exchange ("AMEX") under the symbol HEB. The following table sets
forth the high and low list prices for our Common Stock for the last two fiscal
years as reported by the AMEX. Such prices reflect inter-dealer prices, without
retail markup, markdowns or commissions and may not necessarily represent actual
transactions.
COMMON STOCK High Low
---- ---
Time Period:
January 1, 2003 through March 31, 2003 $2.19 $1.33
April 1, 2003 through June 30, 2003 3.35 1.33
July 1, 2003 through September 30,
2003 2.35 1.85
October 1, 2003 through December 31, 2003 2.94 1.83
Time Period:
January 1, 2004 through March 31, 2004 4.85 2.27
April 1, 2004 through June 30, 2004 5.40 3.30
July 1, 2004 through September 30, 2004 3.54 2.10
October 1, 2004 through December 31, 2004 2.50 1.50
As of March 11, 2005, there were approximately 258 holders of record of
our Common Stock. This number was determined from records maintained by our
transfer agent and does not include beneficial owners of our securities whose
securities are held in the names of various dealers and/or clearing agencies.
On March 11, 2005, the last sale price for our common stock on the AMEX
was $1.44 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 our business.
42
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, 2004.
Number of securities
Remaining available for
future issuance under
Number of Securities to Weighted-average equity compensation
be issued upon exercise Exercise price of plans(excluding
of outstanding options, Outstanding securities
warrants and options, warrants reflected in
rights and rights column (a))
------ ----------------- -------------------
Plan Category
- -------------
(a) (b) (c)
Equity compensation plans approved by
security holders: 921,997 $ 2.66 7,538,801
Equity compensation plans not approved _ _ _
by security holders:
-------- -------- ---------
Total 921,997 $ 2.66 7,538,801
In September 2003, our Board of Directors changed the non-employee
Board Member compensation to be 50% cash and 50% stock. The Board's stock
compensation is to be paid on the first day of each calendar quarter. The number
of shares paid shall have a value of $12,500 with the value of the shares being
determined by the closing price of our common stock on the American Stock
Exchange on the last trading day of the preceding quarter. In no event shall the
number of shares issued under this plan exceed 1,000,000 shares over a ten year
period.
43
ITEM 6. Selected Financial Data (in thousands except for share and per share
data).
Year Ended
December 31 2000 2001 2002 2003(2) 2004
- ----------- ---- ---- ---- ------- ----
Statement of Operations
Data:
Revenues and License
fee Income $788 $390 $904 $657 $1,229
Total Costs and Expenses(1) 9,831 9,192 6,961 7,909 12,118
Interest Expense and Financing
Costs(3) - - - 7,598 12,927
Net loss (8,552) (9,083) (7,424) (14,770) (24,140)
Basic and diluted net loss per
share (0.29) (0.29) (0.23) (0.42) (0.53)
Shares used in computing basic
and diluted net loss per share 29,251,846 31,433,208 32,085,776 35,234,526 45,177,862
Balance Sheet Data:
Working Capital $7,550 $7,534 $2,925 $7,000 $14,504
Total Assets 13,067 12,035 6,040 13,404 25,172
Common Stockholders Equity 11,572 10,763 3,630 9,248 20,081
Other Cash Flow Data:
Cash used in operating
activities $(8,074) $(7,281) $(6,409) $(7,022) $ (7,240)
Capital expenditures (171) - - (19) (1,696)
(1) General and Administrative expenses include stock compensation expense
totaling $397,000, $673,000, $132,000, $237,000, $2,000,000 for the years ended
December 31, 2000, 2001, 2002, 2003 and 2004, respectively.
(2) For information concerning the acquisition of certain assets of ISI and
related financing see note 4 to our consolidated financial statements for the
year ended December 31, 2004.
(3) In accounting for the March 12, 2003, July 10, 2003, October 29, 2003,
January 26, 2004 and July 13, 2004 issuances of 6% Senior Convertible Debentures
in the principal amounts of $5,426,000, $5,426,000, $4,142,357, and $4,000,000
and $2,000,000 respectively, and related embedded conversion features and
44
warrant issuances, we recorded debt discounts of approximately $17.4 million
which, in effect, reduced the carrying value of the debt to $3.6 million. For
additional information refer to note 7 to our consolidated financial statements
for the year ended December 31, 2004.
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, 2004.
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.
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 obtain the required regulatory approvals
which will allow the progressive introduction of Ampligen(R) (our proprietary
drug) for treating Myalgic Encephalomyelitis/ Chronic Fatigue Syndrome
("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S.,
Canada, Europe and Japan. We recently completed a phase III clinical trial in
the U.S. for use of Ampligen in treatment of ME/CFS and are in the process of
assembling and analyzing the obtained data preparatory to completing and filing
a New Drug Application("NDA") with the U.S. Food and Drug Administration("FDA").
We are also testing Ampligen in Phase IIb Clinical Trials in the U.S. for the
treatment of newly emerging multi-drug resistant HIV, and for the induction of
cell mediated immunity in HIV patients that are under control using potentially
toxic drug cocktails.
Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 170 patents worldwide,
with over 14 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 compositions of matter
patents pertain to other new RNA compounds, which have a similar mechanism of
action.
In March 2003 we obtained from Interferon Sciences, Inc. ("ISI") all of
its raw materials, work-in-progress and finished product ALFERON N Injection(R),
together with a limited license to sell ALFERON N Injection(R), a natural alpha
interferon that has been approved for commercial sale for the intralesional
treatment of refractory or recurring external condylomata acuminata ("genital
45
warts") in patients 18 years of age or older in the United States. In March
2004, we acquired from ISI the balance of ISI's rights to its product as well as
ISI's production facility. We are marketing the ALFERON N Injection(R) in the
United States through sales facilitated via third party agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection(R) in multiple sclerosis and other chronic viral diseases. In this
regard, the FDA recently authorized a Phase II clinical study designed to
investigate the activity and safety of Alferon LDO(R) in early stage HIV
positive patients.
We were 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.
Result of Operations
Years Ended December 31, 2004 vs. 2003
During the year ended December 31, 2004, we 1) materially improved our
cash position, 2) completed the acquisition of our production facility in New
Brunswick, New Jersey, as well as, acquired all of ISI's rights to market
Alferon N, 3) completed drug dosing in our Phase III AMP 516 ME/CFS clinical
trial and 4) continued our efforts to develop Ampligen/Alferon N. Our cash
position improved as a result of placing January and July 2004 6% convertible
debentures with an aggregate maturity value of $6,000,000 (gross proceeds of
$5,695,000) and the August 2004 private placement with select institutional
investors of approximately 3,617,000 shares of our common stock and warrants
producing $7,524,000 in gross proceeds. Completion of the drug dosing in the AMP
516 ME/CFS clinical trial in August 2004 allows us to start the next step
towards final data collection and analysis.
Progress was made on all fronts including a 100% increase in Alferon N
sales. This increase in sales of Alferon was due, among other things, to the
fact that we were selling for an entire year in 2004 compared to nine months in
2003. However, we were disappointed in these results as we planned to achieve
much higher sales. Adjustments to our marketing strategy were made in late 2004
and we expect better results in 2005.
Net loss
Non-cash charges materially affected our net losses for the years ended
December 31, 2004 and 2003. Our losses of $24,140,000 for the year ended
December 31, 2004, include non-cash financing charges of $12,543,000 and
non-cash charges of $2,000,000 for stock compensation expenses. The losses for
the same period in 2003 of $14,770,000 included non-cash financing charges of
$7,345,000. This $9,370,000 increase in net operating losses reflects an
increase of $7,198,000 in non-cash accounting charges, $692,000 in research and
development expenses and $1,610,000 in production/cost of goods sold. The
increase in our research and development costs were the result of 1) costs
46
incurred in the development of a more efficient bottling manufacturing process
for Alferon N Injection, 2) vials abstracted from the third lot of Alferon N
Injection inventory for research and development purposes, and 3) costs
associated with using Alferon N Injection in a clinical trial to treat patients
infected with the West Nile Virus. Our production cost/cost of goods sold
increased due to 1) higher Alferon N Injection sales, 2) costs related to
preparing our New Brunswick, NJ facility for the installation of the lab now
located in Rockville, MD, and 3) expanding production at our New Brunswick
facility to include Ampligen(R) raw material. The $2,000,000 for stock
compensation expense primarily consisted of $1,769,000 resulting from warrants
issued to Dr. Carter in 2003 that vested in the first quarter 2004. These
warrants vested upon the second ISI asset closing which occurred on March 17,
2004. See Item 11. "Executive Compensation" for details related to how Dr.
Carter has been compensated with respect to this matter.
Revenues
Revenues for the year ended December 31, 2004 were $1,229,000 as
compared to revenues of $657,000 for the same period in 2003. Revenues for the
year ended December 31, 2004 from sales of ALFERON N totaled $1,050,000 versus
$509,000 for the period of March 11, 2003, the date we acquired the rights to
the Alferon N business from ISI, through December 31, 2003. Sales of Alferon N
are anticipated to increase as we have more product available and intend to
expand our marketing/sales programs on an international basis. Revenues from our
ME/CFS cost recovery treatment programs principally underway in the U.S., Canada
and Europe were $179,000 for the year ended December 31, 2004 versus $148,000
for the year ended December 31, 2003. 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-week treatment program.
Since acquiring the right to manufacture and market Alferon N on March
11, 2003, we have focused on converting the work-in-progress inventory into
finished goods. This work-in-progress inventory included three production lots
totaling the equivalent of approximately 55,000 vials (doses) at various stages
of the manufacturing process. Approximately 34,000 vials have been produced.
Some 3,000 of the remaining vials within this lot were held back to be utilized
in the development of a more compatible vial size for manufacturing of Alferon N
Injection. We plan on initiating the process of converting the third lot of
approximately 16,000 vials from work-in-progress to finished goods inventory in
2005. Approximately 2,000 vials were abstracted from the third lot for research
and development purposes as well during the 4th quarter 2004. Our production and
quality control personnel in our New Brunswick, NJ facility are involved in the
extensive process of manufacturing and validation required by the FDA.
Our sales and marketing agreement with Engitech, LLC. to distribute
ALFERON N on a nationwide basis did not produce the desired result. Sales have
not increased as planned and we are expanding our in house sales and marketing
efforts. We are considering the use of other sales organizations in order to
meet our ALFERON N sales goals.
We executed a Memorandum of Understanding (MOU) in January 2004 with
Fujisawa Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting
them an exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOU required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
47
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
responded to subsequent inquiries for additional information. The option period
ends 12 weeks after the later of Fuji's review of the full report on the results
of our Amp 516 clinical trial and Fuji's meeting with three of the trial's
principal investigators. We received an initial fee of 400,000 Euros
(approximately $497,000 US). If we did not provide them with the full report by
December 31, 2004 and Fuji did not wish to exercise its option, we would be
required to refund the entire fee. On November 9, 2004, we and Fuji terminated
the MOU by mutual agreement. We did not agree on the process to be utilized in
certain European Territories for obtaining commercial approval for the sale of
Ampligen(R) in the treatment of patients suffering from Chronic Fatigue Syndrome
(CFS). Instead of a centralized procedure, and in order to obtain an earlier
commercial approval of Ampligen(R) in Europe, we have determined to follow a
decentralized filing procedure which was not anticipated in the MOU. We believe
that it now is in the best interest of our stockholders to potentially
accelerate entry into selected European markets whereas the original MOU
specified a centralized registration procedure. Pursuant to mutual agreement of
the parties we refunded 200,000 Euros to Fuji. We have recorded the remaining
200,000 Euros as an accrued liability as of December 31, 2004. We are currently
holding the 200,000 Euros pending further developments in accordance with the
mutually agreed upon termination with Fuji.
On March 17, 2004, we closed on the acquisition of all of the worldwide
rights of ALFERON N as well as the FDA approved biological production facility
in New Brunswick, New Jersey. We are looking to expand our marketing/sales
programs on an international basis.
Production costs/cost of goods sold
Production costs for the year ended December 31, 2004 and 2003 were
$2,112,000 and $502,000, respectively. These costs reflect approximately
$470,000 for the cost of sales of ALFERON N Injection(R) for the year ended
December 31, 2004. In addition, costs of sales for Alferon N Injection(R) for
the period March 11, 2003 (acquisition date of inventory from ISI) through
December 31, 2003 amounted to $240,000. The remaining production costs in 2004
represent expenditures associated with preparing the New Brunswick facility for
the installation of the lab now located in Rockville, MD and for further
production of Alferon N Injection(R) and Ampligen(R) raw materials. In August
2004, we released most of the second lot of product (approximately 13,000 vials)
to Abbott laboratories for bottling and realized approximately 12,000 vials of
Alferon N. Some 3,000 of the remaining vials within this lot were held back to
be utilized in the development of a more compatible vial size for manufacturing
of Alferon N Injection. We plan on initiating the process of converting the
third lot of approximately 16,000 vials from work-in-progress to finished goods
inventory in 2005. Approximately 2,000 vials were abstracted from the third lot
for research and development purposes as well during the current quarter. Our
production and quality control personnel in our New Brunswick, NJ facility are
involved in the extensive process of manufacturing and validation required by
the FDA.
Research and Development costs
Overall research and development direct costs for the year ended
December 31, 2004 were $3,842,000 as compared to $3,150,000 during the same
period a year earlier. These costs primarily reflect the direct costs associated
with our effort to develop our lead product, Ampligen(R), as a therapy in
48
treating chronic diseases and cancers as well as on-going clinical trials
involving patients with HIV. The primary reasons for the increase in research
and development costs of $692,000 for the year ended December 31, 2004 versus
the same period a year ago were primarily due to 1) costs incurred in the
development of a more efficient bottling manufacturing process for Alferon N
Injection, 2) vials abstracted from the third lot of Alferon N Injection
inventory for research and development purposes, and 3) costs associated with
using Alferon N Injection in a clinical trial to treat patients infected with
the West Nile Virus.
We recently completed the double-blind segment of our AMP 516 ME/CFS
Phase III clinical trial for use of Ampligen(R) in the treatment of ME/CFS.
Clinical data on the primary endpoint exercise treadmill duration was presented
at the 17th International Conference on Anti-viral Research in Tucson, AZ on May
3, 2004. The data showed that patients receiving Ampligen for 40 weeks improved
exercise treadmill performance by a medically and statistically significant
amount compared to the Placebo group. New data was presented at the Interscience
Conference on Antimicrobial Agents and Chemotherapy on increases in exercise
capacity with Ampligen and Placebo which were correlated with an improved
ability to utilize oxygen, so called, maximum oxygen consumption or (VO2max).
VO2max has been previously shown by others to be decreased with individuals with
CFS. An abnormal exercise stress test, including a low VO2max, could help
qualify CFS patients for disability under Social Security Administration rules.
Additional data on subset analyses showed that both Stratification cohorts
(those with baseline exercise treadmill duration greater than or less than nine
minutes) improved exercise capacity by over 6.5%, an amount considered medically
significant in other chronic diseases.
Ampligen is also currently in two Phase IIb studies for the treatment
of HIV to overcome multi-drug resistance, virus mutation and toxicity associated
with current HAART therapies. One study, the AMP-719, is a Salvage Therapy,
conducted in the U.S. and evaluating the potential synergistic efficacy of
Ampligen in multi-drug resistant HIV patients for immune enhancement. The second
study, the AMP-720, is a clinical trial designed to evaluate the effect of
Ampligen under Strategic Treatment Intervention and is also conducted in the
U.S. Enrollment in the AMP 719 study is presently on hold as we focus our
efforts on ramping up the AMP 720 study.
ME/CFS
Over 230 patients have participated in our ME/CFS Phase III clinical
trial. In August 2004, the remaining patients completed drug dosing in the open
label segment (Stage II) of this Phase III protocol. We completed the randomized
placebo controlled phase (Stage I) of this study in February 2004 and have
started final data collection for the data analysis. This process includes
validation and quality assurance and should be completed by early 2005. As with
any experimental drug being tested for use in treating human diseases, the FDA
must approve the testing and clinical protocols employed and must render their
decision based on the safety and efficacy of the drug being tested. Historically
this is a long and costly process. Our ME/CFS AMP 516 clinical study is a Phase
III study, which based on favorable results, will serve as the basis for us to
file a new drug application with the FDA. The FDA review process could take
18-24 months and result in one of the following events; 1) approval to market
Ampligen(R) for use in treating ME/CFS patients, 2) required more research,
development, and clinical work, 3) approval to market as well as conduct more
testing, or 4)reject our application. Given these variables, we are unable to
project when material net cash inflows are expected to commence from the sale of
Ampligen(R).
49
HIV
We are currently focused on recruiting additional clinical
investigators and HIV patients to participate in the AMP 720 HIV clinical trial.
Our efforts to do this have been somewhat hampered as most of our clinical
resources have been directed to completing the AMP 516 ME/CFS clinical trial.
Now that the AMP 516 patients have completed the randomized segment of the
clinical trial, we are devoting more resources toward the AMP 720 HIV clinical
trial. Our AMP 719 HIV clinical trial has been put on hold at this time.
The Amp 720 HIV study is a treatment using a Strategic Treatment
Interruption (STI). The patients' antiviral HAART regimens are interrupted and
Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an experimental
immunotherapeutic designed to display both antiviral and immune enhancing
characteristics. Prolonged use of Highly Active Antiretroviral Therapy (HAART)
has been associated with long-term, potentially fatal, toxicities. The clinical
study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As more patients are enrolled, the
related clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, i.e.: patient drop out rate,
recruitment of clinical investigators, etc. The length of the study and costs
related to our clinical trials cannot be determined at this time as such will be
materially influenced by (a) the number of clinical investigators needed to
recruit and treat the required number of patients, (b) the rate of accrual of
patients and (c) the retention of patients in the studies and their adherence to
the study protocol requirements. Under optimal conditions, the cost of
completing the studies could be approximately $2.0 to $3.0 million. The rate of
enrollment depends on patient availability and on other products being in
clinical trials for the treatment of HIV, as there is competition for the same
patient population. At present, more than 18 FDA approved drugs for HIV
treatment may compete for available patients. The length, and subsequently the
expense of these studies, will also be determined by an analysis of the interim
data, which will determine when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial be conducted or not. In case a Phase
III study is required; the FDA might require a patient population exceeding the
current one which will influence the cost and time of the trial. Accordingly,
the number of "unknowns" is sufficiently great to be unable to predict when, or
whether, we may obtain revenues from our HIV treatment indications.
In September, 2004 we commenced a clinical trial using Alferon N
Injection to treat patients infected with the West Nile Virus. The infectious
Disease section of New York Queens Hospital and the Weill Medical College of
Cornell University will be conducting this double-blinded, placebo controlled
trial. During 2004, over 2,000 human cases of West Nile Virus have been reported
in 40 states.
50
Manufacturing
In order to obtain Ampligen(R) raw materials of higher quality (GMP
certified) and on a more regular production basis, we have implemented
consolidation and transfer of relevant manufacturing operations into our New
Brunswick, New Jersey facility. This consolidation and transfer of manufacturing
operations has been implemented as a recent inspection of the Ribotech facility
in South Africa, our previous supplier of Ampligen(R) raw materials, indicated
that it did not, at present, meet the necessary GMP standards for a fully
certified commercial process. The transfer of Ampligen(R) raw materials
manufacture to our own facilities, while having obvious advantages with respect
to regulatory compliance (other parts of the 43,000 sq. ft. wholly owned
facility are already in compliance for Alferon N manufacture), may delay certain
steps in the commercialization process, specifically a targeted NDA filing. To
facilitate the process, we are in the process of hiring a senior regulatory
officer with specific expertise in global quality assurance for multinational
pharmaceutical operations .
In connection with settling various manufacturing infractions
previously noted by the FDA, Schering-Plough ("Schering") entered into a
"Consent Decree" with the FDA whereby, among other things, it agreed to
discontinue various contract (third party) manufacturing activities at various
facilities including its San Juan, Puerto Rico, plant. Ampligen(R) (which was
not involved in any of the cited infractions) was produced at this Puerto Rico
plant from year 2000-2004. Operating under instructions from the Consent Decree,
Schering has recently advised us that it would no longer manufacture Ampligen(R)
in this facility at the end of the applicable term (which is 4th quarter 2004)
and would assist us in an orderly transfer of said activities to other non
Schering facilities. Accordingly, we have entered into a Confidentiality
Agreement with Mayne Pharma Pty, Ltd ("Mayne") to lead to reinitiation and
expansion of its Ampligen(R) manufacturing program. We are currently in
discussions with Mayne to provide us with proposals on manufacturing Ampligen(R)
at their facility. Mayne (formerly known as Faulding Pharma) has already
successfully manufactured Ampligen(R) several times for ongoing clinical trials,
and maintains a fully GMP compliant facility. Simultaneously, we expect to
qualify at least one other GMP facility to maintain a minimum of two independent
production sites. If we are unable to engage Mayne and/or additional
manufacturers in a timely manner, our plans to file an NDA for Ampligen(R) and,
eventually, to market and sell Ampligen(R) will be delayed.
General and Administrative Expenses
General and Administrative ("G&A") expenses for the year ended December
31, 2004 and 2003 were approximately $6,164,000 and $4,257,000, respectively.
The increase in G&A expenses of $1,907,000 during this period is primarily due
to non-cash charges of $2,000,000 for stock compensation expenses in 2004. These
stock compensation charges consisted of $1,769,000 resulting from warrants
issued to Dr. Carter in 2003 that vested in 2004 and directors' fees paid in
2004 of $231,000. The warrants noted above vested upon the second ISI asset
closing which occurred on March 17, 2004. Please see "Item 11. Executive
Compensation." contained herein for more details on how Dr. Carter was
compensated. In addition, investment banking fees relating to assistance in
financing matters increased in 2004 as compared to a period early by
approximately $124,000. These increases were offset by a decrease in service
fees in 2004 of approximately $191,000 as compared to a year earlier. These
services fees related to the acquisition of ISI.
51
Impairment loss
During the year ended December 31, 2004, we recorded a non-cash charge
of $373,000 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 its then proposed investment offerings.
Other Income/Expense
Interest and other income for the year ended December 31, 2004 and 2003
totaled $49,000 and $80,000, respectively. All funds in excess of our immediate
need are invested in short-term high quality securities.
Interest Expense and Financing Costs
Interest expense and financing costs were $12,543,000 for the year
ended December 31, 2004 versus $7,345,000 for the same period a year ago.
Non-cash financing costs consist of the amortization of debenture closing costs,
the amortization of Original Issue Discounts and the amortization of costs
associated with beneficial conversion features of our debentures and the fair
value of the warrants relating to the Debentures. These charges are reflected in
the Consolidated Statements of Operations under the caption "Financing Costs."
In connection with the redemption obligation recorded in conjunction
with the January 2004 Debentures, we recorded additional financing costs of
approximately $947,000 in the first quarter 2004. In the second quarter 2004, we
recorded a reduction in financing costs of approximately $260,000. Please see
Note 7 in the consolidated financial statements contained herein for more
details on these transactions.
Years Ended December 31, 2003 vs. 2002
- --------------------------------------
During the year ended December 31, 2003, we 1) acquired certain assets
and patent rights to ALFERON N Injection(R), 2) privately placed the March 2003,
the July 2003, and October 2003, 6% convertible debentures with an aggregate
maturity value of $14,994,357 (gross proceeds of $12,850,000), 3) continued our
efforts to develop Ampligen(R) for the treatment of patients afflicted with
ME/CFS and HIV, 4) activated the ISI New Brunswick production facility to
process doses of Alferon N and 5) produced some 21,000 doses of Alferon N for
sale in 2003.
Net loss
Our net loss was approximately $14,770,000 for the year ended December
31, 2003 versus a net loss of $7,424,000 in 2002. Per share loss in 2003 was
$0.42 cents versus a per share loss of $0.23 in 2002. This year-to-year increase
in losses of $7,346,000 is primarily due to non-cash financing costs of
$7,345,000 relating to our March 2003, July 2003, and October 2003 6%
convertible debentures. These non-cash charges account for 50% of our net losses
for the year ended December 31, 2003. In addition, our losses during this period
include $957,000 in operating expenses relating to our new Alferon division.
Solely for comparison purposes, excluding our 2003 losses for these two factors,
our losses were $6,468,000 in 2003 compared to $7,424,000 in 2002 or a reduction
totaling $956,000. This was primarily due to a decrease in research and
development direct costs of $1,800,000 in 2003 due to reduced costs associated
with the development of Ampligen(R) to treat ME/CFS patients. During 2002, our
52
AMP 516 ME/CFS Phase III clinical trial was in full force and effect therefore
increasing our manufacturing and clinical support expenses during that period
(See "Research and Development Costs" below). This was offset by the recovery of
certain legal expenses in 2002 of approximately $1,050,000 related to the
Asensio lawsuit and trial from our insurance carrier. This recovery produced a
one-time reduction in G&A Expenses for 2002 (See "General and Administrative
Expenses" below).
Revenues
Our revenues were $657,000 in 2003 compared to revenues of $904,000 in
2002. Our 2002 revenues included a licensing fee payment of approximately
$563,000 which was not repeated in 2003.
Revenues from our ME/CFS cost recovery treatment programs principally
underway in the U.S., Canada and Europe were $148,000 in 2003 versus $341,000 in
2002. 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. In addition, since the March 11, 2003,
acquisition of inventory from ISI, revenues from sales of ALFERON N totaled
$509,000. Sales of Alferon N are anticipated to increase as we are producing
more product and our marketing/sales programs are underway.
Revenues from the cost recovery treatment programs in 2002 were
$341,000 or 57% higher than 2003 revenues. We expected revenues in the U.S. to
decline due to our efforts to complete the AMP 516 ME/CFS Phase III trials and
the focus of our clinical resources on 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 clinical
data collected in the U.S. AMP 516 Phase III ME/CFS trial.
In 2002, We received a licensing fee of 625,000 Euros ($563,000) from
Laboratorios Del Dr. Esteve S.A. ("Esteve") pursuant to a sales and distribution
agreement in which 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.
Since acquiring the right to manufacture and market Alferon N in March
2003, we have focused on converting the work-in-progress inventory into finished
goods. This work-in-progress inventory included three production lots totaling
the equivalent of approximately 55,000 vials (doses) at various stages of the
manufacturing process. In August 2003, we released the first lot of product to
Abbott Laboratories for bottling and realized some 21,000 vials of ALFERON N.
Preliminary work has started on completing the second lot of approximately
16,000 vials. Our production and quality control personnel in the New Brunswick
facility are involved in the extensive process of manufacturing and validation
required by the FDA. Plans are underway for completing the third lot of some
18,000 vials now in very early stages of production.
Our marketing and sales plan for ALFERON N consists of engaging sales
force contract organizations and supplementing their sales efforts with
marketing support. This marketing support would consist of building awareness of
ALFERON N with physicians as a successful and effective treatment of refractory
on recurring external genital warts in patients of age 18 or older and to assist
primary prescribers in expanding their practice.
53
On August 18, 2003, we entered into a sales and marketing agreement
with Engitech, LLC. to distribute ALFERON N on a nationwide basis. The agreement
stipulated that Engitech will deploy a sales force of 100 sales representatives
within one year in the U.S. domestic market and further expand the sales team up
to 250 sales representative in the second year and after that as many as it
takes to continually drive market share. Engitech, Inc. is to develop and
implement marketing plans including extensive scientific and educational
programs for use in marketing ALFERON N.
Production costs
Production costs were $502,000 for the year ended December 31, 2003.
These costs reflect approximately $240,000 for the cost of sales of ALFERON N
Injection(R) during the period of April 1, 2003 through December 31, 2003. In
addition, we recorded $262,000 of production costs at the New Brunswick
facility. We ramped up the facility in April 2003 and started production on
three lots of Alferon N Injection(R) work in process inventory of which one lot
was completed and is ready to be sold.
Research and Development costs
Our overall research and development direct costs in 2003 were
$3,150,000 compared to research and development direct costs in 2002 of
$4,946,000. These costs primarily reflect the direct costs associated with our
effort to develop our lead product, Ampligen(R), as a therapy in treating
chronic diseases and cancers. At this time, this effort consists of on-going
clinical trials involving patients with HIV. Our research and development direct
costs are $1,796,000 lower in 2003 due to reduced costs associated with the
development of Ampligen(R) to treat ME/CFS patients. During 2002, our AMP 516
ME/CFS Phase III clinical trial was in full force and effect, therefore,
increasing our manufacturing and clinical support expenses during that period.
Our strategy is to develop our lead compound, the experimental
immunotherapeutic Ampligen(R), to treat chronic diseases for which there is
currently no adequate treatment available. We seek the required regulatory
approval, which will allow the commercial introduction of Ampligen for ME/CFS
and HIV/AIDS in the U.S., Canada, Europe and Japan.
We recently completed the double-blind segment of our AMP 516 ME/CFS
Phase III clinical trial for use of Ampligen(R) in the treatment of ME/CFS.
Ampligen is also currently in two Phase IIb studies for the treatment of HIV to
overcome multi-drug resistance, virus mutation and toxicity associated with
current HAART therapies. One study, the AMP-719, is a Salvage Therapy, conducted
in the U.S. and evaluating the potential synergistic efficacy of Ampligen in
multi-drug resistant HIV patients for immune enhancement. The second study, the
AMP-720, is a clinical trial designed to evaluate the effect of Ampligen under
Strategic Treatment Intervention and is also conducted in the U.S. The AMP 719
study is presently on hold as we devote our efforts on the AMP 720 study.
AMP 516
Over 230 patients have participated in our ME/CFS Phase III clinical
trial. Approximately 14 patients are in the open label phase of the clinical
process. We have completed the randomized placebo controlled phase of this study
and expect to complete data collection and start the data analysis process with
the expectation of filing an NDA (New Drug Application) with the FDA by the end
of 2004. As with any experimental drug being tested for use in treating human
54
diseases, the FDA must approve the testing and clinical protocols employed and
must render their decision based on the safety and efficacy of the drug being
tested. Historically this is a long and costly process. Our ME/CFS AMP 516
clinical study is a Phase III study, which based on favorable results, will
serve as the basis for us to file a new drug application with the FDA. The FDA
review process could take 18-24 months and result in one of the following
events; 1) approval to market Ampligen(R) for use in treating ME/CFS patients,
2) required more research, development, and clinical work, 3) approval to market
as well as conduct more testing, or 4)reject our application. Given these
variables, we are unable to project when material net cash inflows are expected
to commence from the sale of Ampligen(R).
AMP 719 and AMP 720
We are currently focused on recruiting additional clinical
investigators and HIV patients to participate in the AMP 720 HIV clinical trial.
Our efforts to do this have been somewhat hampered in late 2003 as most of our
clinical resources have been directed to completing the AMP 516 ME/CFS clinical
trial. Now that the AMP 516 patients have completed the randomized segment of
the clinical trial, we expect to devote more resources toward the AMP 720 HIV
clinical trial.
Our AMP 719 HIV clinical trial has been put on hold at this time.
In July 2003, Dr. Blick, a principal investigator in our HIV studies,
presented updated results on our Amp 720 HIV study at the 2nd IAS CONFERENCE ON
HIV PATHOGENESIS AND TREATMENT in Paris France. In this study using Strategic
Treatment Interruption (STI), patients' antiviral HAART regimens are interrupted
and Ampligen(R) is substituted as mono-immunotherapy. Ampligen(R) is an
experimental immunotherapeutic designed to display both antiviral an immune
enhancing characteristics. Prolonged use of Highly Active Antiretroviral Therapy
(HAART) has been associated with long-term, potentially fatal, toxicities. The
clinical study AMP 720 is designed to address these issues by evaluating the
administration of our lead experimental agent, Ampligen(R), a double stranded
RNA drug acting potentially both as an immunomodulator and antiviral. Patients,
who have completed at least nine months of Ampligen(R) therapy, were able to
stay off HAART for a total STI duration with a mean time of 29.0 weeks whereas
the control group, which was also taken off HAART, but not given Ampligen(R),
had earlier HIV rebound with a mean duration of 18.7 weeks. Thus, on average,
Ampligen(R) therapy spared the patients excessive exposure to HAART, with its
inherent toxicities, for more than 11 weeks. As more patients are enrolled, the
related clinical costs will continue to increase with some offset to our overall
expenses due to the diminishing cost of the ME/CFS clinical trial. It is
difficult to estimate the duration or projected costs of these two clinical
trials due to the many variables involved, i.e.: patient drop out rate,
recruitment of clinical investigators, etc. The length of the study and costs
related to our clinical trials cannot be determined at this time as such will be
materially influenced by (a) the number of clinical investigators needed to
recruit and treat the required number of patients, (b) the rate of accrual of
patients and (c) the retention of patients in the studies and their adherence to
the study protocol requirements. Under optimal conditions, the cost of
completing the studies could be approximately $2.0 to $3.0 million. The rate of
enrollment depends on patient availability and on other products being in
clinical trials for the treatment of HIV, as there is competition for the same
patient population. At present, more than 18 FDA approved drugs for HIV
treatment may compete for available patients. The length, and subsequently the
expense of these studies, will also be determined by an analysis of the interim
data, which will determine when completion of the ongoing Phase IIb is
appropriate and whether a Phase III trial be conducted or not. In case a Phase
55
III study is required; the FDA might require a patient population exceeding the
current one which will influence the cost and time of the trial. Accordingly,
the number of "unknowns" is sufficiently great to be unable to predict when, or
whether, we may obtain revenues from our HIV treatment indications.
General and Administrative Expenses
General and Administrative expenses ("G&A") were $4,257,000 during the
year ended December 31, 2003, which includes $957,000 of expenses relating to
our new Alferon Division and $237,000 for a non cash stock compensation charge.
Excluding the Alferon expenses, our G&A costs were $3,300,000 compared to
$2,015,000 of expenses in 2002. This increase of $1,285,000 is primarily due to
the recovery of certain legal expenses in 2002 of approximately $1,050,000
related to the Asensio lawsuit and trial from our insurance carrier. This
recovery produced a one time reduction in G&A Expenses for 2002. Also, we
recorded non-cash stock compensation expenses of $237,000 in 2003 as compared to
$133,000 in 2002.
Equity Loss-Unconsolidated Affiliates
In the year ended December 31, 2002, we recorded a non-cash charge of
$1,470,000 to operations with respect to our investments in unconsolidated
affiliates. $1,074,000 of these charges were related 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.
We also recorded a non-cash charge of $292,000 with respect to our
investment in Chronix Biomedical. This impairment reduced our carrying value in
this investment to reflect a permanent decline in Chronix's market value based
on its then proposed investment offering.
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 Item 1. Business for
more details on these transactions.
Other Income/Expense
Interest and other income totaled $80,000 in 2003 compared to $103,000
recorded in 2002. Lower cash available for investment basically accounted for
the difference as interest rates remained relatively low in 2003. All funds in
excess of our immediate need are invested in short-term high quality securities.
Interest Expense and Financing Costs
Interest expense and financing costs were $7,598,000 in 2003. Non-cash
financing costs consist of $581,000 for the amortization of debenture closing
costs, $1,066,000 for the amortization of Original Issue Discounts and
$5,698,000 for the amortization of costs associated with beneficial conversion
features of the debentures and the fair value of the warrants relating to the
March 2003, July 2003 and October 2003 6% convertible debentures. These charges
are reflected in the Consolidated Statements of Operations under the caption
"Financing Costs." Please see Note 16 in the consolidated financial statements
contained herein for more details on these transactions.
56
Liquidity And Capital Resources
Cash used in operating activities for the year ended December 31, 2004
was $7,240,000. Cash provided by financing activities for the year ended
December 31, 2004 amounted to $19,085,000, substantially from proceeds from
debenture offerings, the sale of common stock and the exercising of common stock
warrants. As of December 31, 2004, we had approximately $16,737,000 million in
cash and short-term investments. These funds should be sufficient to meet our
operating cash requirements including debt service for the near term. However,
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 including the commercializing of
Ampligen(R) products. There can be no assurances that we will raise adequate
funds from these or other sources, which may have a material adverse effect on
our ability to develop our products. Also, we have the ability to curtail
discretionary spending, including some research and development activities, if
required to conserve cash.
Please see "Recent Financing And Asset Acquisitions" in Item 1.
Business and Note 4 - "Acquisition of Assets of Interferon Sciences, Inc." and
Note 7 - "Debenture Financing" in the consolidated financial statements
contained herein for more details on our acquisition of assets and debenture and
stock financings.
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.
57
(dollars in thousands)
Obligations Expiring by Period
Contractual Cash Obligations =======================================================================
(Including Interest) Total 2005 2006 2007-2008
======================================================= ===============
Operating Leases $445 $187 $193 $65
Convertible Debentures
October 29, 2003 $4,142,000 6%
Senior Convertible Debenture 2,175 2,175 - -
January 26, 2004 $4,000,000 6% Senior Convertible
Debenture 3,268 3,268 - -
July 26, 2004 $2,000,000 6%
Senior Convertible Debenture 2,120 1,413 707 -
------------------------------------------------------------------------
Total $8,000 $7,043 $900 $65
===================================== ================= ===============
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (revised 2004) (FASB
123R), Shared-Based Payment. FASB 123R will require the Corporation to expense
share-based payments, including employee stock options, based on their fair
value. The Corporation is required to adopt the provisions of FASB 123R
effective as of the beginning of its third quarter in 2005. FASB 123R provides
alternative methods of adoption, which include prospective application and a
modified retroactive application. The Corporation is currently evaluating the
financial impact, including the available alternative of adoption of FASB 123R.
Disclosure About Off-Balance Sheet Arrangements
Prior to our annual meeting of stockholders in September 2003, we had 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. Prior to the
meeting, to permit consummation of the sale of the July 2003 Debentures and the
related warrants, Dr. Carter agreed that he would not exercise his warrants or
options unless and until our stockholders approve an increase in our authorized
shares of common stock. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in our authorized shares,
we have agreed to compensate Dr. Carter.
In connection with the Debenture agreements, we have outstanding
letters of credit of $1,000,000 as additional collateral.
58
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods 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:
Revenue
Revenues for non-refundable license fees are recognized under the
Performance Method-Expected Revenue. This method considers the total amount of
expected revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.
Upon receipt, the upfront non-refundable payment is deferred. The
non-refundable upfront payments plus non-refundable payments arising from the
achievement of defined milestones are recognized as revenue over the performance
period based on the lesser of (a) percentage of completion or (b) non-refundable
cash earned (including the upfront payment).
This method requires the computation of a ratio of cost incurred to
date to total expected costs and then apply that ratio to total expected
revenue. The amount of revenue recognized is limited to the total non-refundable
cash received to date.
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 from the sale of product are recognized when the product is
shipped, as title is transferred to the customer. We have no other obligation
associated with our products once shipment has occurred.
Patents and Trademarks
Patents and trademarks are stated at cost (primarily legal fees) and
are amortized using the straight-line method over the estimated useful life of
17 years We review our 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 our respective
capitalized cost. In addition, management's review addresses whether each patent
continues to fit into our strategic business plans.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risks
consist of cash equivalents and accounts receivable.
Our policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being credit worthy, or in short-term money markets, which are
59
exposed to minimal interest rate and credit risks. At times, we have bank
deposits and overnight repurchase agreements that exceed federally insured
limits.
Concentration of credit risk, with respect to receivables, is limited
through our credit evaluation process. We do not require collateral on our
receivables. Our receivables consist principally of amounts due from wholesale
drug companies as of December 31, 2004.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk
Excluding obligations to pay us for various licensing related fees, we
had approximately $16,737,000 in cash and cash equivalents and short-term
investments at December 31, 2004. To the extent that our cash and cash
equivalents exceed our near term funding needs, we invest the excess cash in
three to six month high quality interest bearing financial instruments. We
employ established conservative policies and procedures to manage any risks with
respect to investment exposure.
We have not entered into, and do not expect to enter into, financial
instruments for trading or hedging purposes.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated balance sheets as of December 31, 2003, and 2004, and
our consolidated statements of operations, changes in stockholders' equity and
comprehensive loss and cash flows for each of the years in the three year period
ended December 31, 2004, together with the report of BDO Seidman, LLP,
independent registered 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.
ITEM 9A. Controls and Procedures.
Effectiveness of Control Procedures
Our Chairman of the Board (serving as the principal executive officer)
and the Chief Financial Officer performed an evaluation of our disclosure
controls and procedures, which have been designed to permit us to effectively
identify and timely disclose important information. They concluded that the
controls and procedures were effective as of December 31, 2004 to ensure that
material information was accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. During the
quarter ended December 31, 2004, we have made no change in our internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
Internal Controls Over Financial Reporting
Our management, including the Chief Executive Officer and the Chief
Financial Officer, is responsible for establishing and maintaining adequate
60
internal controls over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Securities Exchange Act of 1934. Our internal controls were
designed to provide reasonable assurance as to the reliability of our financial
reporting and the preparation and presentation of the consolidated financial
statements for external purposes in accordance with accounting principles
generally accepted in the United States, as well as to safeguard assets from
unauthorized use or disposition.
We conducted an evaluation of the effectiveness of our internal
controls over financial reporting based on the framework in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion on this evaluation. Through
this evaluation, we did not identify any material weaknesses in our internal
controls. There are inherent limitations in the effectiveness of any system of
internal controls over financial reporting; however, based on our evaluation, we
have concluded that our internal controls over financial reporting were
effective as of December 31, 2004.
BDO Seidman, LLP, an independent registered public accounting firm, has
issued an attestation report on management's assessment of internal control over
financial reporting, which is included in ITEM 9A.
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting
To The Board of Directors and Stockholders:
We have audited management's assessment, included in Management's Report on
Internal Control Over Financial Reporting, that Hemispherx Biopharma, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control'Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Hemispherx Biopharma, Inc.'s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on managemen's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
61
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Hemispherx Biopharma, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Hemispherx Biopharma, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We have also audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 2004 and 2003,
and 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, 2004, and our report dated February 4, 2005 expressed
an unqualified opinion thereon.
/s/ BDO SEIDMAN LLP
- -----------------------------
Philadelphia, PA
February 4, 2005
ITEM 9B. Other Information.
None.
62
PART III
Item 10. 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 report:
Name Age Position
William A. Carter, M.D. 67 Chairman, Chief Executive Officer, and
R. Douglas Hulse 61 President
Robert E. Peterson 68 Chief Financial Officer
David R. Strayer, M.D. 59 Medical Director, Regulatory Affairs
Mei-June Liao, Ph.D. 54 Vice President of Regulatory Affairs, Quality
Control and Research and Development
Robert Hansen 61 Vice President of Manufacturing
Carol A. Smith, Ph.D. 55 Director of Process Development
Richard C. Piani 78 Director
William M. Mitchell, M.D. 70 Director
Ransom W. Etheridge 66 Director, Secretary and General Counsel
Iraj Eqbhal Kiani, Ph.D. 59 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 us in 1978,
and has served as: (a) our Chief Scientific Officer since May 1989; (b) the
Chairman of our Board of Directors since January 1992; (c) our Chief Executive
Officer since July 1993; (d) our President since April, 1995; and (e) a director
since 1987. From 1987 to 1988, Dr. Carter served as our 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 our 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
63
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.
R. DOUGLAS HULSE was appointed our President and Chief Operating Officer in
February 2005. Mr. Hulse has been an executive director at Sage Group, Inc., an
international organization providing senior level strategic management services
to the biotechnology and pharmaceutical sector, since 1995. Mr. Hulse is a Phi
Beta Kappa graduate of Princeton University with a cum laude degree in chemistry
and the holder of S.M. Degrees in both management and Chemical Engineering from
M.I.T., previously served as our Chief Operating Officer in 1996 and 1997. Mr.
Hulse devotes approximately 40 to 50% of his time to our business.
ROBERT E. PETERSON has served as our Chief Financial Officer since April,
1993 and served as an Independent Financial Advisor to us 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 our Medical
Director 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.
MEI-JUNE LIAO, Ph.D. has served as Vice President of Regulatory Affairs,
Quality and Research & Development since October 2003 and as Vice President of
Research & Development since March 2003 with responsibilities for the
regulatory, quality control and product development of Alferon(R). Before the
acquisition of certain assets of ISI, Dr. Liao was Vice President of Research
and Development from 1995 to 2003 and held senior positions in the Research and
Development Department of ISI from 1983 to 1994. Dr. Liao received her Ph.D.
from Yale University in 1980 and completed a three year postdoctoral appointment
at the Massachusetts Institute of Technology under the direction of Nobel
Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many
scientific publications and invention disclosures.
ROBERT HANSEN joined us as Vice President of Manufacturing in 2003 upon
the acquisition of certain assets of ISI. He is responsible for the manufacture
of Alferon N(R). Mr. Hansen had been Vice President of Manufacturing for ISI
since 1997, and served in various capacities in manufacturing since joining ISI
in 1987. He has a B.S. degree in Chemical Engineering from Columbia University
in 1966.
64
CAROL A. SMITH, Ph.D. is Director of Process Development and has served as
our 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 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 us in 1993, with respect to general business
strategies for our 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 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 since October 1997, and presently
serves as our secretary and general counsel. Mr. Etheridge first became
associated with us in 1980 when he provided consulting services to us and
participated in negotiations with respect to our 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., Ph.D. has been a director 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 one of our directors from 1987 to 1989.
IRAJ EQHBAL KIANI, M.B.A., Ph.D., 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 established 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 our proprietary technology. Dr. Kiani received his Ph.D.
degree from the University of Warwick in England.
65
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,
2004, all of our officers, directors and ten percent stockholders complied with
all applicable Section 16(a) filing requirements on a timely basis, except that
Dr. Esteve, a former director, and Mr. Kiani did not file a Form 3.
Audit Committee and Audit Committee Expert
Audit Committee. Our Audit Committee of the Board of Directors consists of
Richard Piani, Committee Chairman, William Mitchell, M.D. and Iraj-Eqhbal Kiani.
Mr. Piani, Dr. Mitchell and Iraj-Eqhbal Kiani are Independent Directors. We do
not have a financial expert as defined in Securities and Exchange Commission
rules on the 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. We believe Mr.
Piani, Dr. Mitchell and Iraj-Eqhbal Kiani to be independent of management and
free of any relationship that would interfere with their exercise of independent
judgment as members of this committee. Our audit committee is responsible for
annually recommending independent accountants, preparing the reports or
statements as may be required by AMEX or the securities laws, and reviewing: (i)
the adequacy of our system of internal accounting controls; (ii) our audited
financial statements and reports and discussing the statements and reports with
management, including any significant adjustments, management judgments and
estimates, new accounting policies and disagreements with management; and (iii)
disclosures by independent accountants concerning relationships with our company
and the performance of our independent accountants
Code of Ethics
Our Board of Directors adopted a code of ethics and business conduct
for officers, directors and employees that went into effect on May 19, 2003.
This code has been presented and reviewed by each officer, director and
employee. You may obtain a copy of this code by visiting our web site at
www.hemispherx.net (Corporate Info) or by written request to our office at 1617
JFK Boulevard, Suite 660, Philadelphia, PA 19103.
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, 2004,
2003 and 2002 to (i) our Chief Executive Officer and (ii) our five 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 $100,000 (collectively, the "Named Executives").
66
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary ($) Restricted Warrants & Options All Other
Stock Awards Awards Compensation(1)
- ----------------------------- ------------- --------------------- --------------- -------------------- ---------------
William A. Carter 2004 (2)605,175 - (3) 320,000 $32,003
Chairman of 2003 (2)582,461 - (4)1,450,000 28,375
the Board and CEO 2002 (2)565,514 - (5)1,000,000 24,747
-
Robert E. Peterson 2004 (6) 221,242 - (7) 63,824 -
Chief 2003 (6) 193,816(6) - - -
Financial 2002 187,689 - (5) 200,000 -
Officer
David R. Strayer, M.D. 2004 180,394 - (8) 10,000 -
Medical Director 2003 190,096 - - -
2002 178,594 - (5) 50,000 -
Carol A. Smith, Ph.D. 2004 134,658 - (8) 10,000 -
Director 2003 140,576 - - -
of 2002 128,346 - (5) 20,000 -
Process Development
Mei-June Liao, Ph.D., V.P. 2004 149,000 - (8) 10,000 -
of Quality Control 2003 (9) 100,575 - - -
2002 - - - -
Robert Hansen 2004 132,000 - (8) 10,000 -
V.P. of Manufacturing 2003 (9)104,500 - - -
2002 - - - -
- ----------------------
(1) Consists of insurance premiums paid by us with respect to term life and
disability insurance for the benefit of the named
executive officer.
(2) Includes bonuses of $96,684, $99,481 and $121,035 in 2002, 2003 and 2004,
respectively.
(3) Consist of a stock option grant of 320,000 shares exercisable at $2.60 per
share.
(4) Represents warrants to purchase 1,450,000 shares of common stock
exercisable at $2.20 per share.
(5) Represents number of options to purchase shares of common stock at $2 per
share.
67
(6) 2002 includes a bonus of $36,634 and 2003 includes a bonus of $37,830 both
paid in 2004, 2004 includes a bonus of $44,248 paid in 2005.
(7) Consist of stock option grant of 50,000 shares exercisable at $3.44 per
share and 13,824 stock options to purchase common stock at $2.60 per share.
(8) Consists of stock option grant exercisable at $1.90 per share.
(9) Compensation since March 2003. Employed by ISI prior to that.
The following table sets forth certain information regarding stock
options granted during 2004 to the executive officers named in the Summary
Compensation Table.
- ------------------ ------------------------------------ ------------- ---------------- ----------------------------------
Individual Grants
- ------------------ ------------------------------------ ------------- ---------------- ----------------------------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------------------------
Name Number Of Percentage Of Exercise Expiration Date Potential Realizable Value At
Total Options
Securities Granted To
Underlying Employees In
Warrants Fiscal Year Price Per Assumed Rates Of Stock Price
Granted 2004(1) Share (2) Appreciation For Options Term
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------------------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
5% (3) 10%(3)
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Carter, W.A. 320,000 50.5 $2.60 9/7/14 $1,357,130 $2,161,355
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Peterson, R. 50,000 13,864 10.1 3.44 6/22/14 280,170 446,123
2.60 9/7/14 58,627 93,369
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Strayer, D. 10,000 1.6 1.90 12/7/14 30,949 49,498
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Smith, C. 10,000 1.6 1.90 12/7/14 30,949 49,498
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Liao, M. 10,000 1.6 1.90 12/7/14 30,949 49,498
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Hansen, R. 10,000 1.6 1.90 12/7/14 30,949 49,498
- ------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
(1) Total stock options issued to employees in 2004 were 633,080.
(2) The exercise price is equal to the closing price of our common stock at
the date of issuance.
(3) 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 our estimate
of future stock price appreciation.
68
The following table sets forth certain information regarding the stock
options held as of December 31, 2004 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
Warrants/ In-the-Money-Options At Fiscal
Options at Fiscal Year End Numbers Year End (1)
Dollars
Name Shares Value Realized Exercisable Unexercisable Exercisable Unexercisable
Acquired on ($)
Exercise (#)
- ----------------------- --------------- ---------------- ---------------- ------------------- ----------------- ------------------
- ----------------------- --------------- ---------------- ---------------- ------------------- ----------------- ------------------
William Carter - - 5,325,378(2) 250,000(3) $69,750 $0
Robert Peterson - - 453,750(4) 0 0 0
David Strayer - - 130,000(5) 10,000(7) 0 0
Carol Smith - - 41,791(6) 10,000(7) 0 0
Mei-June Liao - - - 10,000(7) 0 0
Robert Hansen - - - 10,000(7) 0 0
- ----------------------------
(1) Computation based on $1.90, the December 31, 2004 closing bid price for
the common stock on the American Stock Exchange.
(2) Consist of (i) 750,000 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) 1,450,000 warrants
to purchase common stock at $2.20 per share expiring on September 8,
2008, (v) 320,000 stock option exercisable at $2.60 per share expiring
on September 7, 2014 and (vi) 73,728 stock options exercisable at $2.71
per share until exercised. Also includes 2,355,000warrants 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) 170,000
warrants exercisable at $4.00 per share expiring on January 1,
2008,(ii) 300,000 warrants exercisable at $6.00 per share expiring on
January 1, 2006 (iii) 20,000 warrants exercisable at $4.00 per share
expiring on 2008,(iv) 465,000 warrants exercisable at $1.75 expiring on
January 1, 2008, and 1,400,000 warrants exercisable at $3.50 per share
expiring on September 30, 2007.
(3) Consists of (i) 250,000 warrants exercisable at $2.00 per share
expiring on August 13, 2007.
(4) Consists of (i) 10,000 stock options exercisable at $4.03 per share
expiring on January 3, 2011 (ii) 13,750 stock options exercisable at
69
$3.50 per share expiring on January 22, 2007, (iii) 200,000 warrants
exercisable at $2.00 per share expiring on August 13, 2007, (iv) 50,000
warrants exercisable at $3.50 expiring on March 1, 2006, (v) 100,000
warrants exercisable at $5.00 per share expiring on April 14, 2006,
(vi) 30,000 warrants exercisable at $5.00 per share expiring on
February 28, 2009 and 50,000 options to purchase common stock at $3.44
per share expiring June 22, 2014.
(5) Consists of (i) 50,000 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) 10,000 stock options exercisable
at $4.03 expiring on January 3, 2011 and (iv) 20,000 stock options
exercisable at $3.50 per share expiring on January 22, 2007.
(6) Consists of (i) 20,000 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) 10,000 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.
(7) Consists of options to purchase common stock at $1.90 per share
expiring on December 7, 2014.
In September 2003, our Board of Directors changed the non-employee Board Member
compensation to be 50% cash and 50% stock. The Board's stock compensation is to
be paid on the first day of each calendar quarter. The number of shares paid
shall have a value of $12,500 with the value of the shares being determined by
the closing price of our common stock on the American Stock Exchange on the last
trading day of the preceding quarter. In no event shall the number of shares
issued under this plan exceed 1,000,000 shares over a ten year period.
Employment and Change in Control Agreements
On March 11, 2005, our board of directors, at the recommendation of the
Compensation Committee, approved an amended and restated employment agreement
and an amended and restated engagement agreement with Dr. William A. Carter.
The amended and restated employment agreement provides for Dr. Carter's
employment as our Chief Executive Officer and Chief Scientific Officer until
December 31, 2010 unless sooner terminated for cause or disability. The
agreement automatically renews for successive one year periods after the initial
termination date unless we or Dr. Carter give written notice otherwise at least
ninety days prior to the termination date or any renewal period. Dr. Carter has
the right to terminate the agreement on 30 days' prior written notice. The
initial base salary retroactive to January 1, 2005 is $290,888, subject to
adjustment based on the average increase or decrease in the Consumer Price Index
for the prior year. In addition, Dr. Carter could receive an annual performance
bonus of up to 25% of his base salary, at the sole discretion of the
Compensation Committee of the board of directors, based on his performance or
our operating results. 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 us from any joint
venture or corporate partnering arrangement. Dr. Carter's agreement also
70
provides that he be paid a base salary and benefits through the last day of the
then term of the agreement if he is terminated without "cause", as that term is
defined in agreement. In addition, should Dr. Carter terminate the agreement or
the agreement be terminated due to his death or disability, the agreement
provides that Dr Carter be paid a base salary and benefits through the last day
of the month in which the termination occurred and for an additional twelve
month period. Pursuant to his original agreement, Dr. Carter was granted options
to purchase 73,728 (post split) shares in 1991. The exercise period of these
options is extended through December 31, 2010 and, should Dr. Carter's
employment agreement be extended beyond that date, the option exercise period is
further extended to the last day of the extended employment period.
The amended and restated engagement agreement, retroactive to January
1, 2005, provides for our engagement of Dr. Carter as a consultant related to
patent development, as one of our directors and as chairman of the Executive
Committee of our board of directors until December 31, 2010 unless sooner
terminated for cause or disability. The agreement automatically renews for
successive one year periods after the initial termination date or any renewal
period. Dr. Carter has the right to terminate the agreement on 30 days' prior
written notice. The initial base fee as of January 1, 2004 is $207,777, subject
to annual adjustments equal to the percentage increase or decrease of annual
dollar value of directors' fees provided to our directors during the prior year.
The annual fee is further subject to adjustment based on the average increase or
decrease in the Consumer Price Index for the prior year. In addition, Dr. Carter
could receive an annual performance bonus of up to 25% of his base fee, at the
sole direction of the Compensation Committee of the board of directors, based on
his performance. Dr. Carter will not participate in any discussions concerning
the determination of this annual bonus. Dr. Carter's agreement also provides
that he be paid his base fee through the last day of the then term of the
agreement if he is terminated without "cause", as that term is defined in the
agreement. In addition, should Dr. Carter terminate the agreement or the
agreement be terminated due to his death or disability, the agreement provides
that Dr. Carter be paid fees due him through the last day of the month in which
the termination occurred and for an additional twelve month period.
On February 14, 2005 we entered into an agreement with The Sage Group
of Branchburg, New Jersey for R. Douglas Hulse, an Executive Director of The
Sage Group, to serve as President and Chief Operating Officer of our company. In
addition, other Sage Group principals and Senior Directors will be made
available to assist as needed. The engagement is expected to continue for a
period of 18 months; however, it is terminable on 30 days written notice by
either party after 12 months. Compensation for the services include a ten year
warrant to purchase 250,000 shares of our common stock at an exercise price of
$1.55. These warrants are to be issued to Sage Healthcare Advisors, LLC and are
to vest at the rate of 12,500 per month of the engagement with 25,000 vesting
upon completion of the eighteenth month. Vesting accelerates in the event of a
merger or a purchase of a majority of our assets or equity. The Sage Group also
is to receive a monthly retainer of $10,000 for the period of the engagement. In
addition, for each calendar year (or part thereof) during which the agreement is
in effect, The Sage Group will be entitled to an incentive bonus in an amount
equal to 0.5% of the gross proceeds received by us during such year from any
joint ventures or corporate partnering arrangements. After termination of the
agreement, The Sage Group will only be entitled to receive the incentive bonus
based upon gross proceeds received by us during the two year period commencing
on the termination of the agreement with respect to any joint ventures or
corporate partnering arrangements entered into by us during the term of the
agreement. Mr. Hulse will devote approximately two to two and one half days per
week to our business.
We entered into an engagement agreement, retroactive to January 1,
2005, with Ransom W. Etheridge which provides for Mr. Etheridge's engagement as
our General Counsel until December 31, 2009 unless sooner terminated for cause
71
or disability. The agreement automatically renews for successive one year
periods after the initial termination date unless we or Mr. Etheridge give
written notice otherwise at least ninety days prior to the termination date or
any renewal period. Mr. Etheridge has the right to terminate the agreement on 30
days' prior written notice. The initial annual fee for services is $96,000 and
is annually subject to adjustment based on the average increase or decrease in
the Consumer Price Index for the prior year. Mr. Etheridge's agreement also
provides that he be paid all fees through the last day of then current term of
the agreement if he is terminated without "cause" as that term is defined in the
agreement. In addition, should Mr. Etheridge terminate the agreement or the
agreement be terminated due to his death or disability, the agreement provides
that Mr. Etheridge be paid the fees due him through the last day of the month in
which the termination occurred and for an additional twelve month period. Mr.
Etheridge will devote approximately 85% of his business time to our business.
We entered into an amended and restated engagement agreement,
retroactive to January 1, 2005, with Robert E. Peterson which provides for Mr.
Peterson's engagement as our Chief Financial Officer until December 31, 2010
unless sooner terminated for cause or disability. Mr. Peterson has the right to
terminate the agreement on 30 days' prior written notice. The initial annual fee
for services is $202,680 and is annually subject to increases based on the
average increase in the cost of inflation index for the prior year. Mr. Peterson
shall receive an annual bonus in each year that our Chief Executive Officer is
granted a bonus. The bonus shall equal a percentage of Mr. Peterson's base
annual compensation comparable to the percentage bonus received by the Chief
Executive Officer. In addition, Mr. Peterson shall receive bonus compensation
upon Federal Drug Administration approval of commercial application of Ampligen.
Mr. Peterson's agreement also provides that he be paid all fees through the last
day of then current term of the agreement if he is terminated without "cause" as
that term is defined in the agreement. In addition, should Mr. Peterson
terminate the agreement or the agreement be terminated due to his death or
disability, the agreement provides that Mr. Peterson be paid the fees due him
through the last day of the month in which the termination occurred and for an
additional twelve month period. Mr. Peterson will devote approximately 85% of
his business time to our business.
On March 11, 2005 the Board of Directors, deeming it essential to the best
interests of our shareholders to foster the continuous engagement of key
management personnel and recognizing that, as is the case with many publicly
held corporations, a change of control might occur and that such possibility,
and the uncertainty and questions which it might raise among management, might
result in the departure or distraction of management personnel to the detriment
of our company and our shareholders, determined to reinforce and encourage the
continued attention and dedication of members of our management to their
engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of our company
and entered into identical agreements regarding change in control with William
A. Carter, our Chief Executive Officer and Chief Scientific Officer, Robert E.
Peterson, our Chief Financial Officer and Ransom W. Etheridge, our General
Counsel. Each of the agreements regarding change in control became effective
March 11, 2005 and continue through December 31, 2007 and shall extend
automatically to the third anniversary thereof unless we give notice to the
other party prior to the date of such extension that the agreement term will not
be extended. Notwithstanding the foregoing, if a change in control occurs during
the term of the agreements, the term of the agreements will continue through the
second anniversary of the date on which the change in control occurred. Each of
the agreements entitles William A. Carter, Robert E. Peterson and Ransom W.
72
Etheridge, respectively, to change of control benefits, as defined in the
agreements and summarized below, upon their respective termination of
employment/engagement with our company during a potential change in control, as
defined in the agreements or after a change in control, as defined in the
agreements, when their respective terminations are caused (1) by us for any
reason other than permanent disability or cause, as defined in the agreement (2)
by William A. Carter, Robert E. Peterson and/or Ransom W. Etheridge,
respectively, for good reason as defined in the agreement or, (3) by William A.
Carter, Robert E. Peterson and/or Ransom W. Etheridge, respectively for any
reason during the 30 day period commencing on the first date which is six months
after the date of the change in control.
The benefits for each of the foregoing executives would be as follows:
o A lump sum cash payment of three times his base salary and annual bonus
amounts; and o Outplacement benefits.
Each agreement also provides that the executive is entitled to a "gross-up"
payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.
Dr. Carter's agreement also provides for the following benefits:
o Continued insurance coverage through the third anniversary of his termination;
and o Retirement benefits computed as if he had continued to work for the above
period.
Compensation of Directors
The compensation package for Members of the Board of Directors was
changed on September 9, 2003. Board member compensation consists of an annual
retainer of $100,000 to be paid 50% in cash and 50% in Company common stock. On
September 9, 2003 the Directors approved a 10 year plan which authorizes up to
1,000,000 shares for use in supporting this compensation plan. In addition, all
non-employee directors received some compensation in 2003 for special project
work performed on our behalf. This project work ceased as of September 30, 2003.
All directors have been granted options to purchase common stock under our Stock
Option Plans and/or Warrants to purchase common stock. We believe such
compensation and payments are necessary in order for us to attract and retain
qualified outside directors.
2004 Equity Incentive Plan
Our 2004 Equity Incentive Plan ("2004 Plan") provides for the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards to our employees, directors, officers, consultants
and advisors for the purchase of up to an aggregate of 8,000,000 shares of
common stock. The 2004 plan is administered by the board of directors, which has
complete discretion to select eligible individuals to receive and to establish
the terms of grants under the plan. Stock options awarded under the Equity
Incentive Plan may be exercisable at such times (not later than 10 years after
the date of grant) and at such exercise prices (not less than fair market value
at the date of grant) as the Board may determine. The Board may provide for
options to become immediately exercisable upon a "change in control" as defined
in the plan. The number of shares of common stock available for grant under the
2004 Plan is subject to adjustment for changes in capitalization. As of December
73
31, 2004, 7,366,920 shares were available for grants under the 2004 Plan. Unless
sooner terminated, the Equity Incentive Plan will continue in effect for a
period of 10 years from its effective date
1990 Stock Option Plan
Our 1990 Stock Option Plan, as amended ("1990 Plan"), provides for the
grant of options to our employees, directors, officers, consultants and advisors
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, 2004, no options 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, we established a defined contribution plan, effective
January 1, 1995, entitled the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement. All of our full time employees 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 our contributions will
vest over one year. In 2004 we provided matching contributions to each employee
for up to 6% of annual pay for a total of $76,886 for all eligible employees.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2004, the members of our
Compensation Committee were William Mitchell and Richard Piani. Dr. Mitchell and
Mr. Piani received fees for certain consulting work performed on our behalf in
2003. 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 our employees and consultants.
The following report of the compensation committee discusses our executive
compensation policies and the basis of the compensation paid to our executive
officers in 2004.
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 our executive total compensation program, all
determined by individual and corporate performance as specified in the various
employment agreements; base salary, annual incentive, and long-term incentives.
74
Base Salary
The Summary Compensation Table shows amounts earned during 2004 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.
We established the base salaries for Chief Executive Officer, Dr. William A.
Carter under an employment agreement in December 3, 1998 (as amended and
restated on March 11, 2005), which provides for a base salary of $290,887.68. In
addition, we entered into an agreement with Dr. Carter for his services as a
consultant related to patient development, development of patents and as a
member of our Board of Directors. This agreement establishes a base annual fee
of $207,776.88. Both agreements are subject to annual cost of living
adjustments. Dr. Carter is entitled to an annual performance bonus of up to 25%
of the base salary of each agreement at the discretion of the compensation
committee of the Board of Directors.
On March 11, 2005, we entered into an extended engagement agreement with
Robert E. Peterson, Chief Financial Officer retroactive to January 1, 2005 for a
base annual fee of $202,680 until December 31, 2010. Mr. Peterson's agreement
all ows for an nual cost of living increases and a performance bonus.
On March 11, 2005, we entered into an engagement agreement with Ransom W.
Etheridge, Corporate General Counsel, retroactive to January 1, 2005 for an
annual fee of $96,000 until December 31, 2009.
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 our Chief Executive Officer in 2004 and
the cash bonus awarded to the Chief Financial Officer in 2004 were determined
based on this provision in their employment agreements.
Long-Term Incentives
We grant long-term incentive awards periodically to align a significant
portion of the executive compensation program with stockholder interest over the
long-term through encouraging and facilitating executive stock ownership.
Executives are eligible to participate in our incentive stock option plans. Our
Chief Executive Officer and President, Dr. William Carter, received a grant of
320,000 stock options in 2004. These options are exercisable at $2.60 per share
and expire on September 7, 2014, unless previously exercised. The options vested
on September 8, 2004.
On June 23, 2004, our Chief Financial Officer, Robert E. Peterson, was
granted 50,000 stock options exercisable at $3.44 per share expiring on June 22,
2014 unless previously exercised. These options were issued in connection with
his renewed and extended employment agreement. On September 8, 2004 Mr. Peterson
was granted 13,824 stock options exercisable at $2.60 per share expiring on
September 7, 2014.
Ransom Etheridge, our Corporate Secretary and General Counsel, was
awarded 50,000 stock options on September 8, 2004 exercisable at $2.60 per share
expiring September 7, 2014, unless previously exercised.
75
Performance Graph
Total Return to Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name / Index Dec00 Dec01 Dec02 Dec03 Dec04
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
HEMISPHERX BIOPHARMA INC -52.20 -5.26 -52.67 6.10 -15.93
S&P 600 INDEX 11.80 6.54 -14.63 38.79 22.65
PEER GROUP -33.76 48.39 -45.76 5.33 -52.63
INDEXED RETURNS
Base Years Ending
Period
Company Name / Index Dec99 Dec00 Dec01 Dec02 Dec03 Dec04
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
HEMISPHERX BIOPHARMA INC 100 47.80 45.28 21.43 22.74 19.12
S&P 600 INDEX 100 111.80 119.11 101.68 141.13 173.09
PEER GROUP 100 66.24 98.29 53.31 56.15 26.60
Peer Group Companies
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
AVI BIOPHARMA INC
IMMUNE RESPONSE CORP/DE
LA JOLLA PHARMACEUTICAL CO
MAXIM PHARMACEUTICALS INC
76
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth as of March 1, 2005, the number and
percentage of outstanding shares of common stock beneficially owned by:
o Each person, individually or as a group, known to us to be
deemed the beneficial owners of five percent or more of our
issued and outstanding common stock;
o each of our directors and the Named Executives; and
o all of our officers and directors as a group.
As of March 1, 2005, 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.
Name and Address of Beneficial Owner Shares Beneficially Owned % Of Share Beneficially Owned
- -------------------------------------------- ---------------------------------- -------------------------------------------
William A. Carter, M.D. 6,067,868 (1) 10.9
Robert E. Peterson 468,074 (2) *
Ransom W. Etheridge 454,430(3) *
2610 Potters Rd.
Virginia Beach, VA 23452
77
Richard C. Piani 241,469(4) *
97 Rue Jeans-Jaure
Levaillois-Perret
France 92300
Doug Hulse 339,400(10) *
Sage Group, Inc.
3322 Route 22 West
Building 2, Suite 201
Branchburg, NJ 08876
William M. Mitchell, M.D. 215,454(5) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232
David R. Strayer, M.D. 148,746(6) *
Carol A. Smith, Ph.D. 51,791(7) *
Iraj-Eqhbal Kiani, Ph.D. 12,000(8) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648
Mei-June Liao, Ph.D. 10,000(9) *
Robert Hansen 10,000(9) 0
All directors and executive officers as a
group (11 persons) 8,019,232 14.1%
- ------------------------
* Less than 1%
(1) Includes (i) warrants to purchase 1,450,000 shares of common stock at
$2.20 per share, expiring on September 8, 2008, (ii) 1,000,000 warrants
to purchase common stock at $2.00 per share expiring on August 7, 2007,
(iii) 188,325 warrants to purchase common stock at $6.00 per share
expiring on February 22, 2006, (iv) 188,325 warrants to purchase common
stock at $9.00 per share expiring on February 22, 2006, (v) 320,000
stock options to purchase common stock at $2.60 per share expiring on
September 7, 2014, (vi) 73,728 stock options exercisable at $2.71 per
share until exercised and (vii) 492,490 shares of common stock. Also
includes 2,355,000 warrants and options originally issued to Dr. Carter
and subsequently transferred to Carter Investments of which Dr. Carter
is a majority owner. These warrants and options include 170,000
warrants to purchase common stock at $4.00 per share expiring January
1, 2008; 300,000 warrants to purchase common stock at $6.00 per share
expiring on January 1, 2006; 20,000 warrants to purchase common stock
expiring on January 1, 2008; 465,000 warrants to purchase common stock
78
at $1.75 expiring on June 30, 2005 and 1,400,000 warrants to purchase
common stock at $3.50 expiring on September 30, 2007.
(2) Includes (i) 13,750 options to purchase common stock at an exercise
price of $3.50 per share, expiring on January 7, 2007; (ii) warrants to
purchase 50,000 shares of Common stock at an exercise price of $3.50
per share, expiring on February 28, 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 April 30, 2006 (v) options to purchase 10,000
shares at $4.03 per share that expire on January 3, 2011 (vi) 200,000
warrants exercised at $2.00 per share expiring on August 13, 2007,
(vii) 50,000 options to purchase common stock at $3.44 per share
expiring on June 22, 2014; (viii) 13,824 options to purchase common
stock exercisable at $2.60 per share expiring on September 7, 2014 and
(ix) 500 shares of common stock.
(3) Includes (i) 100,000 warrants to purchase common stock at $2.00 per
share expiring on August 13, 2007, (ii) 20,000 warrants to purchase
common stock at $4.00 per share expiring January 2, 2008, (iii) 100,000
stock options to purchase common stock at $2.75 per share expiring on
November 13, 2013, (iv) 50,000 stock options to purchase common stock
at $2.60 per share expiring on September 7, 2014 and 84,430 shares of
common stock. Also includes 100,000 stock options originally issued to
Mr. Etheridge and subsequently transferred to relatives and trusts.
These options to purchase common stock at $2.75 expire on December 4,
2013.
(4) Includes (i) 20,000 warrants to purchase common stock at $4.00 per
share expiring on January 1, 2006, (ii) 54,608 stock options to
purchase Common Stock at $2.60 per share expiring on September 7, 2014,
(iii) 100,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007, (iv) 48,961 shares of common stock owned by Mr. Piani
(v) 12,900 shares of common stock owned jointly by Mr. and Mrs. Piani;
and (vi) 5,000 shares of common stock owned by Mrs. Piani.
(5) Includes (I) warrants to purchase 12,000 shares of common stock at
$6.00 per share, expiring on August 25, 2008; (ii) 50,000 stock options
to purchase common stock at $2.60 per share expiring on September 7,
2014,(iii) 100,000 warrants exercisable at $2.00 per share expiring in
August 13, 2007 and 53,454 shares of common stock.
(6) Includes (i) stock options to purchase 20,000 shares of common stock at
$3.50 per shares expiring on February 22, 2007; (ii) 50,000 warrants to
purchase common stock at $4.00 per shares expiring on February 28,
2008; (iii) 10,000 stock options exercisable at $4.03 per share and
expiring on January 3, 2011; 50,000 warrants to purchase common stock
at $2.00 per share and expiring on August 13, 2007, 10,000 stock
options to purchase common stock at $1.90 per share expiring on
December 7, 2014 and (iv) 8,746 shares of common stock.
(7) Consists of 5,000 warrants to purchase common stock at $4.00 per share
expiring June 7, 2008; 6,791 stock options exercisable at $3.50
expiring January 22, 2007, 20,000 warrants exercisable at $2.00 per
share expiring in August 13, 2007, options to purchase 10,000 shares of
common stock at $ 4.03 per share expiring on January 3, 2011 and 10,000
stock options to purchase common stock at $1.90 per share expiring on
December 7, 2014.
79
(8) Consist of 12,000 warrants exercisable at $3.86 per share expiring on
April 30, 2005.
(9) Consists of options to purchase common stock at $1.90 per share
expiring on December 7, 2014.
(10) Consists of 250,000 options to purchase common stock at $1.55 expiring
February 13, 2015. These warrants vest at the rate of 12,000 per month
beginning March 14, 2005. These options are issued to Sage Healthcare, LLC,
an affiliate of The Sage Group. Also includes 89,400 shares of common stock
owned by The Sage Group.
Item 13. Certain Relationships and Related Transactions.
We have employment agreements with certain of our executive officers
and have granted such officers and directors options and warrants to purchase
our common stock, as discussed under the headings, "Item 11. Executive
Compensation," and "Item 12. Security Ownership of Certain Beneficial Owners and
Management," above.
Ransom W. Etheridge, our secretary and one of our directors, is an
attorney in private practice, who renders corporate legal services to us from
time to time, for which he has received fees totaling $60,000 in 2004 and
options to purchase Company stock valued at $237,000 using the Black Scholes
pricing model and recorded as stock compensation expense. Richard C. Piani,
another of our directors, lives in Paris, France and assisted our European
subsidiaries in their dealings with medical institutions and the European
Medical Evaluation Authority. Dr. William Mitchell, another of our directors,
assisted us in establishing clinical trial protocols and performed other
scientific work for us from time to time. The services provided by these latter
two directors were terminated in September 2003. For these services, these two
directors were paid an aggregate of $144,955, $170,150 and $100,100 for the
years ending December 31, 2001, 2002 and 2003, respectively.
Through November 2002, William A. Carter, our Chief Executive Officer,
had received an aggregate of $12,106 in short term advances which were repaid as
of December 31, 2002. All advances bore interest at 6% per annum. We loaned
$60,000 to Ransom W. Etheridge in November, 2001 for the purpose of exercising
15,000 class A redeemable warrants. This loan bears interest at 6% per annum.
We paid $33,450, $18,800 and $7,600 for the years ending December 31, 2002,
2003 and 2004, respectively to Carter Realty for the rent of property used at
various times in years 2002, 2003 and 2004 by us. The property was owned by
others, but was acquired in 2004 by Resort House, LLC of which William A. Carter
has minority interest .
Antoni Esteve, one of our former directors, is a Member of the Executive
Committee and Director of Scientific and Commercial Operations of Laboratorios
Del Dr. Esteve S.A. In March 2002, our European subsidiary Hemispherx S.A.
entered into a Sales and Distribution Agreement with Laboratorios Del Dr. Esteve
S.A. For more information about our activities with Laboratorios Del Dr. Esteve
S.A. see "European Operations" in Item 1. Business above. In addition, in March
2003, we issued 347,445 shares of our common stock to Provesan SA, an affiliate
of Laboratorios Del Dr. Esteve S.A., in exchange for 1,000,000 Euros of
convertible preferred equity certificates of Hemispherx S.A., owned by
Laboratorios Del Dr. Esteve S.A.
80
ITEM 14. Principal Accounting Fees and Services.
All audit and professional services provided by BDO Seidman, LLP are approved by
the Audit Committee. The total fees billed by BDO Seidman, LLP were $308,497 in
2003 and $226,484 in 2004. The following table shows the aggregate fees billed
to us by BDO Seidman, LLP for professional services rendered during the year
ended December 31, 2004.
- ------------------------------------------ -------------------------------------------------------------------------------
Amount ($)
- ------------------------------------------ -------------------------------------------------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
Description of Fees 2003 2004
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
Audit Fees $264,917 $149,950
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
Audit-Related Fees 43,580 76,534
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
Tax Fees - -
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
All Other Fees - -
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
- ------------------------------------------ --------------------------------------- ---------------------------------------
Total $308,497 $226,484
======== ========
- ------------------------------------------ --------------------------------------- ---------------------------------------
Audit Fees
Represents fees for professional services provided for the audit of our annual
financial statements and review of our financial statements included in our
quarterly reports and services in connection with statutory and regulatory
filings.
Audit-Related Fees
Represents the fees for assurance and related services that are reasonably
related to the performance of the audit or review of our financial statements,
including those in 2003 and 2004 related to the acquisition of ISI.
The Audit Committee has determined that BDO Seidman, LLP's rendering of these
non-audit services is compatible with maintaining auditors independence. The
Board of Directors considers BDO Seidman, LLP to be well qualified to serve as
our independent public accountants. The committee also approved the charges for
services performed in 2004.
The Audit Committee pre-approves all auditing services and the terms thereof
(which may include providing comfort letters in connection with securities
underwriting) and non-audit services (other than non-audit services prohibited
under Section 10A(g) of the Exchange Act or the applicable rules of the SEC or
the Public Company Accounting Oversight Board) to be provided to us by the
independent auditor; provided, however, the pre-approval requirement is waived
with respect to the provisions of non-audit services for us if the "de minimus"
provisions of Section 10A (i)(1)(B) of the Exchange Act are satisfied. This
authority to pre-approve non-audit services may be delegated to one or more
members of the Audit Committee, who shall present all decisions to pre-approve
an activity to the full Audit Committee at its first meeting following such
decision.
81
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(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.
Except as disclosed in the footnotes, the following exhibits were filed with the
Securities and Exchange Commission as exhibits to our 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.(1) 2.2 Second Asset Purchase Agreement dated March 11, 2003, by
and between the Company and ISI.(1)
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 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.(2)
4.3 Form of 6% Convertible Debenture of the Company issued in
March 2003.(1)
4.4 Form of Warrant for Common Stock of the Company issued in
March 2003.(1)
4.5 Form of Warrant for Common Stock of the Company issued in
June 2003.(3)
4.6 Form of 6% Convertible Debenture of the Company issued in
July 2003.(4)
4.7 Form of Warrant for Common Stock of the Company issued in
July 2003.(4)
4.8 Form of 6% Convertible Debenture of the Company issued in
October 2003.(5)
4.9 Form of Warrant for Common Stock of the Company issued in
October 2003.(5)
4.10 Form of 6% Convertible Debenture of the Company issued in
January 2004.(6)
4.11 Form of Warrant for Common Stock of the Company issued in
January 2004.(6)
4.12 Form of Warrant for Common Stock of the Company. (9)
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.(7)
10.8 Employment Agreement by and between the Registrant and
Robert E. Peterson, dated April 1, 2001.
10.9 License Agreement by and between the Company and The Johns
Hopkins University, dated December 31, 1980.
82
10.10 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.
10.11 Pharmaceutical Use Agreement, by and between the Company
and Temple University, dated August 3, 1988.
10.12 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.
10.13 Lease Agreement between the Company and Red Gate Limited
Partnership, dated November 1, 1989, relating to the
Company's Rockville, Maryland facility.
10.14 Agreement between the Company and Bioclones (Proprietary)
Limited.
10.15 Amendment, dated August 3, 1995, to Agreement between the
Company and Bioclones (Proprietary) Limited (contained in
Exhibit 10.14).
10.16 Licensing Agreement with Core BioTech Corp.
10.17 Licensing Agreement with BioPro Corp.
10.18 Licensing Agreement with BioAegean Corp.
10.19 Agreement with Esteve.
10.20 Agreement with Accredo (formerly Gentiva) Health Services.
10.21 Agreement with Biovail Corporation International.
10.22 Forbearance Agreement dated March 11, 2003, by and between
ISI, the American National Red Cross and the Company.(1)
10.23 Forbearance Agreement dated March 11, 2003, by and between
ISI, GP Strategies Corporation and the Company.(1)
10.24 Securities Purchase Agreement, dated March 12, 2003, by and
among the Company and the Buyers named therein.(1)
10.25 Registration Rights Agreement, dated March 12, 2003, by and
among the Company and the Buyers named therein.(1)
10.26 Securities Purchase Agreement, dated July 10, 2003, by and
among the Company and the Buyers named therein.(4)
10.27 Registration Rights Agreement, dated July 10, 2003, by and
among the Company and the Buyers named therein.(4)
10.28 Securities Purchase Agreement, dated October 29, 2003, by
and among the Company and the Buyers named therein.(5)
10.29 Registration Rights Agreement, dated October 29, 2003, by
and among the Company and the Buyers named therein.(5)
10.30 Securities Purchase Agreement, dated January 26, 2004, by
and among the Company and the Buyers named therein.(6)
10.31 Registration Rights Agreement, dated January 26, 2004, by
and among the Company and the Buyers named therein.(6)
10.32 Memorandum of Understanding with Fujisawa. (8)
10.33 Securities Purchase Agreement, dated July 30, 2004, by and
among the Company and the Purchasers named therein.(9)
10.34 Registration Rights Agreement, dated July 30, 2004, by and
among the Company and the Purchasers named therein. (9)
10.35 Agreement for services of R. Douglas Hulse, (11)
10.36 Amended and Restated Employment Agreement of Dr. William A.
Carter. (10)
10.37 Engagement Agreement with Dr. William A. Carter. (10)
10.38 Amended and restated employment agreement of Dr. William A.
Carter (11)
10.39 Amended and restated engagement agreement with Dr. William
A. Carter (11)
10.40 Amended and restated engagement agreement with Robert E.
Peterson (11)
10.41 Engagement Agreement with Ransom W. Etheridge (11)
10.42 Change in control agreement with Dr. William A. Carter (11)
10.43 Change in control agreement with Dr. William A. Carter (11)
10.44 Change in control agreement with Robert E. Peterson (11)
10.45 Change in control agreement with Ransom Etheridge (11)
83
21 Subsidiaries of the Registrant.
23.1 BDO Seidman, LLP consent.(11)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(11)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(11)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(11
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(11)
(1) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated March 12, 2003 and is
hereby incorporated by reference.
(2) 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) and is
hereby incorporated by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated June 27, 2003 and is
hereby incorporated by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated July 14, 2003 and is
hereby incorporated by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated October 30, 2003 and is
hereby incorporated by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated January 27, 2004 and is
hereby incorporated by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit to the
Company's quarterly report on Form 10-Q (No. 1-13441) for the period ended
September 30, 2001 and is hereby incorporated by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form S-1 Registration Statement (No. 333-113796) and is hereby
incorporated by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated August 6, 2004 and is
hereby incorporated by reference.
(10) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated September 15, 2004 and
is hereby incorporated by reference.
(11) Filed herewith.
84
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
---------------------------------------------
William A. Carter, M.D.
Chief Executive Officer
March 11, 2005
Pursuant to the requirements of Section 13 or 15(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 William A. Carter, Chairman of the Board, Chief Executive
- ----------------------
M.D. Officer and Director March 11, 2005
/s/ Richard Piani Richard Piani Director March 11, 2005
- ---------------------
/s/ Robert E. Peterson Chief Financial Officer March 11, 2005
- ----------------------
Robert E. Peterson
/s/ Ransom Etheridge Ransom Etheridge Secretary And Director March 11, 2005
- ----------------------
/s/ William Mitchell William Mitchell, Director March 11, 2005
- ---------------------
M.D., Ph.D.
/s/ Iraj E. Kiani Director March 11, 2005
- -----------------
Iraj E. Kiani, Ph.D.
F-1
HEMISPHERx BIOPHARMA, INC AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Registered Certified,
Public Accounting Firm. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 2003 and 2004. . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2004. . . . . . . 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, 2004 . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2004 . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . F-8
F-2
Report of Independent Registered Public Accounting Firm
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, 2003 and 2004 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, 2004. 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 of the
Public Company Accounting Oversight Board (United States). 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, 2003 and 2004 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the effectiveness of
Hemispherx Biopharma, Inc. internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated February 4, 2004 expressed an
unqualified opinion thereon.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
February 4, 2005
F-3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2004
(in thousands)
2003 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 3,764 $8,813
Short term investments (Note 5) 1,495 7,924
Inventory (Note 3) 2,896 2,148
Accounts and other receivables (Note 2) 282 139
Prepaid expenses and other current assets 170 266
---------------- ---------------
Total current assets 8,607 19,290
---------------- ---------------
Property and equipment, net 94 3,303
Patent and trademark rights, net 1,027 908
Investment 408 35
Deferred acquisition costs (Note 4) 1,546 -
Deferred financing costs 393 319
Advance receivable (Note 7) 1,300 1,300
Other assets 29 17
---------------- ---------------
Total assets $ 13,404 $ 25,172
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 488 $ 526
Accrued expenses (Note 6) 1,119 1,012
Current portion of long-term debt - 3,248
--------------- ---------------
Total current liabilities 1,607 4,786
---------------- ---------------
Long-Term Debt-net of current portion (Note 7) 2,058 305
Commitments and contingencies
(Notes 10, 12, 13 and 15)
Redeemable common stock (Note 4) 491 -
Stockholders' equity (Note 8):
Common stock 39 50
Additional paid-in capital 123,054 158,024
Accumulated other comprehensive income - (10)
Accumulated deficit (113,843) (137,983)
Treasury stock (2) -
--------------- ----------------
Total stockholders' equity 9,248 20,081
---------------- ---------------
Total liabilities and stockholders' equity $ 13,404 $25,172
======== =======
See accompanying notes to consolidated financial statements.
F-4
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations For each of the years
in the three-year period ended December 31, 2004
(in thousands, except share and per share data)
Years ended December 31,
-----------------------------
2002 2003 2004
---- ---- ----
Revenues:
Sales of product net $ - $ 509 $ 1,050
Clinical treatment programs 341 148 179
License fee income 563 - -
----------------- ----------------- -----------------
Total Revenues: 904 657 1,229
Costs and expenses:
Production/cost of goods sold - 502 2,112
Research and development 4,946 3,150 3,842
General and administrative 2,015 4,257 6,164
----------------- ----------------- -----------------
Total costs and expenses 6,961 7,909 12,118
Equity loss and write off of investments in unconsolidated
affiliates (Note 2c)
(1,470) - (373)
Interest and other income 103 80 49
Interest expense (253) (384)
Financing costs (Note 7) (7,345) (12,543)
----------------- ----------------- -----------------
Net loss $ (7,424) $ (14,770) $ (24,140)
========= ========== ==========
Basic and diluted loss per share $ (.23) $ (.42) $ (.53)
======= ======= =======
Weighted average shares outstanding 32,085,776 35,234,526 45,177,862
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive (loss)
For each of the years in the
three-year period ended
December 31, 2004
(in thousands except share data)
Common Common Additional Accumulated Total
Stock Stock .001 paid-in other Treasury Treasury stockholders
Shares Par Value capital Comprehensive Accumulated stock Stock equity
------ ------ ------- Income (loss) deficit shares ------ -----------
------------- ------- ------
Balance at December 31, 2001 32,575,986 $ 33 $ 106,832 $ 17 $ (91,649) 515,706 $ (4,470) $ 10,763
Common stock issued 25,800 - 37 - - - - 37
Treasury stock Purchased - - - - - 27,500 (50) (50)
Stock issued in settlement
of debt 48,392 - 154 - - - - 154
Stock and stock warrant
compensation expense - - 132 - - - - 132
Net comprehensive (loss) - - - 18 (7,424) - - (7,406)
--------- ----- --------- -------------- ------- --------- --------- -----------
Balance at December 31, 2002 32,650,178 33 107,155 35 (99,073) 543,206 (4,520) 3,630
Debt conversion and
interest payments 4,334,916 4 6,741 - - - - 6,745
Fair value ascribed to debenture
beneficial conversion features and
related warrants issued - - 9,363 - - - - 9,363
Warrants exercised 790,745 1 1,234 - - - - 1,235
Common stock issued in connection
with ISI acquisition 1,068,789 1 1,667 - - - - 1,668
Reclassification of redeemable
Common Stock in connection
with ISI acquisition - - (491) - - - - (491)
Treasury stock purchased - - - - - 43,000 (83) (83)
Treasury Stock retired (339,543) - (4,272) - - (339,543) 4,144 (128)
Conversion of minority interest
of subsidiary into common stock 347,445 - 946 - - - - 946
Stock issued in settlement of debt 215,047 - 474 - - (246,220) 457 931
Stock warrant compensation expense - - 237 - - - - 237
Net comprehensive loss - - - (35) (14,770) - - (14,805)
----------- ----- ---------- ------------- --------- --------- -------- ---------
Balance December 31, 2003 39,067,577 39 123,054 - (113,843) 443 (2) 9,248
Treasury shares sold - - - - - (443) 2 2
Shares issued for:
Payment of accounts payable 127,243 - 382 - - - - 382
OID on convertible debt 158,104 - 465 - - - - 465
Purchase of building 487,028 1 1,626 - - - - 1,627
Conversion of debt 3,691,695 5 7,239 - - - - 7,244
Interest on convertible debt 170,524 - 430 - - - - 430
Private placement, net of
issuance costs 3,617,306 3 6,981 - - - - 6,984
Warrants exercised 2,268,586 2 5,091 - - - - 5,093
Stock Issued with convertible debt 43,703 - 8,540 - - - - 8,540
Conversion price adjustment - - 1,038 - - - - 1,038
Reclassification of redeemable
Common Stock in connection
with ISI acquisition - - 491 - - - - 491
Options and warrants issued for services - - 2,000 - - - - 2,000
Adjustment in accordance with EITF 00-19 - - 687 - - - - 687
net comprehensive loss - - - (10) (24,140) - - (24,150)
--------- ----- ---------- ------ ----------- --------- -------- --------
Balance December 31, 2004 49,631,766 $ 50 $ 158,024 $ (10) $ (137,983) - $ - $ 20,081
========== ===== ========= ====== =========== ========= ======== ========
See accompanying notes to consolidated financial statements
F-6
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows for each of the years in the three-year period
ended December 31, 2004
(in thousands)
Years ended December 31,
--------------------------------------------------
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net loss $(7,424) $(14,770) $(24,140)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and
Equipment 91 80 113
Amortization of patent and
Trademark rights 206 122 327
Amortization of deferred
Financing costs - 7,345 12,543
Equity loss and write off of
Investments in unconsolidated
Affiliates 1,470 - 373
Stock option and warrant
Compensation and service
Expense 132 237 2,000
Inventory reserve - - 225
Changes in assets and liabilities:
Inventory - (1,429) 523
Accounts and other receivables (1,293) 1,225 143
Prepaid expenses and other
Current assets 104 (98) (96)
Accounts payable (67) (298) 420
Accrued expenses 385 558 323
Other assets (13) 6 6
-------------- --------------- ---------------
Net cash used in operating
Activities (6,409) (7,022) (7,240)
-------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property and
Equipment, net - (19) (150)
Additions to patent and trademark
Rights (176) (154) (208)
Maturity of short term
Investments 5,293 520 1,496
Purchase of short term
Investments (520) (1,496) (7,934)
Deferred acquisition costs - (638) -
-------------- --------------- ---------------
Net cash (used in) provided by
Investing Activities 4,597 (1,787) (6,796)
-------------- --------------- ---------------
(CONTINUED)
F-7
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Years ended December 31,
---------------------------------------------------
2002 2003 2004
---- ---- ----
Cash flows from financing activities:
$ 65 $ - $ -
Proceeds from issuance of common
stock,net - - 6,984
Deferred financing costs - (835) (542)
Proceeds from issuance of
Preferred stock Certificates of
Subsidiary 946 - -
Proceeds from long-term borrowing - 11,300 7,550
Advance receivable - (1,300) -
Proceeds from exercise of stock
Warrants - 1,235 5,093
Purchase of treasury stock (50) (83) -
-------------- --------------- --------------
Net cash provided by financing
Activities 961 10,317 19,085
-------------- --------------- --------------
Net increase (decrease) in cash
and cash equivalents (851) 1,508 5,049
Cash and cash equivalents at beginning of year 3,107 2,256 3,764
-------------- --------------- --------------
Cash and cash equivalents at end of year $2,256 $3,764 $8,813
====== ====== ======
Supplemental disclosures of cash flow information:
Issuance of common stock for
accounts payable and accrued
expenses $ 154 $ 931 $ 382
===== ===== =====
Issuance of Common Stock for
Acquisition of ISI assets
deferred acquisition costs
Stock Options and Warrants $1,668 $1,626
===== =====
Issued for Compensation $132 $237 $2,000
==== ==== ======
Issuance of Common Stock for
Debt Conversion Interest
Payments and debt payments - $6,741 $7,669
====== =====
Common Stock Issued for
Conversion of Minority Interest
in Subsidiary - $946 -
======
See accompanying notes to consolidated financial statements.
F-8
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.
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI")
ISI's inventory of ALFERON N INJECTIONS(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.
The consolidated financial statements include the financial statements of
Hemispherx Biopharma, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
(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 $3,764,000 and
$8,813,000 at December 31, 2003 and 2004, 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 $1,495,000 and $7,924,000 at December 31, 2003 and 2004
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
F-9
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 investments 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.
During 2002, CIMM continued to suffer significant losses resulting in a
deterioration of its financial condition. The $485,000 written off during 2001
represented the unamortized balance of goodwill included as part of the
Company's investment. Additionally, during 2001 the Company reduced its
investment in CIMM based on its percentage interest in CIMM's continued
operating losses. The Company's remaining investment at December 31, 2001 in
CIMM, representing its 30% interest in CIMM's equity at such date, was not
deemed to be permanently impaired, but was completely written off during 2002.
Such amount was not material. These charges are reflected in the Consolidated
Statements of Operations under the caption "Equity loss in unconsolidated
affiliates".
The Company's investment in Ribotech, Ltd. is also accounted for using the
equity method of accounting. The Company received 24.9% of Ribotech, Ltd. as
partial compensation under the license agreement described in Note 12. Ribotech,
Ltd. has incurred net losses since inception. The Company does not share in
those losses in accordance with the licensing agreement and is not obligated to
fund such losses. The net investment in Ribotech is zero at all year end periods
presented.
Investments include an initial equity investment of $290,625 in Chronix
Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for
chronic diseases. This initial investment was made in May 31, 2000 by the
issuance of 50,000 shares of Company common stock from the treasury. On October
12, 2000, the Company issued an additional 50,000 shares of its common stock and
on March 7, 2001 the Company issued 12,000 more shares of its common stock from
the treasury to Chronix for an aggregate equity investment of $700,000. The
percentage ownership in Chronix is approximately 5.4% and is accounted for under
the cost method of accounting. During the quarters ended December 31, 2002 and
September 30, 2004, we recorded non cash charges of $292,000 and $373,000,
respectively 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 its then proposed investment offerings.
(d) Property and Equipment (000 omitted)
December 31,
-------------
2003 2004
------- ----------
Land and buildings $ - $ 3,316
Furniture, fixtures, and equipment 779 786
Leasehold improvements 85 85
------- ----------
Total property and equipment 864 4,187
Less accumulated depreciation 770 884
------- ----------
Property and equipment, net $ 94 $ 3,303
======= ==========
F-10
Property and equipment consists of land, building, 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 thirty-nine years.
Depreciation and amortization expense was $91,000, $80,000 and $113,000 for
2002, 2003 and 2004, 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
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the established useful life of 17
years. The Company reviews its patents and trademark rights periodically to
determine whether they have continuing value. Such review includes an analysis
of the patent and trademark's ultimate revenue and profitability potential on an
undiscounted cash flow basis to support the realizability of its respective
capitalized cost. Management's review addresses whether each patent continues to
fit into the Company's strategic business plans. During the years ended December
31, 2002, 2003 and 2004, the Company decided not to pursue the technology in
certain countries for strategic reasons and recorded charges of $5,000, $5,000
and $223,000 respectively. Amortization expense was $201,000, $122,000 and
$104,000 in 2002, 2003 and 2004, respectively. The accumulated amortization as
of December 31, 2003 and 2004 is $2,150,000 and $1,807,000, respectively.
As of December 31, 2004, the weighted average remaining life of the patents and
trademarks was 8.7 years. Amortization of patents and trademarks for each of the
next five years is as follows: 2005 - $87,000, 2006 - $87,000, 2007 - $86,000,
2008 - $86,000 and 2009 - $86,000.
(f) Revenue and License Fee Income
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"). Esteve paid the initial and non refundable fee of 625,000
Euros (approximately $563,000) to Hemispherx S.A. on April 24, 2002.
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.
Revenues for non-refundable license fees are recognized under the Performance
Method-Expected Revenue. This method considers the total amount of expected
revenue during the performance period, but limits the amount of revenue
recognized in a period to total non-refundable cash received to date. This
limitation is appropriate because future milestone payments are contingent on
future events.
F-11
Upon receipt, the upfront non-refundable payment is deferred. The non-refundable
upfront payments plus non-refundable payments arising from the achievement of
defined milestones are recognized as revenue over the performance period based
on the lesser of (a) percentage of completion or (b)non-refundable cash earned
(including the upfront payment).
This method requires the computation of a ratio of cost incurred to date to
total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.
The percentage of expenses incurred to date to total expected expenses in
connection with the research and development project, exceed the percentage of
license fees received compared to total license fees to be earned per the
agreement. Therefore the amount of revenue recognized by the Company was limited
to the total non-refundable cash received to date of approximately $563,000.
We executed a Memorandum of Understanding (MOU) in January 2004 with Fujisawa
Deutschland GmbH, ("Fuji") a major pharmaceutical corporation, granting them an
exclusive option for a limited number of months to enter a Sales and
Distribution Agreement with exclusive rights to market Ampligen(R) for ME/CFS in
Germany, Austria and Switzerland. The MOU required us to file the full report on
the results of our AMP 516 Clinical Trial with Fuji by May 31, 2004. If the full
report was not provided to Fuji by May 31, 2004 and Fuji did not wish to
exercise its option, we would have been required to refund one half of the
400,000 Euro fee. We submitted our initial report to Fuji on May 28, 2004 and
responded to subsequent inquiries for additional information. The option period
ends 12 weeks after the later of Fuji's review of the full report on the results
of our Amp 516 clinical trial and Fuji's meeting with three of the trial's
principal investigators. We received an initial fee of 400,000 Euros
(approximately $497,000 US). If we did not provide them with the full report by
December 31, 2004 and Fuji did not wish to exercise its option, we would be
required to refund the entire fee. On November 9, 2004, we and Fuji terminated
the MOU by mutual agreement. We did not agree on the process to be utilized in
certain European Territories for obtaining commercial approval for the sale of
Ampligen(R) in the treatment of patients suffering from Chronic Fatigue Syndrome
(CFS). Instead of a centralized procedure, and in order to obtain an earlier
commercial approval of Ampligen(R) in Europe, we have determined to follow a
decentralized filing procedure which was not anticipated in the MOU. We believe
that it now is in the best interest of our stockholders to potentially
accelerate entry into selected European markets whereas the original MOU
specified a centralized registration procedure. Pursuant to mutual agreement of
the parties we refunded 200,000 Euros to Fuji. We have recorded the remaining
200,000 Euros as an accrued liability as of December 31, 2004. We are currently
holding the 200,000 Euros pending further developments in accordance with the
mutually agreed upon termination with Fuji.
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 from the sale of Alferon N Injection(R) are recognized when the product
is shipped, as title is transferred to the customer. The Company has no other
obligation associated with its products once shipment has occurred.
(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 the
calculation of diluted net loss per share since their effect is antidilutive.
F-12
(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)
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 December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (revised 2004) (FASB
123R), Shared-Based Payment. FASB 123R will require the Corporation to expense
share-based payments, including employee stock options, based on their fair
value. The Corporation is required to adopt the provisions of FASB 123R
effective as of the beginning of its third quarter in 2005. FASB 123R provides
alternative methods of adoption, which include prospective application and a
modified retroactive application. The Corporation is currently evaluating the
financial impact, including the available alternative of adoption of FASB 123R.
(m) Research and Development Costs
Research and development related to both future and present products are charged
to operation as incurred.
(n) Stock Based Compensation
The Company follows Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." We chose to apply Accounting
Principal Board Opinion 25 and related interpretations in accounting for stock
options granted to our employees.
F-13
The Company provides pro forma disclosures of compensation expense under the
fair market value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure."
The weighted average assumptions used for the years presented are as follows:
December 31,
2002 2003 2004
---- ---- ----
Risk-free interest rate 5.23% 5.23% 2.25 - 3.4%
Expected dividend yield - - -
Expected lives 2.5 yrs 2.5 yrs 5-10 yrs
Expected volatility 63.17% 98.07% 68.92-71.16%
Had compensation cost for the Company's option plan been determined using the
fair value method at the grant dates, the effect on the Company's net loss and
loss per share for the years ended December 31, 2002, 2003, and 2004 would have
been as follows:
(In Thousands except for per share data)
For the years ended December 31, 2002 2003 2004
- --------------------------------
------ ------ -------
Net (loss)as reported $(7,424) $ (14,770) $ (24,140)
Add: Stock based compensation
included in net loss as reported,
net of related tax effects - - 1,769
Deduct: Stock based compensation
determined under fair value based
method for all awards, net of
related tax effects (1,085) (1,825) (638)
-------- ----------- ----------
Pro forma - net loss $(8,509) $ (16,594) $ (23,009)
========= ============ ============
Basic and diluted loss
per share - as reported $(.23) $ (.42) $ (.53)
======== ============ ===========
Basic and diluted loss
per share - pro forma $(.27) $ (.47) $ (.51)
======== ============ ===========
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 or greater than
the fair market value of the underlying common stock as defined by APB 25 on the
date of the grant.
(0) Accounts Receivable
Concentration of credit risk, with respect to accounts receivable, is limited
due to the Company's credit evaluation process. The Company does not require
collateral on its receivables. The Company's receivables primarily consist of
F-14
amounts due from the wholesale drug companies as of December 31, 2004.
(3) Inventories
The Company uses the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.
Inventories consist of the following:
December 31,
2003 2004
----- -----
Raw materials and work in process $1,729 $ 1,711
Finished goods, net of reserves of $225,000
at December 31, 2004 1,167 437
------ ------
$2,896 $2,148
====== ======
(4) ACQUISITION OF ASSETS OF INTEFERON SCIENCES, INC.
On March 11, 2003, we acquired from ISI, ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, 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
registered these shares for public sale and ISI has reported that it has sold
all of these shares. We also agreed to pay ISI 6% of the net sales of ALFERON N
Injection(R).
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 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. We guaranteed the market value of all but
62,500 of these shares to be $1.59 per share on the termination date. As
discussed below, we issued all of these shares and ISI, GP Strategies and the
American National Red Cross have reported that they have sold all of their
shares.
We also agreed to satisfy other liabilities of ISI which were past due and
secured by a lien on ISI's real estate and to pay ISI 6% of the net sales of
products containing natural alpha interferon.
On May 30, 2003, we issued the shares to GP Strategies and the American National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we
registered the foregoing shares for public sale. We guaranteed the market value
all but 62,500 of these shares to be $1.59 per share. As a result at December
31, 2003 the guaranteed value of these shares ($491,000), which had not been
sold by these two creditors, were reclassified to redeemable common stock. At
December 31, 2004 all shares had been sold by these two creditors and the
redeemable common stock was reclassed to equity.
On November 6, 2003 we acquired and subsequently paid, the outstanding ISI
property tax lien certificates in the aggregate amount of $457,000 from certain
investors. These tax liens were issued for property taxes and utilities due for
2000, 2001 and 2002.
In March 2004, we issued 487,028 shares to ISI to complete the acquisition of
the balance of ISI's rights to market its product as well its production
F-15
facility in New Brunswick, New Jersey. ISI has sold all of its shares. The
aggregated cost of the land and buildings was approximately $3,316,000. The cost
of the land and buildings was allocated as follows:
Land $ 423,000
Buildings 2,893,000
---------
Total cost $ 3,316,000
===========
We accounted for these transactions as a Business Combination under Statement of
Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.
The following table represents the Unaudited pro forma results of operations as
though the ISI acquisitions had occurred on January 1, 2003.
Year Ended December 31, 2003
(in thousands except for share data)
Net revenues $ 899
Expenses (16,215)
5787:
Net Loss $(15,316)
========
Basic and diluted loss per share $(.43)
------
Weighted average shares outstanding 35,326,594
===========
- --------------------------------------------------------------
(5) Short-term investments:
Securities classified as available for sale at December 31, 2003 consisted of
General Motors commercial paper with a cost approximating its market value of
$1,495,000 and matures in April and May 2004, and at December 31, 2004 consisted
of General Motors and Ford Motor commercial paper with a market value of
$7,924,000 which was $10,000 less than its cost and matures in May 2005, January
2006 and February 2006 in the amount of $1,018,000, $3,222,000 and $3,684,000,
respectively.
(6) Accrued Expenses
Accrued expenses at December 31, 2003 and 2004 consists of the following:
(000's omitted)
December 31,
--------------
2003 2004
----- ------
Compensation . . . . . . . . . . . . . . . . . $ 366 $ 385
Interest 158 112
Commissions and royalties 100 47
Professional fees 126 50
Other expenses . . . . . . . . . . 369 418
------ -------
$ 1,119 $ 1,012
====== =======
F-16
(7) Debenture Financing
Long term debt consists of the following:
(in thousands)
December December
31, 2003 31, 2004
-------- --------
July 2003 Debenture $ 2,334 $ -
October 2003 Debenture 4,257 2,072
January 2004 Debenture - 3,083
July 2004 Debenture - 2,000
--------- -------
Total 6,591 7,155
Less Discounts (4,533) (3,602)
------ ------
Balance 2,058 3,553
Less Current Portion of long-term debt
(net of discounts of $3,239) - (3,248)
------ -------
Total long-term debt $ 2,058 $ 305
======= ======
On March 12, 2003, we issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 2005 (the "March Debentures") and
an aggregate of 743,288 warrants to two investors in a private placement for
aggregate gross proceeds of $4,650,000. The March Debentures were to mature on
January 31, 2005 and bore 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 were 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
March Debentures, we pledged all of our assets, other than our intellectual
property, as collateral and were subject to comply with certain financial and
negative covenants, which include but were not limited to the repayment of
principal balances upon achieving certain revenue milestones.
The March Debentures were 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 March Debentures was 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 was to 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 was subject to similar adjustments for
anti-dilution protection. All of these warrants have been exercised.
We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the March Debentures and the Warrants. The Registration
Rights Agreement requires that we register the shares of common stock issuable
F-17
upon conversion of the Debentures, as interest shares under the Debentures and
upon exercise of the Warrants. In accordance with this agreement, we have
registered these shares for public sale.
As of December 31, 2003, the investors had converted the total $5,426,000
principal of the March Debentures into 3,716,438 shares of our common stock. The
total interest on these debentures was $111,711 of which $17,290 was paid in
cash and $94,421 was paid by the issuance of shares of our common stock. The
investor exercised all 743,288 warrants in July 2003 which produced proceeds in
the amount of $1,248,724.
On July 10, 2003, we issued an aggregate of $5,426,000 in principal amount of 6%
Senior Convertible Debentures due July 31, 2005 (the "July 2003 Debentures") and
an aggregate of 507,102 Warrants (the "July 2008 Warrants") to the same
investors who purchased the March Debentures, in a private placement for
aggregate proceeds of $4,650,000. Pursuant to the terms of the July 2003
Debentures, $1,550,000 of the proceeds from the sale of the July 2003 Debentures
were to have been held back and released to us if, and only if, we acquired
ISI's facility with in a set timeframe. These funds were released to us in
October 2003 although we had not acquired ISI's facility at that time. The July
2003 Debentures mature on July 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.
The July 2003 Debentures are convertible at the option of the investors at any
time through July 31, 2005 into shares of our common stock. The conversion price
under the July 2003 Debentures was fixed at $2.14 per share; however, as part of
the subsequent debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 2003 Debentures was lowered to $1.89 per share.
The conversion price is 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. In addition, in
the event that we do not pay the redemption price at maturity, the Debenture
holders, at their option, may convert the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
our common stock during the three trading days ending on and including the
conversion date.
The July 2008 Warrants received by the investors, as amended, were an aggregate
of 507,102 shares of common stock at a price of $2.46 per share. The amended
Warrants resulted in an additional debt discount of approximately $335,000 in
2004. These Warrants were exercised in July 2004 which produced gross proceeds
in the amount of $1,247,470.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture holders
warrants to acquire at any time through June 25, 2008 an aggregate of 1,000,000
shares of common stock at a price of $2.40 per share (the "June 2008 Warrants").
These warrants were issued as incentive for the debenture holders to exercise
prior warrant issuances. This issuance resulted in an additional debt discount
to the March debentures of $2,640,000. Pursuant to our agreement with the
Debenture holders, we have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale. These warrants were exercised in May 2004
and we received gross proceeds of $2,400,000.
F-18
As of December 31, 2004, the investors had converted the total $5,426,000
principal of the July Debentures into 2,870,900 shares of common stock.
On October 29, 2003, we issued an aggregate of $4,142,357 in principal amount of
6% Senior Convertible Debentures due October 31, 2005 (the "October 2003
Debentures") and an aggregate of 410,134 Warrants (the "October 2008 Warrants")
in a private placement for aggregate gross proceeds of $3,550,000. Pursuant to
the terms of the October 2003 Debentures, $1,550,000 of the proceeds from the
sale of the October 2003 Debentures were held back and were to be released to us
if, and only if, we acquired ISI's facility within 90 days of January 26, 2004
and provide a mortgage on the facility as further security for the October 2003
Debentures. In March 2004, we acquired the facility and we subsequently provided
the mortgage of the facility to the Debenture holders. The October 2003
Debentures mature on October 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.
Upon completing the sale of the October 2003 Debentures, we received $3,275,000
in net proceeds consisting of $1,725,000 from the October 2003 Debentures and
$1,550,000 that had been withheld from the July 2003 Debentures. As noted above,
pursuant to the terms of the October 2003 Debentures, $1,550,000 of the proceeds
from the sale of the October 2003 Debentures had been held back. However, these
proceeds were released to us in April 2004. As required by the Debentures, we
have provided a mortgage on the ISI facility as further security for the
Debentures.
The October 2003 Debentures are convertible at the option of the investors at
any time through October 31, 2005 into shares of our common stock. The
conversion price under the October 2003 Debentures is fixed at $2.02 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. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date.
The October 2008 Warrants, as amended, received by the investors were to acquire
an aggregate of 410,134 shares of common stock at a price of $2.32 per share.
The amended Warrants resulted in a reduction in debt discount of approximately
$53,000 in 2004. These Warrants were exercised in July 2004 which produced gross
proceeds in the amount of $951,510.
As of December 31, 2004, the investors had converted $2,071,178 principal amount
of the Debenture into 1,025,336 shares of Common Stock.
On January 26, 2004, we issued an aggregate of $4,000,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2006 (the "January 2004
Debentures"), an aggregate of 790,514 warrants (the "July 2009 Warrants") and
158,103 shares of common stock, and Additional Investment Rights (to purchase up
to an additional $2,000,000 principal amount of January 2004 Debentures
commencing in six months) in a private placement for aggregate net proceeds of
$3,695,000. The January 2004 Debentures mature on January 31, 2006 and bear
F-19
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. Commencing July 26, 2004, we are required to start repaying the then
outstanding principal amount under the January 2004 Debentures in monthly
installments amortized over 18 months in cash or, at our option, in shares of
common stock. After one installment payment of $111,111 in our common stock, one
debenture holder exercised its right to waive further installment payments on
their note. Any shares of common stock issued to the investors as installment
payments shall be valued at 95% of the average closing price of the common stock
during the 10-day trading period commencing on and including the eleventh
trading day immediately preceding the date that the installment is due.
The January 2004 Debentures are convertible at the option of the investors at
any time through January 31, 2006 into shares of our common stock. The
conversion price under the January 2004 Debentures was fixed at $2.53 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. In addition, in the event that we do not
pay the redemption price at maturity, the Debenture holders, at their option,
may convert the balance due at the lower of (a) the conversion price then in
effect and (b) 95% of the lowest closing sale price of our common stock during
the three trading days ending on and including the conversion date. Upon
completion of the August 2004 Private Placement (see Note 8), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the remaining
principal on these debentures was $3,083,073. The investors converted $139,150
principal amount of the January 2004 Debenture into 55,000 shares of common
stock. In addition, installment payments of $777,777 were made to our investors
amounting to 358,932 shares of our common stock.
There are two classes of July 2009 Warrants received by the Investors: Class A
and Class B. The Class A warrants are to acquire any time from July 26, 2004
through July 26, 2009 an aggregate of up to 395,257 shares of common stock at a
price of $3.29 per share. The Class B warrants are to acquire any time from July
26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of common
stock at a price of $5.06 per share. On January 27, 2005, the exercise price of
these July 2009 Class A and Class B Warrants will reset to the lesser of their
respective exercise price then in effect or a price equal to the average of the
daily price of the common stock between January 27, 2004 and January 26, 2005.
The exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection. Notwithstanding the
foregoing, the exercise prices as reset or adjusted for anti-dilution, will in
no event be less than $2.58 per share. Upon completion of the August 2004
Private Placement (see Note 8), the exercise price was lowered to $2.58 per
share.
We also issued to the investors Additional Investment Rights pursuant to which
the investors have the right to acquire up to an additional $2,000,000 principal
amount of January 2004 Debentures (the July 2004 Debentures") from us. The July
2004 Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The investors exercised the Additional Investment
Rights on July 13, 2004 and we received net proceeds of $1,860,000. Upon
completion of the August 2004 Private Placement (see below), the conversion
price was lowered to $2.08 per share. As of December 31, 2004, the Debenture
holders had not converted any portion of this debenture.
F-20
Pursuant to the terms and conditions of all of the outstanding Debentures
(collectively, the "Debentures"), we have pledged all of our assets, other than
our intellectual property, as collateral, and we are subject to comply with
certain financial and negative covenants.
On May 14, 2004, in consideration for the Debenture holders' exercise of all of
the June 2008 Warrants, we issued to the holders warrants (the "May 2009
Warrants") to purchase an aggregate of 1,300,000 shares of our common stock. As
a result the warrants were valued at $2,355,000 which was recorded as additional
debt discounts. We issued 1,000,000 shares of common stock and received gross
proceeds of $2,400,000 from the exercise of the June 2008 Warrants.
The May 2009 Warrants are to acquire at any time commencing on November 14, 2004
through April 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $4.50 per share. On May 14, 2005, the exercise price of these May 2009
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 May
15, 2004 and May 13, 2005. The exercise price (and the reset price) under the
May 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $4.008 per share. This transaction generated a non-cash charge of about
$2,300,000 financing costs in the second quarter of 2004. Upon completion of the
August 2004 Private Placement (see below), the exercise price was lowered to
$4.008 per share.
We entered into Registration Rights Agreements with the investors in connection
with the issuance of (i) the Debentures; (ii) the June 2008, July 2008, October
2008, July 2009, and May 2009 Warrants (collectively, the "Warrants"); and (iii)
the shares issued in January 2004. Pursuant to the Registration Rights
Agreements we have registered on behalf of the investors the shares issued to
them in January 2004 and 135% of the shares issuable upon conversion of the
Debentures and upon exercise of all of the Warrants. If, subject to certain
exceptions, sales of all shares so registered cannot be made pursuant to the
registration statements, then we will be required to pay to the investors their
pro rata share of $.00067 times the outstanding principal amount of the relevant
Debentures for each day the above condition exists.
As discussed below, Section 713 of the American Stock Exchange ("AMEX") Company
Guide provides that we must obtain stockholder approval before issuance, at a
price per share below market value, of common stock, or securities convertible
into common stock, equal to 20% or more of our outstanding common stock (the
"Exchange Cap"). The Debentures (including the July 2004 Debentures) and
Warrants have provisions that require us to pay cash in lieu of issuing shares
upon conversion of the Debentures or exercise of the Warrants if we are
prevented from issuing such shares because of the Exchange Cap. In May 2004, the
Debenture holders agreed to amend the provisions of these Debentures and
Warrants to limit the maximum amount of funds that the holders could receive in
lieu of shares upon conversion of the Debentures and/or exercise of the Warrants
in the event that the Exchange Cap was reached to 119.9% of the conversion price
of the relevant Debentures and 19.9% of the relevant Warrant exercise price. See
below for the accounting effect on this matter.
As of December 31, 2004, the investors have converted $13,062,329 principal
amount of debt from the Debentures issued in March, July and October 2003 and
January 2004 into 8,026,606 shares of our common stock. $777,777 of principal
was repaid with the issuance of 358,932 shares of stock. The March and July
F-21
Debentures have been fully converted. The remaining principal balance on the
outstanding Debentures is convertible into shares of our stock at the option of
the investors at any time, through the maturity date. In addition, we have paid
$1,300,000 into the debenture cash collateral account as required by the terms
of the October 2003 Debentures. The amounts paid through December 31, 2004 have
been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of December 31, 2004. The cash collateral account
provides partial security for repayment of the outstanding Debentures in the
event of default.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January, May and July 2004, we paid Cardinal Securities, LLC
an investment banking fee equal to 7% of the investments made by the two
Debenture holders and issued to Cardinal the following common stock purchase
warrants: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500 exercisable at
$2.42 per share; and (iii) 100,000 exercisable at $3.04 per share. The $2.57
warrants expire on July 10, 2008, the $2.42 warrants expire on October 29, 2008
and the $3.04 warrants expire on January 5, 2009. With regard to the exercise of
the June 2008 Warrants and issuance of the May 2009 Warrants, Cardinal received
an investment banking fee of 7%, half in cash and half in shares. With regard to
the exercise of the Additional Investment Rights, the July 2008 and October 2008
Warrants and issuance of the July 2009 Warrants, Cardinal received an investment
banking fee of 7%, 146,980 in cash and 22,703 in shares as well as 50,000
warrants exercisable at $4.07 expiring on July 12, 2009. By agreement with
Cardinal, we have registered all of the foregoing shares and shares issuable
upon exercise of the above mentioned warrants for public sale and we have agreed
to register the balance. As a result of all of the transactions discussed above,
the Company recorded $1,430,000 as additional debt discounts.
Section 713 of the AMEX Company Guide provides that we must obtain stockholder
approval before issuance, at a price per share below market value, of common
stock, or securities convertible into common stock, equal to 20% or more of our
outstanding common stock (the "Exchange Cap"). Taken separately, the July 2003,
October 2003 and January 2004 Debenture transactions do not trigger Section 713.
However, the AMEX took the position that the three transactions should be
aggregated and, as such, stockholder approval was required for the issuance of
common stock for a portion of the potential exercise of the warrants and
conversion of the Debentures in connection with the January 2004 Debentures. The
amount of potential shares that we could exceed the Exchange Cap amounted to
approximately 1,299,000. In accordance with EITF 00-19, Accounting For
Derivative Financial Instruments Indexed to and Potentially Settled in a
Company's Own Stock, we recorded on January 26, 2004, a redemption obligation of
approximately $1,244,000. This liability represented the fair market value of
the warrants and beneficial conversion feature related to the 1,299,000 shares.
In addition, in accordance with EITF 00-19, we revalued this redemption
obligation associated with the beneficial conversion feature and warrants as of
March 31, 2004. We recorded an additional redemption obligation and finance
charge of $947,000 as a result of this revaluation. Upon stockholder approval,
our redemption obligation was recorded as additional paid in capital as of the
date approval was received.
The requisite stockholder approval was obtained at our Annual Meeting of
Stockholders on June 23, 2004. In accordance with EITF 00-19, we revalued this
redemption obligation associated with the beneficial conversion feature and
warrants as of June 23, 2004. We recorded a reduction in the value of the
redemption obligation and financing charge of $260,000 as a result of this
revaluation. In addition, upon receiving the requisite stockholder approval,
F-22
this redemption obligation was reclassified as additional paid in capital as of
the date the approval was received or June 23, 2004.
On July 13, 2004, the Debenture holders exercised all of the July 2003 and
October 2003 Warrants and the Additional Investment Rights amounting to
approximately $4,198,980 in gross proceeds to the Company. We issued to these
holders warrants (the "June 2009 Warrants") to purchase an aggregate of
1,300,000 shares of common stock. The issuance of these warrants resulted in an
additional debt discount to the note of $1,320,000 as explained below and a
financing charge of $2,351,000.
The June 2009 Warrants are to acquire at any time commencing on January 13, 2005
through June 30, 2009 an aggregate of 1,300,000 shares of common stock at a
price of $3.75 per share. On July 13, 2005, the exercise price of these June
2009 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 July
14, 2004 and July 12, 2005. The exercise price (and the reset price) under the
June 2009 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the other Warrants. Notwithstanding the foregoing, the
exercise price as reset or adjusted for anti-dilution, will in no event be less
than $3.33 per share. Upon completion of the August 2004 Private Placement (see
below), the exercise price was lowered to $3.33 per share. This transaction was
subject to a non-cash financing charge of $1,320,000 to be amortized over the
remaining life of the October 2003 Debentures. The Company agreed to register
the shares issuable upon exercise of the June 2009 Warrants pursuant to
substantially the same terms as the registration rights agreements between the
Company and the holders. Pursuant to this obligation, the Company has registered
the shares.
The March, July, October and January 2004 issuances of 6% Senior Convertible
Debentures in the principal amounts of $5,426,000, $4,142,357 and $4,000,000 and
$2,000,000 respectively and related embedded conversion features and warrants
issuances were accounted for in accordance with EITF 98-5: Accounting for
convertible securities with beneficial conversion features or contingency
adjustable conversion and with EITF No. 00-27: Application of issue No. 98-5 to
Certain convertible instruments. The Company determined the fair values to be
ascribed to detachable warrants issued with the convertible debentures utilizing
the Black-Scholes method. We recorded debt discounts of approximately $17.4
million which, in effect, reduced the carrying value of the debt to $3.6
million. For additional information refer to note 7 to our consolidated
financial statements for year ended December 31, 2004.
As of December 31, 2004, the Company was in violation of one minor debt covenant
contained within its debenture agreement. Subsequently, the we obtained a
letter of waiver from the debenture holders with respect with this matter.
In connection with the Debenture agreements, we have outstanding letters of
credit of $1 million as additional collateral.
(8) 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, 2003 and 2004.
F-23
(b) Common Stock
On July 31, 2003, we had approximately 104,000 shares of our $.001 authorized
shares of $.001 par value Common Stock that were not issued or reserved for
issuance. In order to accommodate the shares needed for the July Debenture, Dr.
Carter, our Chief Executive Officer and Cardinal Capital, the placement agent,
agreed that they would not exercise their warrants or options unless and until
our stockholders approved an increase in our authorized shares of common stock
(see note 11). This action freed up 3,206,650 shares. One of the proposals for
the annual meeting of our stockholders that was held in September 2003 was an
amendment to our certificate of incorporation to increase the authorized shares
of common stock from 50,000,000 to 100,000,000 (the "Proposal"). We could not be
assured that the Proposal would be approved.
Our stockholders approved an amendment to our corporate charter at the Annual
Shareholder meeting held in Philadelphia, PA on September 10, 2003. This
amendment increased our authorized shares from 50,000,000 to 100,000,000.
As of December 31, 2003 and 2004, 39,067,134 and 49,631,766 shares, net of
shares held in the treasury, were outstanding, respectively.
(c) Minority Shareholder Interest
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
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 could 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 at December 31, 2002.
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 and we registered 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
F-24
preferred equity certificates and any unpaid dividends. As a result of the
exchange, the minority interest in subsidiary was transferred 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 the 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) Private Placement
On August 5, 2004, the Company closed a private placement with select
institutional investors of approximately 3,617,300 shares of its Common Stock
and warrants to purchase an aggregate of up to approximately 1,085,200 shares of
its Common Stock. Jefferies & Company, Inc. acted as Placement Agent for which
it received a fee and Common Stock Purchase Warrants. The Company raised
approximately $6,984,000 net proceeds from this private offering.
The Warrant issued to each purchaser is exercisable for up to 30% of the number
of shares of Common Stock purchased by such Purchaser, at an exercise price
equal to $2.86 per share. Each Warrant has a term of five years and is fully
exercisable from the date of issuance.
Pursuant to the Registration Rights Agreement, made and entered into as of
August 5, 2004 (the "Rights Agreement"), the Company has registered the resales
of the shares issued to the Purchasers and shares issuable upon the exercise of
the Warrants.
Closing of the August 2004 Private Placement triggered the anti-dilution
provisions of the January 2004 Debentures and the July 2004 Debentures and the
July 2009 Warrants and the June 2009 Warrants. The conversion price adjustment
for the Debentures noted above resulted in an adjustment of $1,320,000 in the
third quarter 2004 to the Debenture discount and additional paid-in-capital. Any
adjustment to the Debenture discount will be amortized over the remaining life
of the Debentures. The exercise price adjustment for the above warrants resulted
in a non-cash financing adjustment in the third quarter 2004 upon revaluing the
warrants at the new anti-dilution pricing using the Black-Scholes Method.
(e) 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-25
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
2002 2003 2004
-------------------------- -------------------------- --------------------
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 306,263 $1.06-4.34 $3.58 294,665 $1.06-4.34 $3.50 433,134 $1.06-4.34 $3.10
Granted - - - 200,000 $2.75 $2.75 -
Canceled (11,598) $3.00-4.34 $3.71 (61,531) $3.80-4.03 $3.97 (18,432) $4.34 $4.34
Exercised - - - - - - - - -
- -
Outstanding,
end of year 294,665 $1.06-4.34 $3.57 433,134 $1.06-4.34 $3.10 414,702 $2.71-4.03 $3.11
======= ======= =======
Exercisable 252,746 $1.06-4.34 $3.50 433,134 $1.06-4.34 $3.10 414,702 $2.71-4.03 $3.11
======= ======= =======
Weighted
average
remaining
contractual 3.68 3.37 8.24
===== ===== =====
life (years) years years years
===== ===== =====
Exercised in
current and
prior years (37,791) (37,791) (37,791)
======== ======== ========
Available for
future grants 200,000 -0- 8,305
======= === =====
The following table summarizes information about these options outstanding at
December 31, 2004:
Exercise Price Range
$2.71 - $2.75 $3.50 $4.03 Total
Outstanding Options:
Number Outstanding 273,728 54,974 86,000 414,702
Remaining contracted life years 9.0 4.0 3.0 7.1
Weighted average exercise price $2.74 $3.50 $4.03 $3.1
Exercisable Options:
Number outstanding 273,728 54,974 86,000 414,702
Weighted average exercise price $2.74 $3.50 $4.03 $3.1
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, advisors, 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
F-26
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.
During 2003, the Company issued options to acquire 200,000 shares to its general
counsel under the 1990 plan for services rendered. As a result, the Company
charged operating expenses in the amount of $237,000.
The Equity Incentive Plan effective May 1, 2004, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 8,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Incentive
Plan. Unless sooner terminated, the Equity Incentive Plan will continue in
effect for a period of 10 years from its effective date.
The Equity Incentive Plan is administered by the Board of Directors. The Equity
Incentive Plan provides for awards to be made to such officers, other key
employees, non-employee directors, consultants and advisors of the Company and
its subsidiaries as the Board may select.
Stock options awarded under the Equity Incentive Plan may be exercisable at such
times (not later than 10 years after the date of grant) and at such exercise
prices (not less than fair market value at the date of grant) as the Board may
determine. The Board may provide for options to become immediately exercisable
upon a "change in control," which is defined in the Equity Incentive Plan to
occur upon any of the following events: (a) the acquisition by any person or
group, as beneficial owner, of 20% or more of the outstanding shares or the
voting power of the outstanding securities of the Company; (b) either a majority
of the directors of Company at the annual stockholders meeting has been
nominated other than by or at the direction of the incumbent directors of the
Board, or the incumbent directors cease to constitute a majority of the
Company's Board; (c) the Company's stockholders approve a merger or other
business combination pursuant to which the outstanding common stock of the
Company no longer represents more than 50% of the combined entity after the
transaction; (d) the Company's shareholders approve a plan of complete
liquidation or an agreement for the sale or disposition of all or substantially
all of the Company's assets; or (e) any other event or circumstance determined
by the Company's Board to affect control of the Company and designated by
resolution of the Board as a change of control.
F-27
Information regarding the options approved by the Board of Directors
under the Equity Incentive Plan is summarized below:
2004
----------------------------------------------------------------------
------------------------ ----------------------- ---------------------
Weighted Average
Exercise
Shares Option Price Price
Granted 633,080 $1.90-3.44 $2.56
Canceled - - -
Exercised - - -
-
Outstanding end of year 633,080 $1.90-3.44 $2.56
=======
Exercisable 538,432 $2.60-3.44 $2.68
=======
Weighted average remaining
contractual life (years) -10 years
=========
Exercised in current year -
=
Available for future grants 7,366,920
=========
(ii) Stock warrants
Number of warrants exercisable into shares of common stock
2002 2003 2004
-------------------------- ------------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
------- ------- -------
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ---------- ------ ----- -----
Outstanding 0 0 0
beginning of
year 6,927,110 $1.75-16.0 $4.77 7,967,810 $1.75-16.0 $3.18 11,502,796 $1.74-16.0 $3.57
Granted 1,802,000 $2.00-6.00 $2.07 4,623,024 $1.68-2.57 $2.32 4,791,187 $2.58-4.20 $3.25
Canceled (750,000) $3.50-6.00 $3.72 (276,000) $4.00-10.00 $6.54 (858,360) $4.00-8.00 $5.34
Exercised (11,300) $1.75-7.50 $3.30 (812,038) $1.68-1.75 $1.69 (2,268,586) $1.74-3.50 $2.32
-------- --------- -----------
Outstanding 0 0 0
end of year 7,967,810 $1.75-16.0 $3.18 11,502,796 $1.74-16.0 $3.57 13,167,037 $1.75-16.0 $3.46
========= ========== ==========
Exercisable 6,345,810 $1.75-16.00 $3.48 8,635,560 $1.74-16.00 $4.11 12,667,037 $1.75-16.00 $3.46
========= ========= ==========
Weighted
average
remaining
contractual
life (years) 4.03 years 4.04 years 4.3 years
========== ========== =========
Years
exercisable 2003-2008 2004-2008 2005-2009
========= ========= =========
F-28
The following table summarizes information about stock warrants outstanding at
December 31, 2004:
Exercise price range Total
$1.75-$5.00 $6.00-$9.00 $10.00-$16.00 $1.75-$16.00
-------------------- ------------------- --------------------- ----------------------
Outstanding warrants
Number outstanding 11,703,387 863,650 600,000 13,167,037
Weighted average remaining
contractual life(years)
4.00 2.22 1.46 4.30
Weighted average exercise price $2.85 $6.89 $12.33 $3.46
Exercisable warrants
Number outstanding 11,203,387 836,650 600,000 12,667,037
Weighted average exercise price $2.88 $6.89 $12.33 $3.46
Certain of the stock warrants outstanding are subject to adjustments for stock
splits and dividends.
Warrants issued to stockholders
At December 31, 2001 there were 232,160 warrants remaining. In 2002, 10,000 were
converted to common stock. At December 31, 2002 and 2003 there were 222,160
warrants remaining. These warrants had an exercise price of $3.50 per share and
expired in October 2004.
Other stock warrants
The Company has issued other stock warrants outstanding - totaling 13,167,037
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. 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 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, 2002, 1,300, 2003 35,000 and in 2004 205,000 of these warrants were
exercised, leaving a balance of these warrants of 1,210,200. These warrants
expire June 30, 2005.
F-29
In the years 2001, 2002 and 2003, the Company issued 450,000, 25,000 and no
warrants, respectively, exclusive of warrants issued in connection with the
Company's 2003 Debenture issuances (see below), to investment banking firms for
services performed on behalf of the Company. Accordingly, the Company recorded
stock compensation of 637,000, 133,000 and none for the years 2001, 2002 and
2003, respectively. These warrants have various vesting dates and exercisable
prices ranging from $4.00 to $16.00 per share. 1,193,800 warrants were
outstanding at December 31, 2002. In 2003, 225,000 of these warrants expired
leaving a balance of 968,800 warrants at December 31, 2003. In 2004, 193,800 of
these warrants expired leaving a balance of 775,000 warrants at December 31,
2004. These warrants are exercisable in five years from the date of issuance.
In 2002, 2003 and 2004 the Company had non-public warrants outstanding of
3,701,650, 5,100,650, and 4,645,650 respectively. These warrants are exercisable
at rates of $2.20 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 2003
the Company granted 1,450,000 warrants to employees with an exercise price of
$2.20 for services performed and 51,000 warrants expired. 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). 2,254,650 of the
non-public warrants were outstanding at December 31, 2002. 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. At December 31, 2003, 5,100,650
warrants were outstanding. During 2004, 15,000 warrants were issued and 470,000
expired leaving a balance of 4,645,650 at December 31, 2004. 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
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 2003 the company issued warrants to acquire 3,173,024 shares in connection
with the financing of the purchase of the assets of Interferon Sciences, Inc.
During 2003, 777,038 of these warrants were exercised leaving a balance of
2,395,986 at December 31, 2003. During 2004, 4,776,187 shares were issued
related to debt financing and 2,035,986 shares were exercised leaving a balance
of 5,136,189 shares at December 31, 2004.
(e) Stock Repurchase
The Company's repurchases of shares of common stock are recorded as "Treasury
Stock" and result in a reduction of "Stockholders' equity." When treasury shares
are reissued, the Company uses a first-in, first-out method and the excess of
repurchase cost over reissuance price is treated as a reduction of "Additional
paid-in capital." At December 31, 2003 there were 443 shares in the treasury.
During 2003 most of the then existing treasury shares were either re-issued or
retired. There was no Treasury Stock repurchased, re-issued or retired in 2004.
(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
F-30
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.
(9) Segment and Related Information
The Company operates in one segment, which performs research and development
activities related to Ampligen(R) and other drugs under development, and sales
and marketing of Alferon(R).
The following table presents revenues by country based on the location of the
use of the product services.
(000's omitted)
2002 2003 2004
----- ---- ----
United States $237 $655 $1,225
Belgium 74 2 4
Other 30 - -
-- ---- ------
$ 341 $ 657 $1,229
====== ===== ======
In addition, in 2002, 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.
F-31
(10) 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 subject to certain terms and conditions. In return, Biovail agrees
to conduct certain pre-marketing clinical studies and market development
programs, including without limitation, expansion of the Emergency Drug Release
Program in Canada with respect to the Company' 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, 2002, 2003
and 2004 the Company incurred approximately $389,000, $395,000 and $220,000
respectively, of consulting service fees under these agreements. These costs are
charged to research and development expense as incurred.
(11) 401(K) Plan
The Company has a defined contribution plan, entitled the Hemispherx Biopharma
Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). Full time employees
of the Company are eligible to participate in the 401(K) Plan following one year
of employment. Subject to certain limitations imposed by federal tax laws,
participants are eligible to contribute up to 15% of their salary (including
bonuses and/or commissions) per annum. Participants' contributions to the 401(K)
Plan may be matched by the Company at a rate determined annually by the Board of
Directors.
Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 2002, 2003 and 2004 the
Company provided matching contributions to each employee for up to 6% of annual
pay aggregating $38,000, $34,000 and $77,000 respectively.
(12) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen(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
F-32
terminated. These legal actions have now been settled. Under the settlement, the
parties have entered into a new pharmaceutical use license agreement (New Temple
Agreement) that is equivalent in duration and scope to the previous license.
Under the terms of the New Temple Agreement, Temple granted the Company an
exclusive world-wide license for the term of the agreement for the commercial
sale of Oragen products using patents and related technology held by Temple,
which license is exclusive except to the extent Temple is required to grant a
license to any governmental agency or non-profit organization as a condition of
funding for research and development of the patents and technology licensed to
the Company.
In 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
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 of Polymers.
On December 27, 2004, we initiated a lawsuit in Federal Court identifying a
conspiratorial group seeking to illegally manipulate our stock for purposes of
bringing about a hostile takeover of Hemispherx. This conspiratorial group
includes Bioclones. This legal action may adversely affect our relationship and
collaborative agreement with Bioclones.
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)
F-33
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, the Company is
obligated to pay ISI a 6% royalty on the net sales of the Alferon N Injection
product.
The Company has contractual agreements with two of its officers. The aggregate
annual base compensation under these contractual agreements for 2002, 2003 and
2004 was $620,000, $637,000 and $761,000 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 2002 no
performance bonuses were granted. In 2003 and 2004, bonuses of $266,100 and
$165,300 respectively were granted. 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. In 2003, the Chief Executive Officer of the Company was granted
warrants to purchase 1,450,000 shares of common stock at $2.20 per share. The
Chief Executive Officer's employment agreement provides for bonuses based on
gross proceeds received by the Company from any joint venture or corporate
partnering agreement. In 2004, the Chief Executive Officer of the Company was
granted options to purchase 320,000 shares of common stock at $2.60 per share
and $3.44 per share and the Chief Financial Officer of the Company was granted
options to purchase 63,824 shares of common stock at $2.60 and $3.44 per share.
In order to facilitate the Company's need to obtain financing and prior to our
shareholders approving an amendment to our corporate charter to merge the number
of authorized shares, Dr. Carter, the Company's Chief Executive Officer, agreed
to waive his right to exercise certain warrants and options unless and until our
shareholder approved an increase in our authorized shares of Common Stock.
In October 2003, in recognition of this action as well as Dr. Carter's prior and
on-going efforts relating to product development securing critically needed
financing and the acquisition of a new product line, the Compensation Committee
determined that Dr. Carter be awarded bonus compensation in 2003 consisting of
$196,636 and a grant of 1,450,000 stock warrants for a value of $1,769,000 based
on Black Scholes calculations with an exercise price of $2.20 per share. This
additional compensation was reviewed by an independent valuation firm and found
to be fair and reasonable within the context of total compensation paid to chief
executive officers of comparable biotechnology companies. These warrants vest
upon the earlier of the second ISI Asset closing or the filing by the Company
with the U.S. Food and Drug Administration of a new drug application. Upon the
occurrence of either of these events, the Company will expense the intrinsic
value, if any, of the warrants.
F-34
(13) Leases
The Company has several noncancelable operating leases for the space in which
its principal offices are located and certain office equipment.
Future minimum lease payments under
noncancelable operating leases are as follows:
(000's omitted)
Year ending Operating
December 31, leases
----------- ---------
2005. . . . . . . . . . . . . . . . . . . . 187
2006. . . . . . . . . . . . . . . . . . . . 193
2007. . . . . . . . . . . . . . . . . . . . 65
----------
Total minimum lease payments. . . . . . . . $ 445
==========
Rent expense charged to operations for the years ended December 31, 2002, 2003
and 2004 amounted to approximately $307,000, $266,000 and $269,000 respectively.
The term of the lease for the Rockville, Maryland facility is through June, 2005
with an average rent of $8,000 per month, plus applicable taxes and charges. The
term of the lease for the Philadelphia, Pennsylvania offices is through April,
2007 with an average rent of $15,000 per month, plus applicable taxes and
charges.
(14) Income Taxes
As of December 31, 2004, the Company has approximately $88,000,000 of federal
net operating loss carryforwards (expiring in the years 2005 through 2025)
available to offset future federal taxable income. The Company also has
approximately $24,000,000 of state net operating loss carryforwards (expiring in
the years 2005 through 2009) 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, 2003 and 2004.
F-35
The components of the net deferred tax asset of December 31, 2003 and 2004
consists of the following:
(000,s omitted)
Deferred tax assets: 2003 2004
---- ----
Net operating losses $24,700 $29,863
Accrued Expenses and Other 12 41
Capitalized Research and
development costs 2,825 2,664
-------- -----
27,537 32,568
Less: Valuation Allowance (27,537) (32,568)
-------- --------
Balance $ -0- $ -0-
===== =====
(15) 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 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 to the Superior Court of Pennsylvania. The Superior Court of Pennsylvania
has denied Asensio's appeal. Asensio has now petitioned the Supreme Court of
Pennsylvania for allowance of an appeal. We have opposed Asensio's petition for
allowance of appeal and the matter is now pending before the Supreme 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.
On June 25, 2004 all claims against us were dismissed with prejudice. The former
ME/CFS clinical trial patient and her husband have now appealed the dismissal of
their claims to the New Jersey Superior Court, Appellate Division, where the
matter is now pending.
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 June 2004, One Penn Associates, L.P. filed a claim in the
Philadelphia Municipal Court for the Commonwealth of Pennsylvania seeking
F-36
$44,242.68 for alleged unpaid rent and charges related to our offices in One
Penn Center in Philadelphia. We believe this claim is without merit and are
defending same pursuant to the terms of our lease as we were damaged and
deprived of the use of a portion of the offices due to water from the landlord's
faulty sprinkler system.
In December, 2004 we filed a multicount complaint in federal court
(Southern District of Florida) against a conspiratorial group seeking to
illegally manipulate our stock for purposes of bringing about a hostile takeover
of Hemispherx. The lawsuit alleges that the conspiratorial group commenced with
a plan to seize control of our cash and proprietary assets by an illegal
campaign to drive down our stock price and publish disparaging reports on our
management and current fiduciaries. The lawsuit seeks monetary damages from each
member of the conspiratorial group as well as injunctions preventing further
recurrences of their misconduct. The conspiratorial group includes Bioclones, a
privately held South African Biopharmaceutical company that collaborated with
us, and Johannesburg Consolidated Investments, a South African corporation,
Cyril Donninger, R. B. Kebble, H. C. Buitendag, Bart Goemaere, and John Doe(s).
On January 10, 2005, we initiated a multicount lawsuit in the United
States District Court for the Eastern District of Pennsylvania seeking
injunctive relief and damages against a conspiratorial group, many of whom are
foreign nationals or companies located outside the United States alleging that
the conspiratorial group has engaged in secret meetings, market manipulations,
fraudulent misrepresentations, utilization of foreign accounts and foreign
secrecy laws all in furtherance of an illegal scheme to take over Hemispherx and
enrich themselves at the expense of Hemispherx's public shareholders. On
February 18, 2005 we filed an amended complaint in the same lawsuit joining
Redlabs, USA, Inc. as a defendant with the existing defendants R.E.D.
Laboratories, N.V./S.A., Bart Goemaere, Jan Goemaere, Dr. Kenny De Meirleir,
Kenneth Schepmans, Johan Goossens, Lieven Vansacker and John Does.
(16) 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.
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
and options to purchase Company stock valued at $237,000 in 2002 using the Black
Scholes pricing model and recorded as stock compensation expense. A Director of
the Company, lives in Paris, France and assisted our European subsidiaries in
their dealings with medical institutions and the European Medical Evaluation
Authority. A Director of the Company assisted us in establishing clinical trial
protocols as well as performs other scientific work for us from time to time.
The services provided by these latter two Directors were terminated in September
2003. For these services, these Directors were paid an aggregate of $170,150 and
$100,100 for the years ending December 31, 2002 and 2003 respectively.
Through November 2002, William A. Carter, Chief Executive Officer of the
Company, received an aggregate of $12,106 in short term advances which were
repaid as of December 31, 2002. All advances bore 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.
F-37
We paid $33,450, $18,800 and $7,600 for the years ending December 31, 2002, 2003
and 2004, respectively to Carter Realty for the rent of property used at various
times in years 2002, 2003 and 2004 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.
(17) Concentrations of credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash, cash equivalents and investments.
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.
(18) Quarterly Results of Operation (unaudited)
(in thousand except per share data)
2003 (1)
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenue $ 66 $ 94 $ 194 $ 303 $ 657
Costs and expenses 1,658 1,730 1,960 2,561 7,909
Net loss (1,617) (3,689) (5,422) (4,042) (14,770)
------- -------- ------- -------- -------
Basic and diluted
loss per share $ (.05) $ (.11) $ (.15) $ (.11) $ (.42)
------- -------- ------- -------- -------
(1) During the fourth quarter 2003, the Company recorded stock compensation of
$237,000.
2004 (2)
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenues and license
fee income $ 308 $ 331 $ 258 $ 332 $ 1,229
Costs and expenses 4,409 2,526 2,972 2,211 12,118
Net loss (8,042) (5,956) (7,007) (3,135) (24,140)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.20) $(.14) $(.15) $(.06) $(.53)
------- -------- ------- -------- -------
(2) During the first quarter 2004, the Company recorded stock compensation of
$1,769,000 and during the third quarter 2004, the Company recorded stock
compensation of $231,000.
Exhibit 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, William A. Carter, Chief Executive Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of
the Registrant;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented
in this report;
4. The Registrant's other certifying officer(s) and I
are responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))and
internal control over financial reporting (as defined
in Exchange Act Rules 13a-15 (f) and 15d-15(f)) for
the Registrant and have:
a. Designed such disclosure controls and
procedures, or caused such disclosure
controls and procedures to be designed under
our supervision, to ensure that material
information relating to the Registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this report is being prepared;
b. designed such internal control over
financial reporting, or caused such internal
control over financial reporting to be
designed under our supervision, to provide
reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for
external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the
Registrant's disclosure controls and
procedures and presented in this report our
conclusions about the effectiveness of the
disclosure controls and procedures, as of
the end of the period covered by this report
based on such evaluation; and
d. Disclosed in this report any change in the
Registrant's internal control over financial
reporting that occurred during the
Registrant's most recent fiscal quarter that
has materially affected, or is reasonably
likely to materially affect, the
Registrant's internal control over financial
reporting; and
5. The Registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's
auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material
weaknesses in the design or operation of
internal control over financial reporting
which are reasonably likely to adversely
affect the Registrant's ability to record,
process, summarize and report financial
information; and
b. Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the Registrant's
internal control over financial reporting.
Date: March 16, 2005
/s/ William A. Carter
---------------------
William A. Carter, M.D.
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Robert Peterson, Chief Financial Officer of Hemispherx Biopharma, Inc. (the
"Registrant"), certify that:
1. I have reviewed this annual report on Form 10-K of the
Registrant;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this
report;
4. The Registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and
procedures, or caused such disclosure
controls and procedures to be designed
under our supervision, to ensure that
material information relating to the
Registrant, including its consolidated
subsidiaries, is made known to us by
others within those entities, particularly
during the period in which this report is
being prepared;
b. designed such internal control over
financial reporting, or caused such
internal control over financial reporting
to be designed under our supervision, to
provide reasonable assurance regarding the
reliability of financial reporting and the
preparation of financial statements for
external purposes in accordance with
generally accepted accounting principles;
c. Evaluated the effectiveness of the
Registrant's disclosure controls and
procedures and presented in this report
our conclusions about the effectiveness
of the disclosure controls and procedures,
as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this report any change in the
Registrant's internal control over
financial reporting that occurred during
the Registrant's most recent fiscal
quarter that has materially affected, or
is reasonably likely to materially affect,
the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the Registrant's
auditors and the audit committee of the Registrant's board
of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material
weaknesses in the design or operation of
internal control over financial reporting
which are reasonably likely to adversely
affect the Registrant's ability to record,
process, summarize and report financial
information; and
b. Any fraud, whether or not material, that
involves management or other employees who
have a significant role in the
Registrant's internal control over
financial reporting.
Date: March 16, 2005
/s/ Robert E. Peterson
----------------------
Robert Peterson
Chief Financial Officer
Exhibit 32.1
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, 2004 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, M.D.
Chief Executive Officer
March 11, 2005
Exhibit 32.2
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, 2004 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 E. Peterson
-------------------------
Robert Peterson
Chief Financial Officer
March 11, 2005
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hemispherx Biopharma, Inc.
Philadelphia, Pennsylvania
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-119017) and Form S-8 (No. 333-57134 and
333-118903) of Hemispherx Biopharma, Inc. and subsidiaries of our reports dated
February 4, 2005, relating to the consolidated financial statements, and the
effectiveness of Hemispherx Biopharma, Inc. and subsidiaries internal control
over financial reporting which appear in the Company's Annual Report on form
10-K.
/s/ BDO Seidman, LLP
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BDO Seidman, LLP
Philadelphia, Pennsylvania
March 14, 2005