FORM 10-K/A
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, 2003
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 _
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Philadelphia, Pennsylvania 19103 _
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section
12(b) of the Act:
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
NONE
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No (X)
The aggregate market value of Common Stock held by non-affiliates at June 30,
2003, the last business day of the registrant's most recently completed second
fiscal quarter, was $71,603,879. For purposes of this calculation, it was
assumed that all Common Stock is valued at the closing price as of such date of
$1.88 per share.
The number of shares of the registrant's Common Stock outstanding as of February
27, 2004 was 40,835,199.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 37
Item 3. Legal Proceedings 38
Item 4. Submission of Matters to a Vote of Security Holders 39
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 39
Item 6. Selected Financial Data 41
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 42
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk 60
Item 8. Financial Statements and Supplementary Data 60
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 61
Item 9A. Controls and Procedures 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 72
Item 13. Certain Relationships and Related Transactions 74
Item 14. Principal Accountant Fees and Services 75
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 76
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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 were founded in the early 1970s as a contract researcher for the
National Institutes of Health (NIH). Dr. William A. Carter, M.D., joined us in
1976 and ultimately become our CEO in 1988. He has focused us on exploring,
understanding and mastering the mechanism of nucleic acid technology to produce
a promising new class of drugs for treating chronic viral diseases and disorders
of the immune system. In the course of almost three decades, we have established
a strong foundation of laboratory, pre-clinical and clinical data with respect
to the development of nucleic acids to enhance the natural antiviral defense
system of the human body and the development of therapeutic products for the
treatment of chronic diseases. Our strategy is to use our proprietary drug,
Ampligen(R), to treat diseases for which adequate treatment is not available. We
seek the required regulatory approvals which will allow the progressive
introduction of Ampligen(R) for Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV") and Hepatitis B ("HBV") in the
U.S., Canada, Europe and Japan. Ampligen(R) is currently in the open label
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portion of phase III clinical trials in the U.S. for use in treatment of ME/CFS
and is in Phase IIb clinical development in the U.S. for the treatment of
patients with HIV infection.
In March, 2003, we acquired from Interferon Sciences Inc. ("ISI"), all
of ISI's raw materials, work-in-progress and finished product of Alferon N
Injection(R), together with a limited license for the production, manufacture,
use, marketing and sale of the product. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been approved by the
U.S. Food and Drug Administration ("FDA") for commercial sale for the
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older. We intend to market this product in the
United States through sales facilitated via third party marketing agreements. In
the future, we expect to implement studies, beyond those conducted by ISI, for
testing the potential treatment of HIV, Hepatitis C and other indications,
including multiple sclerosis.
In March, 2003, we entered into an agreement with ISI subject to
certain events that would grant us global rights to sell Alferon N Injection(R)
as well as acquire certain other assets of ISI which include but are not limited
to real estate and property, plant and equipment.
We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.
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AMPLIGEN(R)
Our proprietary drug technology includes Ampligen(R) and utilizes
specially configured ribonucleic acid ("RNA") and is protected by more than 300
patents worldwide with over 50 additional patent applications pending to provide
further proprietary protection in various international markets. Certain patents
apply to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new medications which have a similar mechanism of
action. The main U.S. ME/CFS treatment patent (#6130206) expires January 23,
2015. Our main patents covering HIV treatment (#4795744, #4820696, #5063209, and
#5091374) expire on August 26, 2006, September 30, 2008, August 10, 2010, and
May 6, 2011, respectively; Hepatitis treatment coverage is conveyed by U.S.
patent #5593973 which expires on October 5, 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.
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 treatments but initiation dates
have not been set.
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.
Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS)
ME/CFS is a debilitating disease that is difficult to diagnose and for
which, at present, there is no cure. People suffering from this illness
experience, among other symptoms, a constant tiredness, recurring dull
headaches, joint and muscle aches, a feeling of feverishness and chills, low
grade fever, depression, difficulty in concentrating on tasks, and tender lymph
glands. With progression of the disease they can become bed-ridden, lose their
jobs and become dependent upon the state for support and medical care.
ME/CFS has been given official recognition by the U.S. Social Security
Administration, and some European nations, rendering ME/CFS patients eligible
for disability benefits and heightening awareness of this debilitating disease
in the medical community. A further scientific publication by independent
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academicians on the accurate laboratory diagnosis of ME/CFS appeared in a
peer-reviewed journal (American Journal of Medicine) in February 2000. The U.S.
Centers for Disease Control ("CDC") reconfirmed its research commitment to
ME/CFS following an audit by the U.S. Government Accounting Office ("GAO") which
was announced July 28, 1999.
Estimates of ME/CFS patient numbers in the Unites States range from a
low of 500,000 (1995-Centers for Disease Control, Atlanta, GA) to a high of
1,000,000 (1999-DePaul University study). Estimates of patient numbers in Europe
range from 600,000 to 2,200,000 as reported in the British Medical Journal in
January 2000. It is believed worldwide patient totals may be as high as ten
million.
In 1989, we received FDA authorization to conduct a Phase II study of
Ampligen(R) for ME/CFS. In 1991, we completed a 24-week, 92 patient, randomized,
placebo-controlled, double-blinded, multi-center trial of Ampligen(R) for
treating patients with ME/CFS. The results, published in a peer review journal
in 1994, suggested enhanced physical performance, greater cognitive functions
and improved ability to perform daily living activities. Patients required
reduced medications, while suffering little or no significant adverse side
effects. The FDA raised certain issues with respect to this clinical trial,
which required further study. These issues were reviewed and satisfactorily
resolved.
In February 1993, we presented results of our Phase II study of
Ampligen(R) for ME/CFS to a FDA Advisory Committee and these results were
published in early 1994 in Clinical Infectious Diseases, a peer reviewed medical
journal, which emphasizes the understanding and potential treatment of
infectious diseases. The results suggested that patients on Ampligen(R), in
contrast to those receiving a placebo, showed significant improvement in
physical capacity as determined by performance on treadmill testing. The
Ampligen(R) treated patient group also required less pain medication than did
the placebo group.
In 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, is 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 twelve (12) clinical investigators at Medical Centers in
California, New Jersey, Florida, North Carolina, Wisconsin, Pennsylvania,
Nevada, Illinois, Utah and Connecticut. These clinical investigators are medical
doctors with special knowledge of ME/CFS who have recruited, prescreened and
enrolled ME/CFS patients for inclusion in the Phase III Amp 516 ME/CFS clinical
trial. This clinical trial has enrolled and randomized over 230 ME/CFS patients
and is now fully enrolled. The patients complete a stage I, forty week,
double-blind, randomized, placebo-controlled portion of the clinical trial. This
stage I has now been completed with the final patients receiving their last
blinded dose in February 2004. Following Stage I, the 14 remaining patients then
move into the stage II or the open label treatment portion of the clinical
trial. We anticipate that this segment should be completed by June, 2004. To
date there have been no reported serious adverse events definitely related to
the study medication. The next stage in our program is the completion of Stage
II and the final data collection, quality assurance of data to insure its
accuracy and analysis of the data according to regulatory guidelines to
facilitate filing for commercial approval to sell.
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Human Immunodeficiency Virus (HIV)
Over fifteen antiviral drugs are currently approved by the FDA for the
treatment of HIV infection. Most target the specific HIV enzymes, reverse
transcriptase ("RT") and protease. The use of various combinations of three or
more of these drugs is often referred to as Highly Active Anti-Retroviral
Therapy ("HAART"). HAART involves the utilization of several antiretrovirals
with different mechanisms of action to decrease viral loads in HIV-infected
patients. The goal of these combination treatments is to reduce the amount of
HIV in the body ("viral load") to as low as possible. Treatments include
different classes of drugs, but they all work by stopping parts of the virus so
the virus cannot reproduce. Experience has shown that using combinations of
drugs from different classes is a more effective strategy than using only one or
two drugs. HAART has provided dramatic decreases in morbidity and mortality of
HIV infection. Reduction of the viral load to undetectable levels in patients
with wild type virus (i.e., non-drug-resistant virus)is routinely possible with
the appropriate application of HAART. HIV mainly infects important immune system
cells called CD4 cells. After HIV has infected a CD4 cell, the CD4 cell becomes
damaged and is eventually destroyed. Fewer CD4 cells means more damage to the
immune system and, ultimately, results in AIDS. Originally, reduction of HIV
loads was seen as possibly allowing the reconstitution of the immune system and
led to early speculation that HIV might be eliminated by HAART.
Subsequent experience has provided a more realistic view of HAART and
the realization that chronic HIV suppression using HAART, as currently
practiced, would require treatment for life with resulting significant
cumulative toxicities. The various reverse transcriptase and protease inhibitor
drugs that go into HAART have significantly reduced the morbidity and mortality
connected with HIV; however there has been a significant cost due to drug
toxicity. It is estimated that 50% of HIV deaths are from the toxicity of the
drugs in HAART. Current estimates suggest that it would require as many as 60
years of HAART for elimination of HIV in the infected patient. Thus the toxicity
of HAART drugs and the enormous cost of treatment makes this goal impractical.
Although more potent second generation drugs are under development that
target the reverse transcriptase and protease genes as well as new HIV targets,
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
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the life cycles of HIV. None of these drugs address the immune system, as
Ampligen(R) potentially does, although HIV is an immune-based disease.
By using Ampligen(R) in combination with STI of HAART, we will
undertake to boost the patients' own immune system's response to help them
control their HIV when they are off of HAART. 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 with individuals
infected with HIV who are responding well to HAART at the moment. Patients in
this study are required to meet minimum immune system requirements of CD4 cell
levels greater than 400, maximum HIV infection levels of less that 50 copies/ml,
and a HAART regimen containing at least one anti-viral drug showing therapeutic
synergy with Ampligen(R) based on a 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 have 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.
Other Diseases
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., is expected to commence in
2004.
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% on sales of Oragen(TM),
depending on how much technological assistance is required of Temple. We
7
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. Research and development of Oragen(TM) may
start in 2004 dependent on the availability of funding provided by various
branches of the U.S. Government, including the Department of Defense where oral
forms of broad spectrum immunotherapeutics may have high value.
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 and
are seeking strategic partnerships to expand these promising studies.
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
interferon species, the types and relative quantity of these species are
different from our natural alpha interferon.
On October 10, 1989, the FDA approved ALFERON N Injection(R) 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
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approximately eight million new and recurrent causes of genital warts occur
annually in the United States alone.
Basically, our interest in acquiring Alferon N Injection(R)was driven
by two factors;
(1) 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 immune response; and
(2) New knowledge about the competitive products in the interferon arena that
we believe implies a large untapped market and potential new therapeutic
indication for Alferon N Injection(R)which could accelerate its revenues in
the near term. Specifically, the recombinant DNA derived alpha interferons
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 Alferon N Injection, which could allow
this product to assume a much larger market share. These revenues would
provide operational capital to complete the Phase III clinical trials of
our experimental drug Ampligen(R)in a more cost effective, non-dilutive
manner on shareholder's equity.
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)]
is a highly purified, natural-source, glycosylated, multispecies alpha
interferon product. There are essentially no antibodies observed against natural
interferon to date and the product has a relatively low side-effect profile.
Alferon is the only natural-source, multispecies alpha interferon currently sold
in the U.S.
The Alferon N Injection(R) targeted market consists of urologists,
proctologists, dermatologists, and Obstetricians/Gynecologists. These physicians
normally see patients with papilloma concondylomas (genital warts) in their
practice. For our marketing plans, see "Marketing/Distribution" below.
According to the NIH, there are one million new cases of venereal warts
every year.
Pipeline Products (Alpha Interferon)
The following products, together with other assets are to be acquired
upon the closing of the second ISI agreement, which is anticipated to occur in
March 2004.
ALFERON N Injection(R) -Other Applications
ALFERON N Injection(R) has been approved by the U.S. FDA for the
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older and has been studied for the potential
treatment of HIV, Hepatitis C and other indications. ISI, the company from which
we obtained our rights to ALFERON N Injection(R), has conducted clinical trials
with regard to the use of ALFERON N Injection(R) in the treatment of HIV and
Hepatitis C. While ISI found the results to be encouraging, in both instances,
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the FDA determined that additional trials were necessary.
We anticipate initiating clinical trials to evaluate the use of Alferon
N Injection(R) to treat West Nile Virus infections and SARS that is dependent on
NIH providing the funds needed.
ALFERON LDO
ALFERON LDO is an experimental low-dose, oral liquid formulation of
Natural Alpha Interferon. Two Phase 2 clinical trials using ALFERON LDO for the
treatment of HIV-infected patients have been completed. We are entering an
active phase of Alferon LDO research. The FDA has recently authorized a new
Phase II clinical study designed to investigate the activity and safety of
Alferon LDO(R) in HIV positive subjects in early stage disease. The endpoints of
the study include an increase or upregulation of expression of genes known to be
mediators of the natural immune response using cutting edge gene chip
technology, as well as, absolute CD4 cell counts and plasma HIV RNA level.
There can be no assurance that any of these proposed products will be
cost-effective, safe, and effective or that we will be able to obtain FDA
approval for such use. Furthermore, even if such approval is obtained, there can
be no assurance that such products will be commercially successful or will
produce significant revenues or profits for us.
EUROPEAN OPERATIONS
Our European operations were set up to prepare for the introduction of
Hemispherx products and to accelerate market penetration into the European
market once full approval is obtained from the European Medicine Evaluation
Agency ("EMEA"). The EMEA is the equivalent of the United States FDA. From a
regulatory point of view the member countries of the European Economic Union
("EEU") represent a common market under the jurisdiction of the EMEA. However,
from a practical point of view, every country is different regarding developing
relations with the medical community, patient associations and obtaining
reimbursement for treatment from the equivalent of Social Security Agencies and
insurance carriers. This program will be integrated into our new commercial
asset, ALFERON N Injection(R), as well.
Our European operations have assisted the growth of a number of
patient/physician educational associations. The French Chronic Fatigue Syndrome
Association has grown from 10 members in the year 2000 to 800 currently. Every
major country now has an active educational association with substantial numbers
of members who regularly meet and "network". These programs have been modeled on
the successful experience in the U.S. of conducting twice a year meetings on
ME/CFS with Health and Human Services, FDA, NIH and Centers for Disease Control.
We maintain contact with the EMEA, keeping the agency aware of our
activities, as well as the health ministries in numerous countries in the
European Union. In early 2001, our application for "orphan" drug status for the
use of Ampligen(R) in ME/CFS was rejected because the Board found that the
prevalence of ME/CFS was significantly above the five person per 10,000 limit
required to grant orphan drug status 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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Limited numbers of ME/CFS patients were treated during 2003 with
Ampligen(R) in the United Kingdom, Austria and Belgium under existing regulatory
procedures in these countries, which allow the therapeutic use of an
experimental drug under certain conditions. These procedures allowed us to
recover the cost of Ampligen(R) used as well as to collect additional clinical
data. Corresponding procedures are being considered in several other countries
at the request of locally based physicians.
Our European operations are considering implementing clinical trials in
Europe for the use of Ampligen(R) in the treatment of HIV/AIDS on the basis of
the new U.S. Protocols involving the use of the drug either in combination with
"cocktail" therapies or as part of a strategic interruption of the "cocktail"
therapies. We presented results of one these programs (AMP 720) at the LAS
Conference on HIV Pathogenesis and Treatment in Paris, France, in July 2003.
The efforts of our European operation have started to produce results.
In March 2002, our European subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a Sales and Distribution Agreement with
Laboratorios Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
Agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra ("Territory") for the treatment of ME/CFS. In
addition to other terms and other projected payments, Esteve paid an initial and
non-refundable fee of 625,000 Euros (approximately $563,000) to Hemispherx, S.A.
on April 24, 2002. Esteve is to pay a fee of 1,000,000 Euros after U.S. FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 Euros
upon Spain's approval of the final marketing authorization for using Ampligen(R)
for the treatment of ME/CFS. 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. 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.
We executed a Memorandum of Understanding 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 option period ends 12 weeks after Fuji has
had a chance to review the report on the results of our Amp 516 clinical trial
and meet with the trial's principal investigators. We received an initial fee of
400,000 Euros (approximately $500,000US). If we do not provide Fuji with the
full report by May 31, 2004 we will be required to repay half of this fee and if
we do not provide them with the report by December 31, 2004, we will be required
to refund the entire fee. If Fuji exercises the option, Fuji would be required
to pay us an additional 1,600,000 Euros upon execution of the Sales and
Distribution agreement, purchase Ampligen(R) exclusively from us and meet
11
certain annual minimum purchase quotas. We would be required to file an
application with the EMEA for commercial sale of Ampligen(R) for ME/CFS on or
before December 31, 2005. Upon our filing of that application, we would receive
an additional 1,000,000 Euros and, upon approval by the EMEA, an additional
2,000,000 Euros. If we failed to meet the December 31, 2005 filing deadline, we
would be required to return 40% of all payments that we had received from Fuji.
We would be required to sell Ampligen(R) to Fuji at a 20% price discount until
the aggregate amount of the discount reached $1,000,000 Euros (representing 50%
of the initial 2,000,000 fee paid to us on and prior to execution of the
definitive agreement). The foregoing is a summary of the memorandum of
understanding. We cannot assure that we can prepare and issue the AMP 516 report
within the time frames noted or that Fuji will exercise the option or that the
proposed terms of the Sales and Distribution Agreement will not change
materially.
We continue negotiations with other prospective partners for the
marketing and distribution of Ampligen(R) in other European territories.
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 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 if Ribotech
is unable to supply our needs based on product specifications and pricing.
Sourcing our needs from U.S. suppliers could result in a cost increase for our
raw materials.
Until 1999, we distributed Ampligen(R) in the form of a freeze-dried
powder to be formulated by pharmacists at the site of use. We perfected a
production process to produce ready to use liquid Ampligen(R) in a dosage form,
which will mainly be used upon commercial approval of Ampligen(R). At the
present time, we have engaged the services of Schering-Plough Products to mass
produce ready-to-use Ampligen(R) doses. There are other pharmaceutical
processing companies that can supply our production needs.
Bioclones (PTY) Ltd. is headquartered in South Africa and is the
majority owner in Ribotech, Ltd. (we own 24.9%) which produces most of the
polymers used to date in manufacturing Ampligen(R). The licensing agreement with
Bioclones presently includes 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.
We plan to consult and work with Bioclones in 2004 to assure GMP compliance of a
new manufacturing facility. Bioclones has conducted limited clinical studies in
patients with ME/CFS in Australia and South Africa.
We currently occupy and use the New Brunswick, New Jersey laboratory
and production facility owned by ISI. We expect to acquire title to these
facilities pursuant to our second asset acquisition agreement with ISI by March
31, 2004 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations; Liquidity And Capital Resources" for more details). This
facility operates in compliance to Good Manufacturing Practices (GMP's)and is
12
approved by the FDA for the manufacture of Alferon N Injection(R).
GMP's require that a product be consistently manufactured to an
identical potency (strength) and purity with each lot, and that the
manufacturing facility itself and all the equipment therein, be certified to
operate within a strict set of performance standards. Our facilities in New
Jersey (Alferon) and Maryland (Ampligen) meet these performance standards.
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, Inc. (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
agreement with Bioclones pursuant to the Bioclones Agreement 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 and Distribution Agreement with Esteve, and in
Germany, Austria and Switzerland we have entered into a memorandum of
understanding with Fuji (see "European Operations" above).
Our marketing and distribution plan for Alferon N Injection(R) is
focused on increasing the sales of Alferon N Injection(R) for the intralesional
treatment of refractory and recurring external genital warts in adults. We will
reach out to a targeted audience of physicians consisting of OB/GYNs,
Urologists, Proctologists and Dermatologists and simultaneously create product
awareness in the patient population through several media and health
organizations. Different regional meetings and seminars are scheduled during
which guest speakers will explain the therapeutic benefits and safety profile of
Alferon. Additional exposure will be created by exhibiting at several STD
related conferences, expanded web presence, mailings and publications. We also
have engaged a contract sales organization in order to build up a nationwide
network of dedicated representatives in the U.S. Upon obtaining the foreign
marketing rights to Alferon N Injection(R) at the second asset closing now
13
expected to take place in March, 2004 we expect to amend the current
marketing/distribution agreements with Biovail, Esteve, Bioclones and Fujisawa
to include Alferon N Injection(R). For more information about our arrangements
with Accredo Health Services, Inc., Bioclones, Esteve and Biovails, see
"Research And Development/Collaborative Agreements" below.
In August 2003, we entered into a non exclusive Sales and Marketing
agreement with Engitech, a pharmaceutical contract sales organization, to launch
Alferon N Injection(R) on a nationwide scale in the United States. The agreement
stipulates 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 representatives in the second year and after that as many as it
takes to continually drive market share. As of February 25, 2004 Engitech has 93
sales representatives on board, leading us to believe that Engitech will reach
the target of 100 sales representatives as stated in the agreement. Engitech
will also develop and implement a strategic and tactical marketing action plan
as well as organize a scientific and educational program towards a targeted
audience of physicians and consumers. Engitech has been in business since 1987.
This privately held company has several clients in the pharmaceutical industry.
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
14
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
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. Assuming the results are
positive, we expect to finalize the data of our double-blind, placebo controlled
AMP 516 ME/CFS Phase III clinical trial and submit an NDA by year end 2004.
There are no assurances that such designation will be granted, or if granted,
there are no assurances that Fast Track designation will materially increase the
prospect of a successful commercial application. In 2000 we submitted an
emergency treatment protocol for clinically-resistant HIV patients, which was
withdrawn by us during the statutory 30 day regulatory review period in favor of
a set of individual physician-generated applications. There are no assurances
that authorizations to commence such treatments will be granted by any
regulatory authority or that the resultant treatments, if any, will support drug
efficacy and safety. In 2001, we did receive FDA authorization for two separate
Phase IIb HIV treatment protocols in which 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. We believe that our Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all material
regulations applicable to these activities as advanced by the European Union
Inspections team which conducted detailed audits in year 2000. The ISI
laboratory and production facility in New Brunswick, New Jersey, which we are
currently using and are in the process of acquiring title to, 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, including those operated by
15
Bioclones Ltd., and Ribotech, Ltd., that are utilized in the manufacture of our
products, are in substantial compliance, or if presently in substantial
compliance, will remain so. These third party facilities include manufacturing
operations in San Juan, Puerto Rico; Cape Town, South Africa; Columbia,
Maryland, and Melbourne, Australia.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
In 1994, we entered into a licensing agreement with Bioclones
(Proprietary) 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
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 8%
on Bioclones nucleic acid-derived drug sales in the licensed territories. The
agreement with Bioclones terminates three years after the expiration of the last
of the patents supporting the license granted to Bioclones, subject to earlier
termination by the parties for uncured defaults under the agreement, or
bankruptcy or insolvency of either party. The last patent expires on December
22, 2012.
In August, 1998, we entered into a strategic alliance with Accredo to
develop certain marketing and distribution capacity 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 the
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 and subsequent fees
paid under this agreement total approximately $15,000 for services performed in
2003.
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
16
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 August 22, 2015.
In December, 1999, we entered into an agreement with Biovail
Corporation International ("Biovail"). Biovail is an international full service
pharmaceutical company engaged in the formulation, clinical testing,
registration and manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The agreement grants
Biovail the exclusive distributorship of our product in the Canadian territories
subject to certain terms and conditions. In return, Biovail agrees to conduct
certain pre-marketing clinical studies and market development programs,
including without limitation, expansion of the Emergency Drug Release Program in
Canada with respect to our products. In addition, Biovail agrees to work with us
in preparing and filing a New Drug Submission with Canadian Regulatory
Authorities 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 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.
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
17
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, we recorded a noncash charge of $292,000
with respect to our investment in Chronix. This impairment reduces our carrying
value to reflect a permanent decline in Chronix's market value based on its then
proposed equity offerings.
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. CIMM'S research is
focused on developing therapies for use in treating patients affected by
Hepatitis C ("HCV"). We use the equity method of accounting with respect to this
investment. During the fourth quarter of 2001 we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. This was a result of our
determination that CIMM's operations have not yet evolved to the point where the
full carrying value of our investment could be supported based on that company's
financial position and operating results. 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 hepatitis C
and HIV viruses. The Agreement runs for the longer of ten years from the date of
the 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. We expect Esteve to
start HIV clinical trials in Spain in 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.
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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 $13,876,000 in research and development, of which
approximately $3,150,000 was expended in the year ended December 31, 2003. These
direct costs do not include the overhead and administrative costs necessary to
support the research and development effort. Our European subsidiary has an
exclusive license on all the technology and support from us concerning
Ampligen(R) for the use of ME/CFS and other applications for all countries of
the European Union (excluding the UK where Bioclones has a marketing license)
and Norway, Switzerland, Hungary, Poland, the Balkans, Russia, Ukraine, Romania,
Bulgaria, Slovakia, Turkey, Iceland and Liechtenstein. As mentioned above,
Hemispherx S.A. entered into a Sales and Distribution Agreement with Esteve.
Pursuant to the terms of this agreement, Esteve has been granted the exclusive
right in Spain, Portugal and Andorra to market Ampligen(R) for the treatment of
ME/CFS. See "European Operations", above for more detailed information.
HUMAN RESOURCES
As of February 27, 2004, we had 38 personnel working on the development
of Ampligen(R) consisting of 19 full time employees, 6 regulatory/research
medical personnel on a part-time basis, and 13 clinical investigators. Part time
personnel are paid on a per diem or monthly basis. 22 personnel are engaged in
our research, development, clinical, and manufacturing effort. 5 of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.
In addition to the foregoing personnel, pursuant to our agreement with
ISI, we added personnel from ISI to our payroll consisting of 5 part-time and 12
full-time employees.
We believe that the combination of Hemispherx and ISI Scientific
employees has 1) significantly strengthened our overall organization, 2) added
expertise to monitor and complete our ongoing clinical trials and 3) improved
our data management and system administration.
While we have been successful in attracting skilled and experienced
scientific personnel, there can be no assurance that we will be able to attract
or retain the necessary qualified employees and/or consultants in the future.
SCIENTIFIC ADVISORY BOARD
We reestablished a Scientific Advisory Board in October, 2003,
consisting 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
19
with, and meet informally with our employees. All members of the Scientific
Advisory Board 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 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 proceeds of $4,650,000. Pursuant to the terms of the
March Debentures, $1,550,000 of the proceeds from the sale of the March
Debentures were to have been held back and were to be released to us if, and
only if, we acquired ISI's facility within a set timeframe. Although we had not
acquired ISI's facility yet, these funds were released to us in June 2003. The
March Debentures were to mature on January 31, 2005 with 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 are subject
to comply with certain financial and negative covenants, which included 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 is fixed at $1.46 per share, subject
to adjustment for anti-dilution protection for issuance of common stock or
securities convertible or exchangeable into common stock at a price less than
the conversion price then in effect.
The investors also received Warrants to acquire at any time through
March 12, 2008 an aggregate of 743,288 shares of common stock at a price of
$1.68 per share. On March 12, 2004, the exercise price of the Warrants 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.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture
holders a warrant to acquire at any time through June 25, 2008 an aggregate of
500,000 shares of common stock at a price of $2.40 per share. On June 25, 2004,
the exercise price of these June 2008 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 June 26, 2003 and June 24, 2004 (but in no event
20
less than $1.68 per share). The exercise price (and the reset price) under the
June 2008 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the July 2008 Warrants. Pursuant to our agreement with the
Debenture holders, we have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale.
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 required 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 charges on the debentures were $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 investors exercised the 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
Debentures") and an aggregate of 507,102 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March 12, 2003 Debentures, in a private
placement for aggregate anticipated gross proceeds of $4,650,000. Pursuant to
the terms of the July Debentures, $1,550,000 of the proceeds from the sale of
the July Debentures were to have been held back and were to be released to us
if, and only if, we acquired ISI's facility within a set timeframe. Although we
had not acquired ISI's facility yet, these funds were released to us in October
2003. The July 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 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 Debentures was fixed at $2.14 per share; however, as part
of the new debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 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.
The July 2008 Warrants received by the investors, as amended, are to
acquire at any time commencing on July 26, 2004 through January 31, 2009 an
aggregate of 507,102 shares of common stock at a price of $2.46 per share. On
July 10, 2004, the exercise price of these July 2008 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 11, 2003 and July 9, 2004 (but
in no event less than $2.14 per share). The exercise price (and the reset price)
under the July 2008 Warrants is also subject to similar adjustments for
anti-dilution protection.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the July Debentures and the July 2008 Warrants.
21
The Registration Rights Agreement requires that we register on behalf of the
holders the shares of common stock issuable upon conversion of the Debentures,
as interest shares under the Debentures and upon exercise of the July 2008
Warrants. These shares have been registered for public sale.
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
Debentures") and an aggregate of 410,134 Warrants (the "October 2008 Warrants")
in a private placement for aggregate anticipated gross proceeds of $3,550,000.
Pursuant to the terms of the October Debentures, $1,550,000 of the proceeds from
the sale of the October Debentures have been held back and will be released to
us if, and only if, we acquired ISI's facility within 90 days of October 29,
2003 and provide a mortgage on the facility as further security for the October
Debentures. The debenture holders have extended the deadline to 90 days after
January 26, 2004. The October 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 Debentures, we received
$3,275,000 in net proceeds consisting of $1,725,000 from the October Debentures
and $1,550,000 that had been withheld from the July Debentures. As noted above,
$1,550,000 of the proceeds from the October Debentures have been held back
pending our completing the acquisition of the ISI facility.
The October 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 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.
The October 2008 Warrants, as amended, received by the investors are to
acquire at any time commencing on July 26, 2004 through April 30, 2009 an
aggregate of 410,134 shares of common stock at a price of $2.32 per share. On
October 29, 2004, the exercise price of these October 2008 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 October 29, 2003 and
October 27, 2004 (but in no event less than $2.19 per share). The exercise price
(and the reset price) under the October 2008 Warrants is also subject to similar
adjustments for anti-dilution protection.
As of February 27, 2004, the investors had converted $,9,589,300 of
debt from the March and July Debentures into 5,894,137 shares of our common
stock. The March Debentures have been fully converted. The remaining principal
balance on the remaining 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 Debentures. The amounts paid through December 31,
2003 have been accounted for as advances receivable and are reflected as such on
the accompanying balance sheet as of December 31, 2003. The cash collateral
22
account provides partial security for repayment of the July and October 2003 and
January 2004 Debentures in the event of default.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the October Debentures and the October 2008
Warrants. The Registration Rights Agreement requires that we register on behalf
of the holders the shares of common stock issuable upon conversion of the
October Debentures, as interest shares under the October Debentures and upon
exercise of the 2008 Warrants. If, subject to certain exceptions, sales of all
shares required to be registered cannot be made pursuant to the registration
statement, then we will be required to pay to the investors their pro rata share
of $3,635 for each day such conditions exists.
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 "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 anticipated 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 six months after issuance, the Company is
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 the Company's option, in shares of common stock. 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 is 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.
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 (but in no event less than $2.58 per share with regard to the
Class A warrants and $3.54 per share with regard to the Class B warrants). The
exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection.
The Company also issued to the investors Additional Investment Rights
pursuant to which the investors have the right to acquire up to an additional
23
$2,000,000 principal amount of January 2004 Debentures from the Company. These
Debentures are identical to the January 2004 Debentures except that the
conversion price is $2.58. The Additional Investment Rights are exercisable
commencing on July 26, 2004 (the "Trigger" date) for a period of 90 days from
the Trigger Date or 90 days from the date which the registration statement
registering the shares issuable upon the conversion of the January 2004
Debentures to be issued pursuant to the Additional Investment Rights is declared
effective, whichever is longer.
The Company entered into a Registration Rights Agreement with the
investors in connection with the issuance of the January 2004 Debentures
(including any Debentures issued pursuant to the Additional Investment Rights),
the shares, and the January 2009 Warrants. The Registration Rights Agreement
requires that the Company register on behalf of the investors the shares issued
to the investors and 135% of the shares issuable upon conversion of the
Debentures (including payment of interest thereon) and upon exercise of the
January 2009 Warrants. If the Registration Statement covering these shares is
not filed within the time period required by the agreement, not declared
effective within the time period required by the agreement or, after it is
declared effective and subject to certain exceptions, sales of all shares
required to be registered thereon cannot be made pursuant thereto, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
any of the above conditions exist with respect to this Registration Statement.
By agreement between the Company and the investors, the date upon which
all warrants previously issued to the investors may become exercisable is now
July 26, 2004 and the exercise periods of these warrants have been extended
accordingly.
By agreement with Cardinal Securities, LLC, ("Cardinal") for general
financial advisory services and in conjunction with the private debenture
placements in March, July and October 2003 and in January 2004, we paid Cardinal
an investment banking fee equal to 7% of the investments made by the two
Debenture holders and issued to Cardinal certain warrants. A portion of the
investment banking fee was paid with the issuance of 30,000 shares of our common
stock. Cardinal also received 612,500 warrants to purchase common stock, of
which 112,500 are exercisable at $1.74 per share, 112,500 are exercisable at
$2.57 per share, 200,000 are exercisable at $2.50 per share, 87,500 are
exercisable at $2.42 per share and 100,000 are exercisable at $3.04 per share.
The $1.74 warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire
on March 12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04
warrants expire on January 25, 2009. By agreement with Cardinal, we have
registered 542,500 shares for public sale and have agreed to register the
balance.
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI"),
ISI's inventory of ALFERON N Injection(R), a pharmaceutical product used for
intralesional treatment of refractory or recurring external genital warts in
patients 18 years of age or older, 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, as of December 17,
2003, 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
24
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 have guaranteed the market
value of all but 62,500 of these shares on terms substantially similar to those
for the initial acquisition of the ISI assets. The termination date for these
guarantees is 18 months after the date of issuance of the guaranteed shares to
GP Strategies, 24 months after the date of issuance and delivery of the
additional 487,028 guaranteed shares to ISI and 12 months after the date of
issuance of the guaranteed shares to the American National Red Cross. We also
agreed to satisfy other liabilities of ISI which are 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 have registered the foregoing shares for public sale. As of
December 31, 2003, GP Strategies has indicated to us that it has sold all of
its Hemispherx shares.
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 2005 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.
See "Executive Compensation; Employment Agreements" for details related to how
Dr. Carter has been compensated with respect to these matters.
On November 6, 2003 we acquired some of the outstanding ISI property
tax lien certificates in the aggregate amount of $456,839 from certain
investors. These tax liens were issued for property taxes and utilities due for
2000, 2001 and 2002. For more information about our acquisition of these tax
liens and our suit against ISI in Delaware, see "Item 3. Legal Proceedings."
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, 2003, we had approximately $5,260,000 in cash and
short term investments. We believe that these funds plus the net proceeds of
approximately $3.7 million from the recently placed January 2004 Debentures, 2)
the receipt of the $1.55 million of proceeds held back pending the acquisition
of the ISI facility, 3) potential licensing fee income, 4) the $2,000,000 in
proceeds we expect when the investors exercise their additional investment
rights in connection with the January 2004 Debenture, and 5) and the projected
25
revenue from the acquisition of the ALFERON N Injection(R) business should be
sufficient to meet our operating requirements for the 2004 fiscal year.
In addition, we may raise additional funds through additional equity or
debt financing, collaborative arrangements with corporate partners, lease
financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing our
products. If adequate funds are not available from operations and if we are not
able to secure additional sources of financing on acceptable terms, we would be
materially adversely affected in our commercialization process.
RISK FACTORS
The following cautionary statements identify important factors that could cause
our actual result to differ materially from those projected in the
forward-looking statements made in this Form 10-K. Among the key factors that
have a direct bearing on our results of operations are:
No assurance of successful product development
Ampligen(R) and related products. The development of Ampligen(R) and
our other related products is subject to a number of significant risks.
Ampligen(R) may be found to be ineffective or to have adverse side effects, fail
to receive necessary regulatory clearances, be difficult to manufacture on a
commercial scale, be uneconomical to market or be precluded from
commercialization by proprietary right of third parties. Our 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. 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
26
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, 2003, our accumulated deficit was $113,843,000. 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, 2003, we had approximately $5.3 million
in cash and short term investments. We believe that these funds plus 1) the
$3,695,000 in net proceeds from the January Debenture placement, 2) the
anticipated infusion of approximately $1.55 million in remaining net proceeds
from the October Debentures, 3) the projected net cash flow from the sale of
ALFERON N Injection(R), 4) the proceeds from licensing agreements and/or the
expected infusion of $2,000,000 in proceeds from our investors exercising their
additional investment rights should be sufficient to meet our operating cash
requirements including debt service during the 2004 fiscal year. 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 raise adequate funds from these or other sources,
which may have a material adverse effect on our ability to develop our products.
27
In addition, if we do not timely complete the second ISI asset acquisition, our
financial condition could be materially and adversely affected (see the next
risk factor).
If we do not complete the second Interferon Sciences, Inc. asset acquisition,
our ability to generate revenues from the sale of ALFERON N Injection(R) and our
financial condition will be adversely affected.
In March, 2003 we executed two agreements with ISI to purchase certain
assets of ISI. In the first agreement we acquired ISI's inventory of ALFERON N
Injection(R) and a limited license for the production, manufacture, use,
marketing and sale of this product. Our ability to generate sustained revenues
from sales of this product is dependent, among other things, on our completing
the terms of the second agreement to acquire the balance of ISI's rights to its
product as well as ISI's production facility used to formulate and purify the
drug concentrate of ALFERON N Injection(R). If we are unable to generate
sustained revenues from the sale of this product, our financial condition could
be materially and adversely affected.
In addition, pursuant to terms of the October Debentures, we are
required to acquire ISI's facility within 90 days from January 26, 2004 and,
unless and until we acquire the facility, $1,550,000 of the proceeds from the
sale of the October Debentures will be held back. The same condition was in the
July Debentures and in the debentures issued in March 2003; however, the holders
waived this condition in both debentures. Consummation of the second agreement
requires, among other things, approval by ISI's stockholders. On March 9, 2004
ISI's stockholders approved the second asset acquisition.
Due to ongoing delays on the part of ISI, on September 23, 2003, we
commenced an action against ISI in Delaware seeking specific performance and
declaratory and injunctive relief related to the first and second asset
acquisition agreements. Our primary objectives are to compel ISI to complete the
second asset acquisition and to prevent ISI from terminating the second asset
acquisition agreement due to the passage of time. For more information on this
action, see "Item 3. Legal Proceedings." It is possible that that this lawsuit
could further delay the closing of the second asset acquisition.
Our failure to complete the acquisition within the 90 day period will
result in a technical default of the terms of the October Debentures and, absent
consent from the holders of these debentures for additional time, might result
in our having to redeem the securities. If we do not receive the additional
funds from the October Debentures as planned and, especially if we are required
to redeem these debentures, our financial condition would be materially and
adversely affected and we would probably have to reduce or possibly curtail
operational spending including some critical clinical effort. In addition,
although we have not yet completed the acquisition, we issued an aggregate of
581,761 shares to GP Strategies and the American National Red Cross, two
creditors of ISI, as partial consideration for the acquisition and we may be
required to repurchase some of the shares in the future at $1.59 per share (see
the risk factor "We have guaranteed the value of a number of shares issued and
to be issued as a result of our acquisition of assets from Interferon Sciences.
If our share price is not above $1.59 per share 12 or 24 months after the dates
of issuance of the guaranteed shares, our financial condition could be adversely
affected" below). If we do not complete the acquisition, we will look to ISI to
pay us the value of the shares that we issued to these two creditors. No
assurance can be given that we will be able to so recoup the value of these
shares.
28
We have guaranteed the value of a number of shares issued and to be issued as a
result of our acquisition of assets from Interferon Sciences. If our share price
is not above $1.59 per share 12 or 24 months after the dates of issuance of the
guaranteed shares, our financial condition could be adversely affected.
Upon the consummation of the second ISI asset acquisition, we will
issue an additional 487,028 shares to ISI. In May 2003 we issued an aggregate of
581,761 shares to two creditors of ISI. We anticipate, but cannot assure, that
we will close the second ISI asset acquisition sometime in March 2004. We have
guaranteed the value of all but 62,500 of these shares to be issued to ISI and
the creditors, to be $1.59 per share on the termination date. As of February 10,
2004, GP Strategies has sold all of its guaranteed shares. The termination dates
are 24 months after the dates of issuance and delivery of the guaranteed shares
to ISI, and 12 months after the date of issuance of the guaranteed shares to the
American National Red Cross. The guarantee relates only to those shares still
held by ISI and the American National Red Cross on the applicable termination
date. If, within 30 days after the relevant termination date, holders of the
guaranteed shares request that we honor the guarantees, we will reacquire the
holders' remaining guaranteed shares and pay the holders $1.59 per share. By way
of example, assuming that all remaining 738,993 shares are still held on the
relevant termination dates and the holders requested that we honor the
guarantees, we would be obligated to pay to ISI and the American National Red
Cross an aggregate of $1,174,999. The reported last sale price for our common
stock on the American Stock Exchange on February 18, 2004 was $4.05 per share.
If, during the 31 days commencing on the relevant termination dates, the market
price of our stock is not above $1.59 per share, we most likely would be
requested and obligated to pay the guaranteed amount on the guaranteed shares
outstanding on the relevant termination dates. We believe that the guaranteed
shares still outstanding on the relevant termination dates might be a factor of
the market price and sales volume of our common stock during the 24, and 12
month periods prior to the relevant termination date.
If the holders of the guaranteed shares do not sell a significant
amount of their guaranteed shares prior to the relevant termination dates and
the price of our common stock during the 31 day period commencing on the
relevant termination dates is not above $1.59 per share, we most likely will be
required to repurchase a significant number of guaranteed shares and our
financial condition could be materially and adversely affected.
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. If and when we obtain all
rights to ALFERON N Injection(R), we will need to preserve and acquire
enforceable patents covering its use for a particular disease too. Our success
depends, in large part, on our ability to preserve and obtain patent protection
for our products and to obtain and preserve our trade secrets and expertise.
Certain of our know-how and technology is not patentable, particularly the
procedures for the manufacture of our drug product which are carried out
according to standard operating procedure manuals. We have been issued certain
patents including those on the use of Ampligen(R) and Ampligen(R) in combination
with certain other drugs for the treatment of HIV. We also have been issued
patents on the use of Ampligen(R) in combination with certain other drugs for
the treatment of chronic Hepatitis B virus, chronic Hepatitis C virus, and a
29
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), ISI has a
patent for natural alpha interferon produced from human peripheral blood
leukocytes and its production process and has additional patent applications
pending. We will acquire this patent and related patent applications, if and
when, we close on the second ISI asset acquisition. We cannot assure you that
any of these applications will be approved or that our competitors will not seek
and obtain patents regarding the use of our products in combination with various
other agents, for a particular target indication prior to us. If we cannot
protect our patents covering the use of our products for a particular disease,
or obtain additional pending patents, we may not be able to successfully market
our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can be no
assurance that new patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position that we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
30
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.
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. should provide a sales force in South America, Africa, United
Kingdom, Australia and New Zealand, Canada, Spain and Portugal.
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.
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
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all. If we are unable to obtain the
required raw materials, we may be required to scale back our operations or stop
manufacturing ALFERON N Injection(R). The costs and availability of products and
materials we need for 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.
31
There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will lead to a successful transition to
commercial, large-scale production.
Small changes in methods of manufacturing may affect the chemical
structure of Ampligen(R) and other RNA drugs, as well as their safety and
efficacy. Changes in methods of manufacture, including commercial scale-up may
affect the chemical structure of Ampligen(R) and can, among other things,
require new clinical studies and affect orphan drug status, particularly, market
exclusivity rights, if any, under the Orphan Drug Act. The transition from
limited production of pre-clinical and clinical research quantities to
production of commercial quantities of our products will involve distinct
management and technical challenges and will require additional management and
technical personnel and capital to the extent such manufacturing is not handled
by third parties. There can be no assurance that our manufacturing will be
successful or that any given product will be determined to be safe and
effective, capable of being manufactured economically in commercial quantities
or successfully marketed.
We have limited manufacturing experience and capacity.
Ampligen(R) is currently produced only in limited quantities for use in
our clinical trials and we are dependent upon certain third party suppliers for
key components of our products and for substantially all of the production
process. The failure to continue these arrangements or to achieve other such
arrangements on satisfactory terms could have a material adverse affect on us.
Also, to be successful, our products must be manufactured in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
To the extent we are involved in the production process, our current facilities
are not adequate for the production of our proposed products for large-scale
commercialization, and we currently do not have adequate personnel to conduct
commercial-scale manufacturing. We intend to utilize third-party facilities if
and when the need arises or, if we are unable to do so, to build or acquire
commercial-scale manufacturing facilities. We will need to comply with
regulatory requirements for such facilities, including those of the FDA and HPB
pertaining to current Good Manufacturing Practices ("cGMP") regulations. There
can be no assurance that such facilities can be used, built, or acquired on
commercially acceptable terms, or that such facilities, if used, built, or
acquired, will be adequate for our long-term needs.
The purified drug concentrate utilized in the formulation of ALFERON N
Injection(R) is manufactured in ISI's facility and ALFERON N Injection(R) is
formulated and packaged at a production facility operated by Abbott Laboratories
located in Kansas. If and when we close on the second ISI asset acquisition, we
will acquire their New Brunswick, NJ facility. We still will be dependent upon
Abbott Laboratories and/or another third party for product formulation and
packaging.
32
We may not be profitable unless we can produce Ampligen(R) or other products in
commercial quantities at costs acceptable to us.
We have never produced Ampligen(R) or any other products in large
commercial quantities. Ampligen(R) is currently produced for use in clinical
trials. We must manufacture our products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
us to be profitable. We intend to utilize third-party manufacturers and/or
facilities if and when the need arises or, if we are unable to do so, to build
or acquire commercial-scale manufacturing facilities. If we cannot manufacture
commercial quantities of Ampligen(R) or enter into third party agreements for
its manufacture at costs acceptable to us, our operations will be significantly
affected. 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) has a shelf life of 18
months after having been bottled.
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.
33
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
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.
34
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
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure. Although we currently maintain product liability
insurance coverage, there can be no assurance that this insurance will provide
adequate coverage against product liability claims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.
The loss of Dr. 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 million 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
35
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.
There are risks of liabilities associated with handling and disposing of
hazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, we could be held liable for any damages
that result, and any such liability could be significant. We do not maintain
insurance coverage against such liabilities.
The market price of our stock may be adversely affected by market volatility.
The market price of our common stock has been and is likely to be
volatile. In addition to general economic, political and market conditions,
the price and trading volume of our stock could fluctuate widely in response
to many factors, including:
o announcements 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;
o 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, 2003, the price of our
common stock has ranged from $1.33 to $2.96. 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
36
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 10, 2004, approximately 556,523 shares of our common
stock constituted "restricted securities" as defined in Rule 144 under the
Securities Act of 1933. Substantially all of these shares have been or will be
registered pursuant to agreements between us and the holders of these shares. In
addition, we have registered 10,160,362 shares issuable (i) upon conversion of
approximately 135% of the January 2004 Debentures, October Debentures, July
Debentures and the January 2004 Debentures (issuable upon exercise of Additional
Investment Rights issued in conjunction with the January 2004 Debentures); (ii)
as payment of 135% of the interest on all of the Debentures; (iii) upon exercise
of 135% of the 2009 Warrants, October 2008 Warrants, July 2008 Warrants and June
2008 Warrants; (iv) upon exercise of certain other warrants and stock options
and (v) shares issued to certain suppliers. 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. Moreover, we anticipate that we will be issuing and
registering for public resale 487,028 shares if and when we close the second ISI
asset acquisition. 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
shareholder rights plan and, under the Plan, our Board of Directors declared a
dividend distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on November 29, 2002. Each Right
37
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 12.8% 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
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 and occupy a total of approximately 18,850 square
feet of laboratory and office space in two states and some office space in
Paris, France. Our headquarters is located in Philadelphia, Pennsylvania
consisting of a suite of offices of approximately 15,000 square feet. We also
lease space of approximately 3,850 square feet in Rockville, Maryland for
research and development, our pharmacy, packaging, quality assurance and quality
control laboratories, as well as additional office space. Approximately 2,000
square feet are dedicated to the pharmacy, packaging, quality assurance and
control functions. We believe that our Rockville facilities will meet our
requirements, for planned clinical trials and treatment protocols through 2004
and possibly longer after which time we may need to increase our Rockville
facilities either through third parties or by building or acquiring
commercial-scale facilities.
We currently occupy and use the New Brunswick, New Jersey laboratory
and production facility owned by ISI. We are in the process of acquiring title
to these facilities pursuant to our second asset acquisition agreement with ISI.
These assets 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.
We also have a 24.9% interest in Ribotech, Ltd. located in South
Africa. Ribotech was established by Bioclones to develop and operate a
manufacturing facility. Manufacturing at the pilot facility commenced in 1996.
We expect that Ribotech will start construction on a new commercial production
facility in the future, although no assurance can be given that this will occur.
38
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
defamation and disparagement. Thereafter, Asensio appealed the granting of a new
trial. This appeal is now pending in the Superior Court of Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and her husband
filed a claim in the Superior Court of New Jersey, Middlesex County, against us,
one of our clinical trial investigators and others alleging that she was harmed
in the ME/CFS clinical trial as a result of negligence and breach of warranties.
We believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
claim in Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian
subsidiary, and one of our clinical trial investigators alleging that she was
harmed in the Belgium ME/CFS clinical trial as a result of negligence and breach
of warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.
On September 16, 2003, we filed and subsequently served and moved for
expedited proceedings on, a complaint filed in the Court Of Chancery of the
State of Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the first and
second asset acquisition agreements with ISI. Specifically, we allege that ISI
has delayed its performance pursuant to the agreements and, as a result, the
second asset purchase did not close within 180 days of the date of the
agreements. Paragraph 7.7 of the second asset purchase agreement states that
either party to the agreement may terminate the agreement if there is no closing
within 180 days of the date of the agreement. We request that the Court require
ISI to specifically perform its obligations under the agreement or, in the
alternative, that paragraph 7.7 of the agreement be eliminated or reformed to
eliminate ISI's ability to terminate pursuant to that paragraph. We also request
that ISI, as a result of its conduct, not be permitted to terminate the
agreements pursuant to paragraph 7.7 or due to the passage of time. At a hearing
held on September 29, 2003, the Court set a trial of our case for January 6-7,
2004, which was postponed until March 4-5, 2004, and accepted the agreement of
39
the parties pursuant to which the date on which ISI may exercise its termination
right is extended until no earlier than two weeks following trial. In response
to our complaint, ISI has filed a motion to dismiss. In February, we notified
the Court to remove the trial from the docket in light of the pending ISI
stockholder meeting to approve the transaction.
On November 5, 2003 we purchased for the sum of $476,839 from M.D. Sass
Municipal Finance Partners II, L.P. ("SASS") certain tax lien certificates
evidencing liens on the ISI facility in New Brunswick, New Jersey. By this
purchase we also succeeded to the position of SASS and became the plaintiff in
the Complaint For Foreclosure Of Tax Sale Certificate(s) now pending in the
Superior Court Of New Jersey Chancery Division, Middlesex County, Docket No.
F-11766-03.
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, 2003.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
In 2003, we issued 6,756,942, shares of common stock consisting of 1)
1,068,789 shares related to the ISI Asset Acquisition, 2) 4,334,916 shares for
debt conversion and interest payments related to the 6% convertible debentures,
3) 790,745 shares for exercise of warrants, 4)215,047 shares for payment of debt
and 5) 347,445 shares for conversion of minority interest of subsidiary.
See "RECENT FINANCING AND ASSET ACQUISITIONS" above in Item 1.
Business, for information on our private issuance of securities.
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.
40
COMMON STOCK High Low
---- ---
Time Period:
January 1, 2002 through March 31, 2002 $4.95 $3.40
April 1, 2002 through June 30, 2002 4.00 2.30
July 1, 2002 through September 30, 2002 2.89 0.75
October 1, 2002 through December 31, 2002 2.95 1.10
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
As of February 27, 2004 there were approximately 258 holders of record
of our Common Stock. This number was determined from records maintained by the
Company's transfer agent and does not include beneficial owners of the Company's
securities whose securities are held in the names of various dealers and/or
clearing agencies.
As of February 27, 2004, the last sale price for our common stock on
the AMEX was $3.91 per share.
We have not paid any dividends on our Common Stock in recent years. It
is management's intention not to declare or pay dividends on our Common Stock,
but to retain earnings, if any, for the operation and expansion of the Company's
business.
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, 2003.
41
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 reflected in
warrants and rights options, warrants column (a))
and rights
------ -----------
Plan Category
-------------
(a) (b) (c)
Equity compensation plans approved by
security holders: 433,134 $ 3.16 -
Equity compensation plans not approved by _ _ _
security holders:
Total 433,134 $ 3.16 -
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.
ITEM 6. Selected Financial Data (in thousands except for share and per share
data).
Year Ended
December 31 1999 2000 2001 2002 2003(2)
----------- ---- ---- ---- ---- -------
Statement of Operations
Data:
Revenues and License
fee Income $678 $788 $390 $904 $657
Total Costs and Expenses(1) 13,458 9,831 9,192 6,961 7,909
Interest Expense and Financing
Costs(3) - - - - 7,598
42
Net loss (12,298) (8,552) (9,083) (7,424) (14,770)
Basic and diluted net loss per
share (0.47) (0.29) (0.29) (0.23) (0.42)
Shares used in computing basic
and diluted net loss per share 26,380,351 29,251,846 31,433,208 32,085,776 35,234,526
Balance Sheet Data:
Working Capital $9,507 $7,550 $7,534 $2,925 $7,000
Total Assets 14,168 13,067 12,035 6,040 13,404
Common Stockholders Equity 12,657 11,572 10,763 3,630 9,248
Other Cash Flow Data:
Cash used in operating
activities $(6,990) $(8,074) $(7,281) $(6,409) $(7,022)
Capital expenditures (251) (171) - - (19)
(1) General and Administrative expenses include stock compensation expense
totaling $4,618, $397, $673, $132, $237 for the years ended December 31, 1999,
2000, 2001, 2002, and 2003, respectively.
(2) For information concerning recent acquisitions of certain assets of ISI and
related financing see notes 1, 4 and 7 to our consolidated financial statements
for the year ended December 31, 2003.
(3) In accounting for the March 12, 2003, July 10, 2003, and October 29, 2003
issuances of 6% Senior Convertible Debentures in the principal amounts of
$5,426,000, $5,426,000, and $4,142,357, respectively, and related embedded
conversion features and warrant issuances, we recorded debt discounts of
approximately $11.3 million which, in effect, reduced the carrying value of the
debt to $1.6 million. Excluding the application of related accounting standards,
our debt outstanding as of December 31, 2003 totaled approximately $6.6 million.
Through December 31, 2003, we have recorded charges of approximately $7.3
million for amortization of original issue discount and other related debt
costs. Such amounts have been reflected as financing costs in the statement of
operations. For additional information refer to note 7 to our consolidated
financial statements for the year ended December 31, 2003.
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, 2003.
This information should be read in conjunction with Item 6 - "Selected Financial
43
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.
We have established a strong foundation of laboratory and pre-clinical
data with respect to the development of nucleic acid to enhance the natural
antiviral defense system of the human body and the development of the
therapeutic products for the treatment of chronic disease. Our strategy is to
obtain the required regulatory approval which will allow the progressive
introduction of Ampligen(R) (our proprietary drug) for treating Myalgic
Encephalomyelitis Chronic Syndrome (ME/CFS"), HIV, hepatitis C ("HCV") and
hepatitis B ("HBV") in the U.S., Canada, Europe and Japan. In February, 2004, we
completed the double-blind segment of the AMP 516 Phase III clinical trial for
use of Ampligen(R) in treating ME/CFS. The 14 remaining patients are enrolled in
the open label portion of the trial and should complete this segment by June,
2004. With the conclusion of the double-blind segment we can finalize data
collection and start date analysis in anticipation of preparing the NDA for
submission to the FDA. Ampligen(R) is also in Phase IIb Clinical trials in the
U.S. for the treatment of newly emerged multi-drug resistant HIV, and for the
induction of Cell mediated immunity in HIV patients that are under control using
potentially toxic drug cocktail.
Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 350 patents worldwide as
well as over 80 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patent apply to the use of
Ampligen(R) in combination with certain other drugs. Some composition of matter
patents pertain to other new medication, which have a similar mechanism of
action.
In March, 2003, we acquired from ISI, all of ISI's raw materials,
work-in-progress and finished product of Alferon N Injection(R), together with a
limited license for the production, manufacture, use, marketing and sale of the
product. Alferon N Injection(R) [interferon alfa- n3 (human derived)] is a
natural alpha interferon that has been approved by the U.S. Food and Drug
Administration ("FDA") for commercial sale for the treatment of certain types of
genital warts. We intend to market this product in the United State through
sales facilitated via third party marketing agreements. Additionally, we intend
to implement studies, beyond those conducted by ISI, for testing the potential
treatment of HIV, Hepatitis C and other indications, including multiple
sclerosis.
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
44
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, 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 2005,
the July 2005, and October 2005, 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 2005, July 2005, and October 2005 6%
convertible debentures. These non-cash charges account for 48% 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 $6,775,000 in 2003 compared to $7,424,000 in 2002 or a reduction
totaling $649,000. 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
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.
45
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.
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.
46
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
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.
47
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
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
48
$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 Part 1 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 January 2005, July
2005 and October 2005 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.
Years Ended December 31, 2002 vs. 2001
Net loss
Our net loss was approximately $7,424,000 for the year ended December
31, 2002 versus a net loss of $9,083,000 in 2001. Per share loss in 2002 was
$0.23 versus a per share loss of $0.29 in 2001. This year to year decrease in
losses of $1,659,000 was primarily due to higher revenues and lower costs in
2002. Revenues were up $514,000 in 2002 and total expenses were down by
$2,231,000 offset by a write down in the carrying value of our investments in
the amount of $1,366,000 for a net cost decrease of $865,000.
Revenues
Our revenues came from our ME/CFS cost recovery treatment programs
principally underway in the U.S., Canada and Europe. These clinical programs
allow us to provide Ampligen(R) therapy at our cost to severely debilitated
ME/CFS patients. Under this program the patients pay for the cost of Ampligen(R)
doses infused. These costs total approximately $7,200 for a 24 weeks treatment
program. Revenues from cost recovery treatment programs totaled some $341,000 in
2002. In 2001, these revenues were $390,000 or 14% higher than 2002 revenues. We
expected revenues in the U.S. to decline due to the focus of our clinical
49
resources on conducting and completing the AMP 516 ME/CFS Phase III clinical
trial as well as the start up of the AMP 719 and AMP 720 HIV clinical trials.
The clinical data collected from treating patients under the cost recovery
treatment programs will augment and supplement the data collected in the U.S.
Phase III ME/CFS trial.
We received a licensing fee of 625,000 Euros (some $563,000) from
Esteve pursuant to a sales and distribution agreement 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. Our total revenues, including this licensing fee, in 2002 was
$904,000 compared to revenues of $390,000 in 2001.
Research and Development costs
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.
At December 31, 2002, Ampligen was being tested in a Phase III clinical
trial, in the U.S., for use in treatment of ME/CFS, the so-called AMP-516 study.
It also was 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.
AMP 516
As of December, 2002, the AMP 516 clinical trial was fully enrolled
with more than the targeted 230 patients in order to potentially compensate for
"drop outs". The last patients completed the randomized segment of this clinical
trial in February, 2004. The next stage of the program is final data collection,
quality assurance of the data to insure its accuracy and analysis of the data
according to regulatory guidelines to facilitate the New Drug Application (NDA),
expected to be filed by the end of 2004. The date of potential commercial
approval depends on whether we receive Fast Track Status from the FDA. In case
of Fast Track the FDA approval time is maximum six months. If we are not granted
Fast Track Designation, the approval time can take substantially longer,
depending on the progress made by the FDA in review of the application. The FDA
may deny full commercial approval to the drug at any time, including after Fast
Track Status has been awarded.
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,
50
2) require 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
As of December 2002, approximately 55 patients had been enrolled in
both studies combined and they were being treated in approximately 10 different
active sites around the U.S.
The length of the study and the costs related to these trials cannot be
determined at this time as it will be materially influenced by (a) the number of
clinical investigators needed to fulfill the required number of patients, (b)
the rate of accrual of patients and (c) the retention of patients on the
protocol and their adherence to the protocol requirements. See "AMP 719 and AMP
720" in "Result of Operations; Years Ended December 31, 2003 vs. 2002; Research
and Development costs" above.
Our overall research and development direct costs in 2002 were
$4,946,000 compared to direct research and development costs in 2001 of
$5,780,000 and $6,136,000 in 2000. We estimate that 80% of these expenditures to
be related to our ME/CFS research and development and 20% related to our HIV
studies.
General and Administrative Expenses
Excluding stock compensation expense, general and administrative
expenses were approximately $1,882,000 in 2002 versus $2,741,000 in 2001. This
decease in expenses of $859,000 in 2002, is due to several factors including the
recovery of certain legal expenses of approximately $1,050,000 relating to the
Asensio lawsuit from our insurance carrier and lower overall legal expenses due
to less litigation, partially offset by higher Insurance premiums.
Stock compensation expenses was $133,000 or $538,000 lower than
recorded in the year 2001. The compensation reflects the imputed non-cash
expense recorded to reflect the cost of warrants granted to outside parties for
services rendered to us.
Equity Loss-Unconsolidated Affiliates
During the three months ended June 2002 and December 2002, we recorded
a non-cash charge of $678,000 and $396,000 respectively, to operations with
respect to our $1,074,000 investment in R.E.D. These charges were the result of
our determination that R.E.D.'s business and financial position had deteriorated
to the point that our investment had been permanently impaired. Please see
"RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS" in Part 1 for more details
on these transactions.
In May 2000, we acquired an equity interest in Chronix Biomedical Corp.
("CHRONIX") for $700,000. During the quarter ended December 31, 2002, we
recorded a noncash charge of $292,000 with respect to our investment in Chronix.
This impairment reduces our carrying value to reflect a permanent decline in
Chronix's market value based on its then proposed equity offerings. Please see
"RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS" in Part 1 for more details
on these transactions.
51
In April, 1999 we acquired a 30% equity position in the California
Institute of Molecular Medicine ("CIMM") for $750,000. During the fourth quarter
of 2001 we recorded a non-cash charge of $485,000 with respect to our investment
in CIMM. This was a result of our determination that CIMM's operations have not
yet evolved to the point where the full carrying value of our investment could
be supported based on that company's financial position and operating results.
This amount represented the unamortized balance of goodwill included as part of
our investment. During 2002, CIMM continued to suffer significant losses
resulting in a deterioration of its financial condition. The $485,000 written
off during 2001 represented the un-amortized 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 12, 2002 in CIMM, representing a 30% interest
in CIMM's equity at such date, 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." Please
see "RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS" in Part 1 for more
details on these transactions.
Interest and Other Income
Interest and other income totaled $103,000 in 2002 compared to $284,000
recorded in 2001. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities, which earned much lower interest income in 2002.
Liquidity And Capital Resources
Cash used in operating activities for the twelve months ended December
31, 2003 was $7,022,000. Cash provided by financial activities for twelve months
ended December 31, 2003 amounted to $10,317,000, substantially from proceeds
from debentures (see below). As of December 31, 2003, we had approximately
$5,260,000 in cash, cash equivalents and short term investments. We believe that
these funds plus the net proceeds of approximately $3.7 million from the
recently placed January 2004 Debentures, 2) the potential receipt of the $1.55
million of proceeds held back pending the acquisition of the ISI facility, 3)
potential licensing fee income, 4) the $2,000,000 in proceeds we expect when the
investors exercise their additional investment rights, and 5) and the projected
revenue from the acquisition of the ALFERON N Injection(R) business will be
sufficient to meet our operating requirements including debt service during the
2004 fiscal year. Sales of ALFERON N Injection(R) could be greater than expected
which would improve our cash position during the next twelve months. Also, we
have the ability to curtail discretionary spending, including some research and
development activities, if required to conserve cash. If we do not timely
complete the second ISI asset acquisition, our financial condition could be
adversely affected (see the risk factor "If we do not complete the second
Interferon Sciences asset acquisition, our ability to generate revenues from the
sales of ALFERON N Injection(R) and our financial condition will be adversely
affected").
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
52
placement for aggregate proceeds of $4,650,000. Pursuant to the terms of the
March Debentures, $1,550,000 of the proceeds from the sale of the March
Debentures were to have been held back and were to be released to us if, and
only if, we acquired ISI's facility within a set timeframe. Although we had not
acquired ISI's facility, these funds were released to us in June 2003. 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 is 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 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 the 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 742,288 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
Debentures") and an aggregate of 507,103 Warrants (the "July 2008 Warrants") to
the same investors who purchased the March 12, 2003 Debentures, in a private
placement for aggregate anticipated proceeds of $4,650,000. Pursuant to the
terms of the July Debentures, $1,550,000 of the proceeds from the sale of the
July Debentures were to have been held back and were to be released to us if,
and only if, we acquired ISI's facility with in a set timeframe. Although we
have not acquired ISI's facility, these funds were released to us in October
2003. The July Debentures mature on July 31, 2005 and bear interest at 6% per
53
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 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 Debentures was fixed at $2.14 per share; however, as part
of the new debenture placement closed on October 29, 2003 (see below), the
conversion price under the July 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.
The July 2008 Warrants received by the investors, as amended, are to
acquire at any time commencing on July 26, 2004 through January 31, 2009 an
aggregate of 507,102 shares of common stock at a price of $2.46 per share. On
July 10, 2004, the exercise price of these July 2008 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 11, 2003 and July 9, 2004 (but
in no event less than $2.14 per share). The exercise price (and the reset price)
under the July 2008 Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the July Debentures and the July 2008 Warrants.
The Registration Rights Agreement requires that we register on behalf of the
holders the shares of common stock issuable upon conversion of the Debentures,
as interest shares under the Debentures and upon exercise of the July 2008
Warrants. These shares have been registered for public sale.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture
holders a warrant to acquire at any time through June 25, 2008 an aggregate of
500,000 shares of common stock at a price of $2.40 per share. On June 25, 2004,
the exercise price of these June 2008 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 June 26, 2003 and June 24, 2004 (but in no event
less than $1.68 per share). The exercise price (and the reset price) under the
June 2008 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the July 2008 Warrants. Pursuant to our agreement with the
Debenture holders, we have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale.
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
Debentures") and an aggregate of 410,134 Warrants (the "October 2008 Warrants")
in a private placement for aggregate anticipated gross proceeds of $3,550,000.
Pursuant to the terms of the October Debentures, $1,550,000 of the proceeds from
the sale of the October Debentures have been held back and will 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
Debentures. The October 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
54
the third business day immediately preceding the applicable interest payment
date.
Upon completing the sale of the October Debentures, we received
$3,275,000 in net proceeds consisting of $1,725,000 from the October Debentures
and $1,550,000 that had been withheld from the July Debentures. As noted above,
$1,550,000 of the proceeds from the October Debentures have been held back
pending our completing the acquisition of the ISI facility.
The October 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 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.
The October 2008 Warrants, as amended, received by the investors are to
acquire at any time commencing on July 26, 2004 through April 30, 2009 an
aggregate of 410,134 shares of common stock at a price of $2.32 per share. On
October 29, 2004, the exercise price of these October 2008 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 October 29, 2003 and
October 27, 2004 (but in no event less than $2.19 per share). The exercise price
(and the reset price) under the October 2008 Warrants also is subject to similar
adjustments for anti-dilution protection.
As of February 27, 2004, the investors had converted $9,589,300 of debt
from the March, July and October Debentures into 5,894,137 shares of our common
stock. The remaining principal balance on the 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 Debentures. The
amounts paid through December 31, 2003 have been accounted for as advances
receivable and are reflected as such on the accompanying balance sheet as of
December 31, 2003. The cash collateral account provides partial security for
repayment of the March, July and October 2003 and January 2004 Debentures in the
event of default.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the October Debentures and the October 2008
Warrants. The Registration Rights Agreement requires that we register on behalf
of the holders the shares of common stock issuable upon conversion of the
October Debentures, as interest shares under the October Debentures and upon
exercise of the 2008 Warrants. These shares have been registered for public
sale. If, subject to certain exceptions, sales of all shares required to be
registered cannot be made pursuant to the registration statement, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
such conditions exists.
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 "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
55
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 six months after issuance, 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. 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 is 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.
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 (but in no event less than $2.58 per share with regard to the
Class A warrants and $3.54 per share with regard to the Class B warrants). The
exercise price (and the reset price) under the July 2009 Warrants also is
subject to similar adjustments for anti-dilution protection.
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 from us. These Debentures are
identical to the January 2004 Debentures except that the conversion price is
$2.58. The Additional Investment Rights are exercisable commencing on July 26,
2004 (the "Trigger" date) for a period of 90 days from the Trigger Date or 90
days from the date which the registration statement registering the shares
issuable upon the conversion of the January 2004 Debentures to be issued
pursuant to the Additional Investment Rights is declared effective, whichever is
longer.
We entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the Additional Investment Rights), the shares, and
the January 2009 Warrants. The Registration Rights Agreement requires that we
register on behalf of the investors the shares issued to the investors and 135%
of the shares issuable upon conversion of the Debentures (including payment of
interest thereon) and upon exercise of the January 2009 Warrants. If the
Registration Statement containing these shares is not filed within the time
period required by the agreement, not declared effective within the time period
required by the agreement or, after it is declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we will be required to pay to the investors their
56
pro rata share of $3,635 for each day any of the above conditions exist with
respect to this Registration Statement.
By agreement between us and the investors, the date upon which all
warrants previously issued to the investors may become exercisable is now July
26, 2004 and the exercise periods of these warrants have been extended
accordingly.
By agreement with Cardinal Securities, LLC, for general financial
advisory services and in conjunction with the private debenture placements in
March, July and October 2003 and in January 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 certain warrants. A portion of the
investment banking fee was paid with the issuance of 30,000 shares of our common
stock. Cardinal also received 612,000 warrants to purchase common stock, of
which 112,500 are exercisable at $1.74 per share, 112,500 are exercisable at
$2.57 per share, 200,000 are exercisable at $2.50 per share, 87,500 are
exercisable at $2.42 per share and 100,000 are exercisable at $3.04 per share.
The $1.74 warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire
on March 12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04
warrants expire on January 5, 2009. By agreement with Cardinal, we have
registered 542,500 shares for public sale and have agreed to register the
balance.
In connection with the debenture agreements, we have outstanding
letters of credit of $1 million as additional collateral.
On March 11, 2003, we acquired from ISI, ISI's inventory of ALFERON N
Injection(R), a pharmaceutical product used for intralesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older, 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 have registered
these shares for public sale. ISI 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 have guaranteed the market
value of all but 62,500 of these shares to be $1.59 per share on the termination
date. The termination date for these guarantees is 18 months after the date of
issuance of the guaranteed shares to GP Strategies, 24 months after the date of
issuance and delivery of the 487,028 guaranteed shares to ISI and 12 months
after the date of issuance of the guaranteed shares to the American National Red
Cross. These stockholders are permitted to periodically sell certain amounts of
their shares. If, within 30 days after the respective termination date, one or
more of these stockholders requests that we honor the guarantee, we will be
obligated to reacquire their remaining guaranteed shares and pay them $1.59 per
share. Please see "We have guaranteed the value of a number of shares issued and
to be issued as a result of our acquisition of assets from Interferon Sciences.
If our share price is not above $1.59 per share 12 or 24 months after the dates
of issuance of the guaranteed shares, our financial condition could be adversely
affected" in "Risk Factors," above.
57
We also agreed to satisfy other liabilities of ISI which are 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 have registered the foregoing shares for public sale. As of
February 10, 2004 GP Strategies had sold all of its shares
In addition, as of December 31, 2003, we have $200,000 in restricted
cash under other letter of credit agreements required by our insurance carrier.
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 a such as debentures, options and warrants. Prior to the meeting, to
permit consummation of the sale of the July 2005 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 agreed to compensate Dr. Carter. See "Executive Compensation; Employment
Agreements" for details related to how Dr. Carter has been compensated with
respect to this matter.
On November 6, 2003 we acquired some of the outstanding ISI property
tax lien certificates in the aggregate amount of $456,839 from certain
investors. These tax liens were issued for property taxes and utilities due for
2000, 2001 and 2002.
Because of our long-term capital requirements, we may seek to access
the public equity market whenever conditions are favorable, even if we do not
have an immediate need for additional capital at that time. Any additional
funding may result in significant dilution and could involve the issuance of
securities with rights, which are senior to those of existing stockholders. We
may also need additional funding earlier than anticipated, and our cash
requirements, in general, may vary materially from those now planned, for
reasons including, but not limited to, changes in our research and development
programs, clinical trials, competitive and technological advances, the
regulatory process, and higher than anticipated expenses and lower than
anticipated revenues from certain of our clinical trials for which cost recovery
from participants has been approved.
Contractual Obligations
(dollars in thousands)
Obligations Expiring by Period
Contractual Cash Obligations ======================================================================
Total 2004 2005-2006 2007-2008
=================== ==================================================
Operating Leases $784 $286 $433 $65
Convertible Debentures
July 10, 2003 5,426,000 6%
Senior Convertible Debenture 4,257 - 4,257 -
October 29, 2003 $4,142,000 6% Senior Conver ible
Debenture 2,334 - 2,334 -
------------------ --------------------------------------------------
Total $7,375 $286 $7,024 $65
================== ==================================================
58
NEW ACCOUNTING PRONOUNCEMENTS
In November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. We will
continue to account for stock-based compensation using the intrinsic value
method of APB Opinion No. 25, "Accounting for Stock Issued to Employees," but
have adopted the enhanced disclosure requirements of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Interpretation No. 46"), that clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, "to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Interpretation No. 46 is
applicable immediately for variable interest entities created after January 31,
2003. For variable interest entities created prior to January 31, 2003, the
provisions of Interpretation No. 46 have been deferred to the first quarter of
2004. This Interpretation did not have an effect on our consolidated financial
statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires an issuer to classify certain financial
instruments, such as mandatory redeemable shares and obligations to repurchase
the issuers equity shares, as liabilities. The guidance is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
is otherwise effective at the beginning of the first interim period after June
15, 2003. SFAS 150 did not have an impact on our financial condition or results
of operations.
59
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 2005 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. See "Executive Compensation; Employment
Agreements" for details related to how Dr. Carter has been compensated with
respect to this matter.
In connection with the debenture agreements, HEB has outstanding
letters of credit of $1,000,000 as additional collateral.
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.
60
Patents and Trademarks
Effective October 1, 2001, we adopted a 17 year estimated useful life
for the amortization of our patents and trademark rights in order to more
accurately reflect their useful life. Prior to October 1, 2001, we were using a
ten year estimated useful life.
Patents and trademarks are stated at cost (primarily legal fees) and
are amortized using the straight line method over the life of the assets. 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
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, 2003.
ITEM 7a. Quantitative and Qualitative Market Risk.
Market Risk
We had $5.2 million in cash, cash equivalents and short term
investments at December 31, 2003. To the extent that our cash and cash
equivalents exceed our near term funding requirements, the excess cash was
invested in three (3) to six (6) month high quality financial instruments. We
employ established policies and procedures to manage any risks with respect to
any investment exposure.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated balance sheets as of December 31, 2002, and 2003, 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, 2003, together with the report of BDO Seidman, LLP,
independent public accountants, are included at the end of this report.
Reference is made to the "Index to Financial Statements and Financial Statement
Schedule" on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
61
ITEM 9A. Controls and 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, 2003 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, 2003, 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.
62
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors and Executive Officers of the Registrant
The following sets forth biographical information about each of our
directors and executive officers as of the date of this Agreement:
Name Age Position
William A. Carter, M.D. 66 Chairman, Chief Executive Officer,
and President
Robert E. Peterson 66 Chief Financial Officer
David R. Strayer, M.D. 58 Medical Director, Regulatory Affairs
Mei-June Liao, Ph.D. 53 Vice President of Regulatory Affairs,
Quality Control and
Research and Development
Robert Hansen 60 Vice President of Manufacturing
Carol A. Smith, Ph.D. 54 Director of Process Development
Richard C. Piani 77 Director
William M. Mitchell, M.D.,Ph.D. 69 Director
Ransom W. Etheridge 64 Director, Secretary, and General Counsel
Eraj Kiani, M.B.A., Ph.D. 58 Director
Antoni Esteve, Ph.D. 45 Director
Each director has been elected to serve until the next annual meeting
of stockholders, or until his earlier resignation, removal from office, death or
incapacity. Each executive officer serves at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.
WILLIAM A. CARTER, M.D., the co-inventor of Ampligen, joined Hemispherx in
1978, and has served as: (a) 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 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.
63
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.
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 of Hemispherx since 1995. Mr. Piani
has been employed as a principal delegate for Industry to the City of Science
and Industry, Paris, France, a billion dollar scientific and educational
complex. Mr. Piani provided consulting to Hemispherx in 1993, with respect to
general business strategies for 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
64
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 of Hemispherx since October 1997,
and presently serves as our secretary and general counsel. Mr. Etheridge first
became associated with Hemispherx 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 of Hemispherx since
July 1998. Dr. Mitchell is a Professor of Pathology at Vanderbilt University
School of Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from
Johns Hopkins University, where he served as an Intern in Internal Medicine,
followed by a Fellowship at its School of Medicine. Dr. Mitchell has published
over 200 papers, reviews and abstracts dealing with viruses and anti-viral
drugs. Dr. Mitchell has worked for and with many professional societies,
including the International Society for Interferon Research, and committees,
among them the National Institutes of Health, AIDS and Related Research Review
Group. Dr. Mitchell previously served as a director of Hemispherx from 1987 to
1989.
IRAJ E. KIANI, M.B.A., 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.
ANTONI ESTEVE, Ph.D. became a member of our Board of Directors in November
2003. Dr. Esteve is a Member of the Executive Committee and Director of
Scientific and Commercial Operations for Laboratorios del Dr. Esteve S.A. He has
been engaged at Laboratorios del Dr. Esteve since 1984. Since 1986 he is
Professor at the Autonomous University of Barcelona, School of Pharmacy. In 2001
he was elected as member of the Advisory Board for R&D of the Spanish Ministry
of Science and Technology. Since 2002 he also has been President of Centre de
Transfussio i Banc de Teixits (the Transfusion and Tissues Bank Center of
Catalonia). Dr. Esteve received a degree in Pharmacy from the University of
Barcelona, Faculty of Pharmacy, in 1981 and a Ph.D. in Pharmaceutical Science in
1990.
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,
2003, 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. Carter, Dr. Mitchell and Mr. Piani each filed a Form 5 late in which each
reported one transaction that should have been reported on a Form 4 during 2003;
Mr. Etheridge filed a Form 5 late in which he reported two transactions that
should have been reported on a Form 4 during 2003; and Dr. Esteve and Mr. Kiani,
we have been informed, are each in the process of filing 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,
M.B.A., Ph.D. Mr. Piani, Dr. Mitchell and Dr. 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 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. The principal functions of
the Audit Committee are to recommend our independent auditors, review the scope
of their engagement, consult with the auditors, review the results of their
examination, act as liaison between the Board of Directors and the auditors and
review various company policies, including those relating to accounting and
internal controls.
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, 2003,
2002 and 2001 to (i) our Chief Executive Officer and (ii) our four most highly
paid executive officers other than the CEO who were serving as executive
officers at the end of the last completed fiscal year and whose total annual
salary and bonus exceeded $100,000 (collectively, the "Named Executives").
66
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary ($) Restricted Warrants & Options All Other
Stock Awards Awards Compensation
(1)
----------------------------- ------------- --------------------- --------------- -------------------- ---------------
William A. Carter 2003 (4)$582,561 - (5)1,450,000 $37,175
Chairman of 2002 (4) 565,514 - (8)1,000,000 25,747
the Board and CEO 2001 (4) 551,560 - (2) 386,650 22,917
-
Robert E. Peterson 2003 (9)$230,450 - - -
Chief 2002 151,055 - (8) 200,000 -
Financial 2001 146,880 - (3) 40,000 -
Officer
David R. Strayer, M.D. 2003 (6)$190,096 - - -
Medical Director 2002 (6)178,594 - (8) 50,000 -
2001 (6)174,591 - (7) 10,000 -
Carol A. Smith, Ph.D. 2003 $140,576 - - -
Director 2002 128,346 - (8) 20,000 -
of 2001 124,800 - (7) 10,000 -
Manufacturing
Robert Hansen, V.P. of 2003 (10)$104,500 - - -
Manufacturing 2002 - - - -
2001 - - - -
----------------------
(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)Consists of 188,325 warrants to purchase common stock at $6.00 per share
and 188,325 warrants to purchase common stock at $9.00 per share. Also includes
a stock option grant of 10,000 shares exercisable at $4.03 per share.
(3)Consist of a stock option grant of 10,000 shares exercisable at $4.03
per share and 30,000 warrants to purchase common stock at $5.00 per share.
(4)Includes a bonus of $94,952, $96,684, and $99,481 in 2001, 2002 and
2003, respectively. Also includes funds previously paid to Dr. Carter by
Hahnemann Medical University where he served as a professor until 1998. This
compensation was continued by us and totaled $79,826 in 2001, $82,095 in 2002
and $84,776 in 2003.
67
(5)Represents warrants to purchase common stock exercisable at $2.20 per
share.
(6)Includes $98,926 paid by Hahnemann Medical University where Dr. Strayer
served as a professor until 1998. This compensation was continued by us in 2001,
2002 and 2003.
(7)Consist of stock option grant of 10,000 shares exercisable at $4.03 per
share.
(8)Represents number of warrants to purchase shares of common stock at $2
per share.
(9)2003 includes a bonus of $74,464 paid in 2004.
(10)Compensation since March 2003. Employed by ISI prior to that. The
following table sets forth certain information regarding stock warrants granted
during 2003 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 WARRANTS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN
WARRANTS FISCAL YEAR PRICE PER ASSUMED RATES OF STOCK PRICE
GRANTED (1) 2002(2) SHARE (3) APPRECIATION FOR WARRANTS TERM
------------------ ----------------- ------------------ ------------- ---------------- ----------------------------------
------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
5% (4) 10%(4)
------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
Carter, W.A. 1,450,000 100% $2.20 9/8/08 $4,071,338 $5,137,527
------------------ ----------------- ------------------ ------------- ---------------- ----------------- ----------------
(1) Warrants vest upon execution of the second ISI asset closing or the
filing by us with the U.S. Food and Drug Administration of a new drug
application, whichever happens first.
(2) Total warrants issued to employees in 2003 were 1,450,000.
(3) The exercise price is equal to the closing price of our common stock at
the date of issuance.
(4) Potential realizable value is based on an assumption that the market
price of the common stock appreciates at the stated rates compounded annually,
from the date of grant until the end of the respective option term. These values
are calculated based on requirements promulgated by the Securities and Exchange
Commission and do not reflect our estimate of future stock price appreciation.
68
The following table sets forth certain information regarding the stock
options held as of December 31, 2003 by the individuals named in the
above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Unexercised Value of Unexercised
Warrants/ In-the-Money-Options At Fiscal
Options at Fiscal Year End Numbers Year End (1)
---------------------------------- ----------------------------------
Dollars
Name Shares Value Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized
Exercise (#) ($)
--------------- -------------- ------------ ----------------- ------------------- ---------------- -------------------
--------------- -------------- ------------ ----------------- ------------------- ---------------- -------------------
William Carter - - 3,805,378(2) 1,950,000(3) $367,150 $217,000
Robert - - 403,750(4) 0 52,000 0
Peterson
David Strayer - - 130,000(5) 0 13,000 0
Carol Smith - - 41,791(6) 0 5,200 0
----------------------------
(1)Computation based on $2.26, the December 31, 2003 closing bid price for the
common stock on the American Stock Exchange.
(2) Consist of (i) 500,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 (ii) 188,325 warrants exercisable at $6.00 per share expiring on
February 22, 2006 (iii) 188,325 warrants exercisable at $9.00 per share expiring
on February 22, 2006 (iv) 100,000 warrants exercisable at $6.25 per share
expiring on April 8, 2004 (v) 25,000 warrants exercisable at $6.50 per share
expiring on September 17, 2004 (vi) 25,000 warrants exercisable at $8.00 per
share expiring on September 17, 2004 (vii) 10,000 stock option exercisable at
$4.03 per share expiring on January 3, 2011, (viii) 73,728 stock options
exercisable at $2.71 per share until exercised. Also include 2,695,000 warrants
and options held in the name of Carter Investments, L.C. of which W.A. Carter in
the principal beneficiary. These securities consist of (i) 340,000 warrants
exercisable at $4.00 per share expiring on January 1, 2008,(ii) 170,000 warrants
exercisable at $5.00 per share expiring on January 1, 2005,(iii) 300,000
warrants exercisable at $6.00 per share expiring on January 1, 2005 (iv) 20,000
warrants exercisable at $4.00 per share expiring on 2008,(v) 465,000 warrants
exercisable at $1.75 expiring on June 3, 2005, and 1,400,000 warrants
exercisable at $3.50 per share expiring on October 16, 2004.
69
(3) Consists of (i) 500,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 and (ii) 1,450,000 warrants exercisable at $2.20 per share
expiring on September 8, 2008.
(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 $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 and (vi) 30,000 warrants exercisable at $5.00 per
share expiring on February 28, 2009.
(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.
Employment Agreements
We entered into an amended and restated employment agreement with our
President and Chief Executive Officer, Dr. William A. Carter, dated as of
December 3, 1998, as amended in August 2003, which provided for his employment
until May 8, 2008 at an initial base annual salary of $361,586, subject to
annual cost of living increases. In addition, Dr. Carter could receive an annual
performance bonus of up to 25% of his base salary, at the sole discretion of the
board of directors. Dr. Carter will not participate in any discussions
concerning the determination of his annual bonus. Dr. Carter is also entitled to
an incentive bonus of 0.5% of the gross proceeds received by us from any joint
venture or corporate partnering arrangement, up to an aggregate maximum
incentive bonus of $250,000 for all such transactions. Dr. Carter's agreement
also provides that he be paid a base salary and benefits through May 8, 2004 if
he is terminated without "cause", as that term is defined in the agreement. This
agreement was extended to May 8, 2008. Pursuant to his original agreement, as
amended on August 8, 1991, Dr. Carter was granted options to purchase 73,728
shares of our common stock at an exercise price of $2.71 per share.
We entered into an amended and restated engagement agreement with
Robert E. Peterson dated April 1, 2001 which provides for Mr. Peterson's
employment as our Chief Financial Officer until December 31, 2003 which has been
extended six months, at an annual base salary of $155,988 per year, subject to
annual cost of living increases. In addition, Mr. Peterson shall receive bonus
compensation upon Federal Drug Administration approval of Ampligen based on the
number of years of his employment by us up to the date of such approval. Mr.
Peterson's agreement also contains a provision for severance pay equal to nine
months compensation.
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
70
retainer of $100,000 to be paid 50% in cash and 50% in Company common stock. In
addition, all non-employee directors received some compensation in 2003 for
special project work performed on our behalf. All directors have been granted
options to purchase common stock under our 1990 Stock Option Plan 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.
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, 2003, 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 2003 we provided matching contributions to each employee
for up to 6% of annual pay for a total of $34,000 for all eligible employees.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 2003, the members of our
Compensation Committee were Ransom W. Etheridge and Richard Piani. Mr. Etheridge
serves as our Secretary and he is an attorney in private practice and has
rendered legal services to us for which he received a fee. Mr. Piani received
fees for certain consulting work performed in Europe on our behalf. 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 2003.
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.
71
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.
Base Salary
The Summary Compensation Table shows amounts earned during 2003 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 on August
14, 2003), which provides for a base salary of $361,586 until May 8, 2008. Also
we entered into an extended employment agreement with Robert E. Peterson, Chief
Financial Officer for a base salary of $155,988 until December 31, 2003, which
was extended six months. Dr. Carter and Mr. Peterson's agreements allow for
annual cost of living increases. Dr. Carter's compensation also includes funds
previously paid to Dr. Carter by Hahneman Medical University where he served as
a professor until 1998. This compensation was continued by us and totaled
$79,826 in 2001, $82,095 in 2002 and $84,776 in 2003.
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 2003 and
the cash bonus awarded to the Chief Financial Officer in 2003 were determined
based on this provision in their employment agreements.
Long-Term Incentives
We grant long-term inventive 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
1,450,000 warrants in 2003. These warrants are exercisable at $2.20 per share
and expire on September 8, 2008, unless previously exercised. These Warrants
vest upon consummation of the second ISI asset closing or the filing by us with
the U.S. Food and Drug Administration of a new drug application, whichever
happens first. The warrants vested on March 17, 2004, when the second ISI asset
closing was consummated.
Performance Graph
Total Return to Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name / Index Dec99 Dec00 Dec01 Dec02 Dec03
----------------------------------------- ----------- ----------- ----------- ---------- ----------- -----------
HEMISPHERX BIOPHARMA INC 44.55 -52.20 -5.26 -52.67 6.10
S&P SMALLCAP 600 INDEX 12.40 11.80 6.54 -14.63 38.79
PEER GROUP -23.18 -33.76 48.39 -45.76 5.33
INDEXED RETURNS
Base Years Ending
Period
Company Name / Index Dec98 Dec99 Dec00 Dec01 Dec02 Dec03
----------------------------------------- ----------- ----------- ----------- ---------- ----------- -----------
HEMISPHERX BIOPHARMA INC 100 144.55 69.09 65.45 30.98 32.87
S&P SMALLCAP 600 INDEX 100 112.40 125.67 133.88 114.30 158.63
PEER GROUP 100 76.82 50.88 75.51 40.95 43.14
72
Peer Group Companies
----------------------------------------- ----------- ----------- ----------- ---------- ----------- -----------
AVI BIOPHARMA INC
IMMUNE RESPONSE CORP/DE
LA JOLLA PHARMACEUTICAL CO
MAXIM PHARMACEUTICALS INC
[GRAPHIC OMITTED][GRAPHIC OMITTED]
GRAPH OF TOTAL SHAREHOLDER RETURNS
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth as of February 15, 2004 the number and
percentage of outstanding shares of common stock beneficially owned by each of
our Directors and the Named Executives, and all of our executive officers and
directors as a group. As of December 31, 2003, 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.
OFFICERS, DIRECTORS AND PRINCIPAL SHARES BENEFICIALLY OWNED % OF SHARES BENEFICIALLY OWNED (1)
STOCKHOLDERS
-------------------------------------------- ---------------------------------- -------------------------------------------
William A. Carter, M.D. 4,392,028 (2) 9.96%
Robert E. Peterson 404,250 (3) 1.00
Ransom W. Etheridge 414,316 (4) 1.02
73
Richard C. Piani 196,747 (5) *
William M. Mitchell, M.D. 196,861 (6) *
Antoni Esteve, M.D. 347,446 (7)
David R. Strayer, M.D. 144,746 (8) *
Carol A. Smith, Ph.D 41,791 (9) *
Iraj-Eghbal Kiani 12,000 (10)
Mei-June Liao, Ph.D. 0 0
Robert Hansen 0 0
All directors and executive officers as a
group (11
persons) 6,150,185 13.56%
--------------------
* Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock, which such person has the
right to acquire within 60 days of February 15, 2004. For purposes of computing
the percentage of outstanding shares of common stock held by each person or
group of persons named above, any security which such person or persons has or
have the right to acquire within such date is deemed to be outstanding but is
not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, Hemispherx believes
based on information supplied by such persons, that the persons named in this
table have sole voting and investment power with respect to all shares of common
stock which they beneficially own.
(2) Includes (i) an option to purchase 73,728 shares of common stock from
Hemispherx at an exercise price of $2.71 per share and expiring on August 8,
2004, (ii) Rule 701 Warrants to purchase 1,400,000 shares of common stock at a
price of $3.50 per share, originally expiring on September 30, 2002 was extended
to September 30,2007; (iii) warrants to purchase 465,000 shares of common stock
at $1.75 per share issued in connection with the 1995 Standby Financing
Agreement and expiring on June 30, 2005; (iv) 340,000 common stock warrants
exercisable at $4.00 per share and originally expiring on January 1, 2003 was
extended to January 1, 2008; (v) 170,000 common stock warrants exercisable at
$5.00 per share and expiring on January 2, 2005;(vi) 25,000 warrants to purchase
common stock at $6.50 per share and expiring on September 17, 2004;(vii) 25,000
warrants to purchase common stock at $8.00 per share and expiring on September
17, 2004;(viii) 100,000 warrants to purchase common stock at $6.25 per share and
expiring on April 8, 2004; (ix) 20,000 warrants to purchase common stock at
$4.00 per share originally expiring January 1, 2003 was extended to January 1,
2008, (x) 188,325 common stock warrants exercisable at $6.00 per share and
expiring on February 22, 2006; (xi) 188,325 common stock warrants exercisable at
$9.00 per share and expiring on February 22, 2006 (xii) 300,000 common stock
warrants granted in 1998 that are exercisable at $6.00 per share and expiring on
January 1, 2006 (xiii) options to purchase 10,000 shares of common stock at
$4.03 per share and expiring on January 3, 2011 (XIV) 500,000 warrants
exercisable $2.00 per share in August 13, 2007, and 586,650 shares of common
stock. Does not include 1,950,000 warrants that are not vested consisting of
500,000 warrants exercisable at $2.00 per share expiring on August 13, 2007 and
1,450,000 warrants exercisable at $2.20 per share expiring on September 9, 2008.
(3) 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
March 1, 2006; (iii) warrants to purchase 100,000 shares of common stock at
74
$5.00 per share, expiring on April 14, 2006; (iv) 30,000 warrants to purchase
common stock at $5.00 per share an expiring on February 28, 2009 (v) options to
purchase 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 November 13, 2007 and
(v) 500 shares of common stock.
(4) Includes 20,000 warrants to purchase common stock at $4.00 per share,
originally expiring on January 1, 2003 and was extended to January 1, 2008;
25,000 warrants to purchase common stock at $6.50 per share; 25,000 warrants to
purchase common stock at $8.00 per share, all expiring on September 12, 2004;
100,000 warrants exercisable $2.00 per share expiring on August 13, 2007;
200,000 stock options exercisable at $2.75 per share and expiring on December 4,
2013 and 44,316 shares of common stock.
(5) Includes (i) 20,000 warrants to purchase common stock at $4.00 per share;
(ii) warrants to purchase 25,000 shares of common stock at $6.50 per share;
(iii) 25,000 warrants to purchase common stock at $8.00 per share, all expiring
on September 17, 2004;(vi) 100,000 warrants exercisable at $2.00 per share
expiring on August 13, 2007, (vi) 8,847 shares of common stock owned by Mr.
Piani (vi) 12,900 shares of common stock owned jointly by Mr. and Mrs. Piani;
and (vii) 5000 shares of common stock owned by Mrs. Piani.
(6) Includes (I) warrants to purchase 12,000 shares of common stock at $6.00 per
share, expiring on August 25, 2008; (ii) 25,000 warrants to purchase common
stock at $6.50 per share; (iii) 25,000 warrants to purchase common stock at
$8.00 per share all expiring on September 17, 2004; (iv) 100,000 warrants
exercisable at $2.00 per share expiring in August 13, 2007 and 34,861 shares of
common stock.
(7)Consists of 347,446 shares of our common stock owned by Provesan S.A., an
affiliate of Laboratorios del Dr. Esteve S.A. Dr. Antoni Esteve is a member of
the executive committee and director of Scientific and Commercial Operations of
Laboratorios del Dr. Esteve S.A.
(8) Includes (i) stock options to purchase 20,000 shares of common stock at
$3.50 per share; (ii) 50,000 warrants to purchase common stock at $4.00 per
share; (iii) 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 and; (iv) 14,746 shares of common stock.
(9) 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 and options to purchase 10,000 shares of common stock at $ 4.03 per share
expiring on January 3, 2011.
(10)Consist of 12,000 warrants exercisable at $3.86 per share expiring on April
30, 2005.
Item 13. Certain Relationships and Related Transactions.
We have employment agreements with certain of our executive officers
and have granted such officers and directors 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.
75
Ransom W. Etheridge, one of our directors, is an attorney in private
practice who has rendered corporate legal services to us from time to time, for
which he has received fees. Richard Piani, another of our director, lives in
Paris, France and assists our European subsidiary in their dealings with medical
institutions and the European Medical Evaluation Authority. William Mitchell,
M.D. another of our directors, works with David Strayer, M.D. (our Medical
Director) in establishing clinical trial protocols as well as performs other
scientific work for us from time to time. For these services, these Directors
were paid an aggregate of $100,100 in the year 2003. Mr. Etheridge was the only
Director to exceed $60,000 for his professional services.
William A. Carter, our Chief Executive Officer, received an aggregate
of $12,106 in short term advances which were repaid as of December 31, 2002. We
loaned $60,000 to Ransom W. Etheridge, one of our directors in November, 2001
for the purpose of exercising 15,000 class A redeemable warrants. This loan
bears interest at 6% per annum. Dr. Carter's short term advances and Mr.
Etheridge's loan was approved by the board of Directors.
We paid $57,750, $33,450, and $18,800 for the years ending December 31,
2001, 2002 and 2003 respectively to Carter Realty for the rent of property used
at various times in years 2001, 2002 and 2003 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.
Antoni Esteve, one of our 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 "Our 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.
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 $178,429 in
2002 and $313,992 in 2003. The following table shows the aggregate fees billed
to us by BDO Seidman, LLP for professional services rendered during the year
ended December 31, 2003.
------------------------------------------ -------------------------------------------------------------------------------
Amount ($)
------------------------------------------ -------------------------------------------------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
Description of Fees 2002 2003
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
Audit Fees $173,929 $264,917
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
Audit-Related Fees 4,500 43,580
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
Tax Fees - -
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
All Other Fees - -
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
------------------------------------------ --------------------------------------- ---------------------------------------
Total $178,429 $308,497
======== ========
------------------------------------------ --------------------------------------- ---------------------------------------
76
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 2002 and 2003 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 2003.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1)(2)Financial Statements and Schedules - See index to financial statements
on page F-1 of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) Reports on Form 8-K
During the fourth quarter of 2003, we filed the following Current Reports on
Form 8-K:
Report dated October 30, 2003, reporting Item 5. "Other Events". No financial
statements were filed with the report.
Report dated October 30, 2003, reporting Item 5. "Other Events". No financial
statements were filed with the report.
Report dated September 12, 2003, reporting Item 5. "Other Events". No financial
statements were filed with the report.
(c) Except as disclosed in the footnotes, the following exhibits were filed with
the Securities and Exchange Commission as exhibits to the Company's Form S-1
Registration Statement (No. 33-93314) or amendments thereto and are hereby
incorporated by reference:
Exhibit
No. Description
2.1 First Asset Purchase Agreement dated March 11, 2003, by and between the
Company and ISI.(1) 2.2 Second Asset Purchase Agreement dated March 11, 2003, by
and between the Company and ISI.(1)
77
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)
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.
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)
78
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)
21 Subsidiaries of the Registrant.
23.1 BDO Seidman, LLP consent.(9)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(9)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(9)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(9)
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(9)
------------------------------------------------
(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.
79
(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 herewith.
80
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 29, 2004
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 Chairman of the Board, March 29, 2004
---------------------- Chief Executive
William A. Carter,M.D. Officer and Director
/s/ Richard Piani Director March 29, 2004
---------------------
Richard Piani
/s/ Robert E. Peterson Chief Financial Officer March 29, 2004
----------------------
Robert E. Peterson
/s/ Ransom Etheridge Secretary And Director March 29, 2004
----------------------
Ransom Etheridge
/s/ William Mitchell Director March 29, 2004
---------------------
William Mitchell, M.D., Ph.D.
F1
HEMISPHERx BIOPHARMA, INC AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants. . . . . F-2
Consolidated Balance Sheets at December 31, 2002 and 2003. . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 2003. . . . . . . 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, 2003 . . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2003 . . . . . . .F-7
Notes to Consolidated Financial Statements . . . . . . . . . F-8
F2
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Hemispherx Biopharma, Inc.
We have audited the accompanying consolidated balance sheets of
Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 2002 and 2003 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, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 2002 and 2003 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
February 13, 2004
F3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2003
(in thousands)
December 31,
------------------------
2002 2003
------- -------
ASSETS
Current assets:
Cash and cash equivalents. . . . . $ 2,256 $ 3,764
Short term investments (Note 5). . 555 1,495
Inventory (Note 3) - 2,896
Accounts and other receivables (Note 15) 1,507 282
Prepaid expenses and
other current assets . . . . . . 71 170
------- ---------
Total current assets . . . . . . 4,389 8,607
Property and equipment, net . . . . 155 94
Patent and trademark rights, net. . 995 1,027
Investment 408 408
Deferred acquisition costs (Note 4) - 1,546
Deferred financing costs - 393
Advance receivable (Note 7) - 1,300
Other assets . . . . . . . . . 93 29
------- ---------
Total assets. . . . . . . . . . $ 6,040 $ 13,404
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . $ 786 $ 488
Accrued expenses (Note 6). . . . . 678 1,119
------- ---------
Total current liabilities . . . 1,464 1,607
------- ---------
Long-Term Debt-net of current portion (Note 7) - 2,058
Commitments and contingencies
(Notes 10, 12, 13 and 15)
Minority Interest in subsidiary (Note 8c) 946 -
Redeemable common stock (Note 4) - 491
Stockholders' equity
(Note 8):
Common stock. . . . . . . . . . . 33 39
Additional paid-in capital. . . . 107,155 123,054
Accumulated other comprehensive
income . . . . . . . . . 35 -
Accumulated deficit . . . . . . . . (99,073) (113,843)
Treasury stock . . . . . . . . . . (4,520) (2)
-------- ----------
Total stockholders' equity. . . 3,630 9,248
-------- ----------
Total liabilities and
stockholders' equity . . . . . $ 6,040 $ 13,404
======== ==========
See accompanying notes to consolidated financial statements.
F4
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations For each of the years
in the three-year period ended December 31, 2003
(in thousands, except share and per share data)
December 31,
---------------------------------
2001 2002 2003
Revenues: ------- ------- ------
Sales of product net $ - $ - $509
Clinical treatment programs . . . . . . 390 341 148
License Fee income (Note 12) - 563 -
------- ------- ------
Total Revenues: 390 904 657
Costs and expenses:
Production/cost of goods sold . . . - - 502
Research and development . . . . 5,780 4,946 3,150
General and
administrative . . . . . . . 3,412 2,015 4,257
------- ------- -------
Total costs and expenses . . . 9,192 6,961 7,909
Equity loss and write offs of
investments in unconsolidated
affiliates (Note 2c) (565) (1,470) -
Interest and other income . . . . 284 103 80
Interest expense - - (253)
Financing costs (Note 7) - - (7,345)
------- ------- -------
Net loss. . . . . . . . . . . $ (9,083) $(7,424) $ (14,770)
======== ======== ========
Basic and diluted loss per share. . $(.29) $(.23) $ (.42)
======= ======== ========
Weighted average shares
outstanding. . . . . . . . . . 31,433,208 32,085,776 35,234,526
========== ========== ===========
See accompanying notes to consolidated financial statements.
F5
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, 2003
(in thousands except share data)
Common Common Additional Accumulated Total
Stock Stock.001 paid-in other Accumulated Treasury Treasury stockholder
Shares Par Value capital Comprehensive deficit stock Stock equity
------ ------ ------- Income (loss) shares
------------- ----------- -------- -------- ----------
Balance at December 31, 2000 30,367,888 $30 $97,984 $34 $(82,566) 395,646 $(3,910) $11,572
Common stock issued 2,155,900 3 8,072 - - - - 8,075
Purchase of equity investment 12,000 - 72 - - - - 72
Treasury stock purchased - - - - - 120,060 (560) (560)
Note issued for purchase of stock - - (60) - - - - (60)
Stock issued in settlement of debt 21,198 - 91 - - - - 91
Stock and stock warrant compensation expense 19,000 - 673 - - - - 673
Net comprehensive (loss) (17) (9,083) (9,100)
---------- ----- -------- ------------ ----------- -------- -------- ----------
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 (Note 4) 1,068,789 1 1,667 1,668
Reclassification of redeemable Common Stock
in connection with ISI
acquisition (Note 4) (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 (Note (8c ) 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
========== === ======== === ========== ======== ===== ======
See accompanying notes to consolidated financial statements
F6
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash
Flows for each of the years in the three-year period
ended December 31, 2003
(in thousands)
December 31,
-----------------------------
2001 2002 2003
------ ------ ------
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . $(9,083) $(7,424) $ (14,770)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . 127 91 80
Amortization of patent and
trademark rights . . . . . . . . 397 206 122
Amortization of deferred financing costs. . . - - 7,345
Equity loss and write offs of investments
in unconsolidated affiliates. . 565 1,470 -
Stock option and warrant compensation and
service expense . . . . . . . . . 673 132 237
Changes in assets and liabilities:
Inventory . . . . . . . . . . . . . . - - (1,429)
Accounts and other receivables. . . . . . . 52 (1,293) 1,225
Prepaid expenses
and other current assets. . . 202 104 (98)
Accounts payable . . . . . . . . . (271) (67) (298)
Accrued expenses . . . . . . . . . 139 385 558
Other assets. . . . . . . . . (82) (13) 6
-------- --------- --------
Net cash used in
operating activities. . . . . . (7,281) (6,409) (7,022)
--------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment . - - (19)
Additions to patent and trademark rights . (218) (176) (154)
Maturity of short term investments . 4,613 5,293 520
Purchase of short term investments. (5,293) (520) (1,496)
Investments in unconsolidated affiliates (22) - -
Deferred acquisition cost. . . . . . - - (638)
-------- --------- --------
Net cash (used in) provided by investing
activities. . (920) 4,597 (1,787)
-------- --------- --------
F7
(CONTINUED)
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
December 31,
-------------------------------
2001 2002 2003
------ ------ ------
Cash flows from financing activities:
Proceeds from stock subscriptions and issuance
of common stock, net. . . . $ 72 $ 65 -
Deferred financing costs . . . . . . - - (835)
Proceeds from issuance of preferred stock
certificates of Subsidiary - 946 -
Proceeds from long-term borrowing . . . - - 11,300
Advance receivable - - (1,300)
Proceeds from exercise of
stock warrants . . . . . 8,075 - 1,235
Purchase of treasury stock . . . . . (560) (50) (83)
---------- --------- -------
Net cash provided by
financing activities. . . . . . 7,587 961 10,317
-------- ---------- -------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . (614) (851) 1,508
Cash and cash equivalents at
beginning of year. . . . 3,721 3,107 2,256
---------- -------- -------
Cash and cash equivalents
at end of year . . $ 3,107 $2,256 $3,764
========== ======== =======
Supplemental disclosures of cash flow information:
Issuance of common stock
for accrued expenses. . . . . . $ 91 $ 154 $ 931
========== ======== =======
Issuance of common stock
for note receivable . . . . . . $ 60 $ - $ -
Issuance of Common Stock for ========== ======== =======
Acquisition of ISI assets, including
deferred acquisition costs $ - $ - $1,668
========== ======== =======
Common Stock Issued for Compensation $ 637 $ 132 $ 237
Issuance of Common Stock for ========= ======== =======
Debt Conversion and Interest Payments $ - $ - $6,741
========= ======== =======
Common Stock Issued for Conversion of
Minority Interest in Subsidiary $ - $ - $ 946
========= ======== =======
See accompanying notes to consolidated financial statements.
F8
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 Injection(R), a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacturing, use, marketing and sale of this product.
On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery. This purchase is contingent on us
receiving appropriate ISI shareholder approval for the real estate transaction.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September
1994, and are inactive, and Hemispherx Biopharma-Europe N.V./S.A. which was
incorporated in 1998 and Hemispherx Biopharma Europe S.A., which was
incorporated during 2002. All significant intercompany balances and transactions
have been eliminated in consolidation.
On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration ("FDA") to recover the cost of Ampligen(R) from patients enrolled
in the Company's AMP-511 ME/CFS open-label treatment protocol. The cost of
Ampligen(R) to the patient is $2,100 for the first eight weeks of treatment and
$2,400 for each additional eight-week period thereafter.
In 1998, the Company initiated the recruitment of clinical investigators to
enroll ME/CFS patients in the confirmatory Phase III double blind
placebo-controlled clinical study of Ampligen(R). This clinical trial was
approved by the FDA in 1998 and is designed to test the safety and efficiency of
Ampligen(R) in treating ME/CFS.
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.
F9
The ME/CFS Cost Recovery Treatment Program in Belgium was started in 1994 with
the approval of the Belgian Regulatory authorities. Since its inception, over
150 patients have participated in this program. Clinical data collected in the
treatment of these ME/CFS patients will be used to support the Company's
European Medical Evaluation Agency ("EMEA") Drug Approval Application and in
applications in other regulatory jurisdictions. A similar program underway in
Austria is undergoing expansion.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market certificates and overnight repurchase
agreements collateralized by money market securities with original maturities of
less than three months, with both a cost and fair value of $2,256,000 and
$3,764,000 at December 31, 2002 and 2003, 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 $555,000 and $1,495,000 at December 31, 2002 and 2003
respectively. The unrealized gains and losses are recorded as a component of
shareholders' equity.
(c) Investments in unconsolidated affiliates
Investments in companies in which the Company owns 20% or more and not more than
50% are accounted for using the equity method of accounting.
Investments in companies in which the Company owns less than 20% of and does not
exercise a significant influence are accounted for using the cost method of
accounting.
In 1998, the Company invested $1,074,000 for a 3.3% equity interest in
R.E.D. Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company
for the development of diagnostic markers for Chronic Fatigue Syndrome and other
chronic immune diseases. We have a research collaboration agreement with R.E.D.
to assist in this development. R.E.D. is headquartered in Belgium. The
investment was recorded at cost. During the three months ended June 30, 2002 and
December 31, 2002 we recorded non-cash charges of $678,000 and $396,000
respectively, to operations with respect to our investment in R.E.D. These
charges were the result of our determination that R.E.D.'s business and
financial position had deteriorated to the point that our 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
F10
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". We still believe CIMM will succeed in their efforts to advance
therapeutic treatment of HCV. We believe that CIMM's Hepatitis C diagnostic
technology has great promise and fills a long-standing global void in the
collective abilities to diagnose and treat Hepatitis C infection at an early
stage of the disorder.
The Company's investment in Ribotech, Ltd. is also accounted for using the
equity method of accounting. The Company received 24.9% of Ribotech, Ltd. as
partial compensation under the license agreement described in note 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. During 2000, the Company prepaid $500,000 to Ribotech, Ltd. for raw
material purchases. $110,000 of materials were delivered in 2000 and the balance
of $390,000 was applied towards the purchase of materials during 2001.
Investments 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 quarter ended December 31, 2002, we
recorded a non cash charge of $292,000 with respect to our investment in
Chronix. This impairment reduces our carrying value to reflect a permanent
decline in Chronix's market value based on its then proposed investment
offerings.
During 2000, pursuant to a strategic alliance agreement, the Company provided
Chronix with $250,000 to conduct research in an effort to develop intellectual
property on potential new products for diagnosing and treating various chronic
illnesses including chronic fatigue syndrome. The strategic alliance agreement
provides the Company certain royalty rights with respect to certain diagnostic
technology developed from this research and a right of first refusal to license
certain therapeutic technology developed from this research. The payment of
$250,000 was charged to research and development expense during 2000.
(d) Property and Equipment (000 omitted)
December 31,
-------------
2002 2003
------- ----------
Furniture, fixtures, and equipment $ 760 $ 779
Leasehold improvements 85 85
------- ----------
Total property and equipment 845 864
Less accumulated depreciation 690 770
------- ----------
Property and equipment, net $ 155 $ 94
======= ==========
Property and equipment consists of furniture, fixtures, office equipment, and
leasehold improvements and is recorded at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
F11
respective assets, ranging from five to seven years. Depreciation and
amortization expense was $127,000, $91,000 and $80,000 for 2001, 2002 and 2003,
respectively. In 2002, fully depreciated equipment in the amount of $418,000 and
fully depreciated leasehold improvements in Europe in the amount of $12,000 were
written-off due to the closing of European offices.
(e) Patent and Trademark Rights
Effective October 1, 2001, the Company adopted a 17 year estimated useful life
for amortization of its patent and trademark rights in order to more accurately
reflect their useful life. Prior to October 1, 2001, the Company was using a 10
year estimated useful life. The adoption of the 17 year life has been accounted
for as a change in accounting estimate.
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the life of the assets. The
Company reviews its patents and trademark rights periodically to determine
whether they have continuing value. Such review includes an analysis of the
patent and trademark's ultimate revenue and profitability potential on an
undiscounted cash flow basis to support the realizability of its respective
capitalized cost. Management's review addresses whether each patent continues to
fit into the Company's strategic business plans. During the years ended December
31, 2001, 2002 and 2003, the Company decided not to pursue the technology in
certain countries for strategic reasons and recorded charges of $38,000 $5,000,
and $5,000 respectively. Amortization expense was $359,000, $201,000 and
$122,000 in 2001, 2002 and 2003, respectively. The accumulated amortization as
of December 31, 2002 and 2003 is $2,096,000 and $2,150,000, respectively.
As of December 31, 2003, the weighted average remaining life of the patents and
trademarks was 8.6 years. Amortization of patents and trademarks for each of the
next five is as follows: 2004 - $96,000, 2005 - $94,000, 2006 - $90,000, 2007 -
$89,000 and 2008 - $87,000.
(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.
F12
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.
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.
During the years ending December 31, 2001, 2002 and 2003 the Company did not
receive any grant monies from local, state and or Federal Agencies.
(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.
(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.
F13
(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 November, 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("Interpretation No. 45"). Interpretation
No. 45 elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also clarifies
that at the time a company issues a guarantee, the company must recognize an
initial liability for the fair market value of the obligations it assumes under
the guarantee and must disclose that information in its interim and annual
financial statements. The initial recognition and measurement provisions of
Interpretation No. 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. Interpretation No. 45 did not have an effect
on our financial statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", and amendment of FASB
Statement No. 123 ("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative method of transition for an
entity that voluntarily changes to the fair value based of accounting for
stock-based employee compensation. It also amends the disclosure provisions of
that Statement to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation. Finally, this Statement amends Accounting Principles
Board ("APB") Opinion No. 28, Interim Financial Reporting to require disclosure
about those effects in interim financial information. SFAS 148 is effective for
financial statements for fiscal years ending after December 15, 2002. The
Company will continue to account for stock-based compensation using the
intrinsic value method of APB Opinion No. 25, "Accounting for Stock Issued to
Employees, "but has adopted the enhanced disclosure requirements of SFAS 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Interpretation No. 46"), that clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, "to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. Interpretation No. 46 is
applicable immediately for variable interest entities created after January 31,
2003. For variable interest entities created prior to January 31, 2003, the
provision of Interpretation No. 46 have been deferred to the first quarter of
2004. This Interpretation did not have an effect on the consolidated financial
statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). SFAS 150 requires an issuer to classify certain financial
instruments, such as mandatory redeemable shares and obligations to repurchase
the issuers equity shares, as liabilities. The guidance is effective for
financial instruments entered into or modified subsequent to May 31, 2003, and
F14
is otherwise effective at the beginning of the first interim period after June
15, 2003. SFAS 150 did not have an impact on our financial condition or results
of operations.
(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. 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,
2001 2002 2003
---- ---- ----
Risk-free interest rate 4.23% 5.23% 5.23%
Expected dividend yield - - -
Expected lives 3.0 yrs 2.5 yrs 2.5 yrs
Expected volatility 74.9% 63.17% 98.07%
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, 2001, 2002, and 2003 would have
been as follows:
(In Thousands except for per share data)
For the years ended December 31, 2001 2002 2003
--------------------------------
------ ------ -------
Net (loss)as reported $(9,083) $(7,424) $ (14,770)
Add: Stock based compensation
included in net loss as reported,
net of related tax effects - - -
Deduct: Stock based compensation
determined under fair value based
method for all awards, net of
related tax effects (632) (1,085) (1,825)
--------------------------------------
Pro forma - net loss $(9,715) $(8,509) $ (16,595)
=======================================
Basic and diluted loss
per share - as reported $(.29) $(.23) $ (.42)
=======================================
Basic and diluted loss
per share - pro forma $(.31) $(.27) $ (.47)
=======================================
F15
For stock warrants granted to non-employees, the Company measures fair value of
the equity instruments utilizing the Black-Scholes method if that value is more
reliably measurable than the fair value of the consideration or service
received. The Company amortizes such cost over the related period of service.
The exercise price of all stock warrants granted was equal to the fair market
value of the underlying common stock as defined by APB 25 on the date of the
grant.
(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
amounts due from the wholesale drug companies as of December 31, 2003.
(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
-----------------
Raw materials and work in process $1,729
Finished goods 1,167
-------
$2,896
=======
(4) ACQUISITION OF ASSETS OF INTEFERON SCIENCES, INC.
On March 11, 2003, we acquired from Interferon Sciences, Inc.'s ("ISI")
inventory of ALFERON N Injection, a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacture, use, marketing and sale of this product. As
consideration, we issued 487,028 shares of our common stock, assumed certain
liabilities and agreed to pay ISI 6% of the net sales of product. Pursuant to
our agreements with ISI, we have registered the foregoing shares for public
sale.
Except for 62,500 of the shares issued to ISI, we have guaranteed the market
value of the shares retained by ISI as of March 11, 2005, the termination date,
to be $1.59 per share. ISI is permitted to periodically sell certain amounts of
its shares. If, within 30 days after the termination date, holders of the
guaranteed shares request that we honor the guarantee, we will be obligated to
reacquire the holders' remaining guaranteed shares and pay the holders $1.59 per
share for a total of $675,000. Accordingly, certain shares issued in connection
with this transaction were initially recorded as redeemable common stock outside
of stockholders' equity. As of February 10, 2004, ISI had sold the 427,528
guaranteed shares at prices in excess of $1.59 per share.
On March 11, 2003, we also entered into an agreement to purchase from ISI all of
its rights to the product and other assets related to the product including, but
not limited to, real estate and machinery. For these assets, we agreed to issue
F16
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, two
creditors of ISI, to continue to pay royalties of 6% on net sales of Alferon N
and other consideration, e.g., paying off a third creditor and paying a real
estate tax liability.
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 have
agreed to register the foregoing shares for public sale. The acquisition of the
real estate and machinery is contingent on our receiving appropriate ISI
stockholder approval. The value of these guaranteed shares totaled $925,000 and
these shares are redeemable under certain conditions, accordingly they were
initially reflected as redeemable common stock and deferred acquisition costs on
the accompanying financial statements as of December 31, 2003. As of February
10, 2004 GP Strategies had sold their 247,296 shares. Additionally other
liabilities associated with the real estate in the amount of $621,000 have been
recorded as deferred acquisition costs. It is expected that ISI stockholder
approval will be obtained in March 2004 with substantially the entire amount of
the deferred purchase price being allocated to real estate.
As of December 31, 2003 all but 314,465 guaranteed shares had been sold. As a
result, the remaining liability for redeemable stock was $491,000.
Except for 62,500 of the 487,028 shares to be issued to ISI at closing of this
second asset acquisition, we have guaranteed the market value of the shares
retained by ISI on terms substantially similar to those for the guaranteed
shares issued to ISI on the first acquisition of ISI assets. Pursuant to our
agreement with ISI, we plan to register the foregoing shares for public sale.
We will account for these transactions as a Business Combination under
Statement of Financial Accounting Standards ("SFAS") No. 141 Accounting for
Business Combinations.
As a result of the first agreement, the following table summarizes the estimated
fair value of the assets and liabilities assumed at the initial acquisition
date.
At March 11, 2003
Inventory $1,840,762
Fair Value of liabilities
Assumed (1,081,041)
----------
Fair Value of Common Shares
Issued $759,721
==========
The following table represents the Unaudited pro forma results of operations as
though the acquisition, described in the first agreement, of certain net assets
of ISI occurred on January 1, 2002.
Years Ended December 31,
2002 2003
---- ----
(in thousands except for share data)
Net revenues $2,830 $899
Expenses (14,699) (16,215)
-------- -------
Net Loss $(11,869) $(15,316)
========= ========
Basic and diluted loss per share $(.36) $(.43)
====== =======
Weighted average shares outstanding 32,572,804 35,326,594
=========== ===========
F17
In giving effect to the additional shares that would be issued as a result of
the second agreement with ISI the weighted average shares outstanding during the
Years Ending December 31, 2002 and 2003 would have been 33,641,593 and
36,055,994 resulting in a pro forma loss per share as adjusted of $(.36) and
$(.45) for said periods respectively.
(5) Short-term investments:
Securities classified as available for sale consisted of General Motors
commercial paper at December 31, 2003 where its cost approximated its market
value of $1,495,000 and matures in April and May 2004, and Calamos Mutual Market
at December 31, 2002 where its carrying value of $555,000 exceeded its cost by
$34,000.
(6) Accrued Expenses
Accrued expenses at December 31, 2002 and 2003 consists of the following:
(000's omitted)
December 31,
--------------
2002 2003
----- ------
Compensation . . . . . . . . . . . . . . . . . $ 6 $ 366
Interest - 158
Commissions and royalties - 100
Professional fees - 126
Other expenses . . . . . . . . . . 222 369
Fees associated with litigation settlement. 450 -
------ -------
$ 678 $ 1,119
====== =======
(7) Debenture Financing
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 proceeds of $4,650,000. Pursuant to the terms of the March Debentures,
$1,550,000 of the proceeds from the sale of the March Debentures were to have
been held back and released to us if, and only if, we acquired ISI's facility
within a set timeframe. Although we had not acquired ISI's facility, these funds
were released to us in June 2003. The March Debentures were to mature on January
31, 2005 with 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 was not limited to the repayment of principal balances upon
achieving certain revenue milestones.
F18
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
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 $5,426,000 principal of
the March Debentures into 3,716,438 shares of our common stock. The total
imputed interest on the debenture was $111,711 of which $17,290 was paid in cash
and $94,421 was paid by the issuance of 39,080 shares of common stock. The
investors exercised the 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 Debentures") and an
aggregate of 507,102 Warrants (the "July 2008 Warrants") to the same investors
who purchased the March 12, 2003 Debentures, in a private placement for
aggregate anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
July Debentures, $1,550,000 of the proceeds from the sale of the July Debentures
were to have been held back and will be released to us if, and only if, we
acquired ISI's facility within a set timeframe. Although we had not acquired
ISI's facility, these funds were released to us in October 2003. The July
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 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 Debentures was fixed at $2.14 per share; however, as part of the
debenture placement closed on October 29, 2003 (see below), the conversion price
under the July 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.
F19
The July 2008 Warrants received by the investors, as amended, are to acquire at
any time commencing on July 26, 2004 through January 31, 2009 an aggregate of
507,102 shares of common stock at a price of $2.46 per share. On July 10, 2004,
the exercise price of these July 2008 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 11, 2003 and July 9, 2004 (but in no event less
than $2.14 per share). The exercise price (and the reset price) under the July
2008 Warrants also is subject to similar adjustments for anti-dilution
protection.
We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the July Debentures and the July 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the Debentures, as
interest shares under the Debentures and upon exercise of the July 2008
Warrants. These shares have been registered for public sale.
On June 25, 2003, we issued to each of the March 12, 2003 Debenture holders a
warrant to acquire at any time through June 25, 2008 an aggregate of 500,000
shares of common stock at a price of $2.40 per share. On June 25, 2004, the
exercise price of these June 2008 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 June 26, 2003 and June 24, 2004 (but in no event
less than $1.68 per share). The exercise price (and the reset price) under the
June 2008 Warrants also is subject to adjustments for anti-dilution protection
similar to those in the July 2008 Warrants. Pursuant to our agreement with the
Debenture holders, we have registered the shares issuable upon exercise of these
June 2008 Warrants for public sale.
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 Debentures")
and an aggregate of 410,134 Warrants (the "October 2008 Warrants") in a private
placement for aggregate anticipated gross proceeds of $3,550,000. Pursuant to
the terms of the October Debentures, $1,550,000 of the proceeds from the sale of
the October Debentures have been held back and will be released to us if, and
only if, we acquired ISI's facility within 90 days of October 29, 2003 and
provide a mortgage on the facility as further security for the October
Debentures. The debenture holders have extended the deadline to 90 days after
January 26, 2004. The October 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 Debentures, we received $3,275,000 in
net proceeds consisting of $1,725,000 from the October Debentures and $1,550,000
that had been withheld from the July Debentures. As noted above, $1,550,000 of
the proceeds from the October Debentures have been held back pending our
completing the acquisition of the ISI facility.
The October 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 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.
F20
The October 2008 Warrants, as amended, received by the investors are to acquire
at any time commencing on July 26, 2004 through April 30, 2009 an aggregate of
410,134 shares of common stock at a price of $2.32 per share. On October 29,
2004, the exercise price of these October 2008 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 October 29, 2003 and October 27, 2004
(but in no event less than $2.19 per share). The exercise price (and the reset
price) under the October 2008 Warrants also is subject to similar adjustments
for anti-dilution protection.
We entered into a Registration Rights Agreement with the investors in connection
with the issuance of the October Debentures and the October 2008 Warrants. The
Registration Rights Agreement requires that we register on behalf of the holders
the shares of common stock issuable upon conversion of the October Debentures,
as interest shares under the October Debentures and upon exercise of the 2008
Warrants. If, subject to certain exceptions, sales of all shares required to be
registered cannot be made pursuant to the registration statement, then we will
be required to pay to the investors their pro rata share of $3,635 for each day
such conditions exist.
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 "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 anticipated 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 six months after issuance, the Company is 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 the Company's
option, in shares of common stock. 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 is 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.
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
F21
(but in no event less than $2.58 per share with regard to the Class A warrants
and $3.54 per share with regard to the Class B warrants). The exercise price
(and the reset price) under the July 2009 Warrants also is subject to similar
adjustments for anti-dilution protection.
The Company 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 from the Company. These Debentures
are identical to the January 2004 Debentures except that the conversion price is
$2.58. The Additional Investment Rights are exercisable commencing on July 26,
2004 (the "Trigger" date) for a period of 90 days from the Trigger Date or 90
days from the date which the registration statement registering the shares
issuable upon the conversion of the January 2004 Debentures to be issued
pursuant to the Additional Investment Rights is declared effective, whichever is
longer.
The Company entered into a Registration Rights Agreement with the investors in
connection with the issuance of the January 2004 Debentures (including any
Debentures issued pursuant to the Additional Investment Rights), the shares, and
the January 2009 Warrants. The Registration Rights Agreement requires that the
Company register on behalf of the investors the shares issued to the investors
and 135% of the shares issuable upon conversion of the Debentures (including
payment of interest thereon) and upon exercise of the January 2009 Warrants. If
the Registration Statement containing these shares is not filed within the time
period required by the agreement, not declared effective within the time period
required by the agreement or, after it is declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we will be required to pay to the investors their
pro rata share of $3,635 for each day any of the above conditions exist with
respect to this Registration Statement.
By agreement between the Company and the investors, the date upon which all
warrants previously issued to the investors may become exercisable is now July
26, 2004 and the exercise periods of these warrants have been extended
accordingly.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in March, July
and October 2003 and in January 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 certain warrants. A portion of the investment
banking fee was paid with the issuance of 30,000 shares of our common stock.
Cardinal also received 612,500 warrants to purchase common stock, of which
112,500 are exercisable at $1.74 per share, 112,500 are exercisable at $2.57 per
share, 200,000 are exercisable at $2.50 per share, 87,500 are exercisable at
$2.42 per share and 100,000 are exercisable at $3.04 per share. The $1.74
warrants expire on July 10, 2008, the $2.57 and $2.50 warrants expire on March
12, 2008, the $2.42 warrants expire on October 30, 2008 and the $3.04 warrants
expire on January 25, 2009. By agreement with Cardinal, we have registered
542,500 shares for public sale and have agreed to register the balance.
In connection with the debenture agreements, we have outstanding letters of
credit of $1 Million as additional collateral.
As of December 31, 2003, the investors have converted $6,595,000 of debt from
the March and July Debentures into 4,334,916 shares of our common stock. The
March Debentures have been fully converted. The remaining principal balance on
the remaining 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
F22
paid $1,300,000 into the debenture cash collateral account as required by the
terms of the October Debentures. The amounts paid through December 31, 2003 have
been accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of December 31, 2003. The cash collateral account
provides partial security for repayment of the July and October 2003 and January
2004 Debentures in the event of default.
The March, July, and October 2003 debenture issuances of $5,426,000, $5,426,000,
and $4,142,357, respectively, and warrant 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.
As a result, the Company recorded debt discounts of approximately $11.8 million
for the 2003 debenture issuances which, in effect, reduced the carrying value of
our debt. As debt is converted to common stock, the remaining unamortized debt
discount is charged to finance costs. These costs were initially deferred and
charged to finance costs over the life of the debentures. As of December 31,
2003, the amount of debt discount amortized to finance cost totaled
approximately $7.3 million.
Costs associated with the financings aggregated approximately $1.3 million.
These costs are also deferred and expensed as finance costs over the life of the
debentures.
Excluding the application of related accounting standards, and remaining debt
discounts of $4.5 million, the Company's outstanding debt as of December 31,
2003 totaled $6.6 million and is due during 2005.
(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, 2002 and 2003.
(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.
F23
As of December 31, 2002 and 2003, 32,106,972 and 39,067,134 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
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) Common Stock Options and Warrants
(i) Stock Options
F24
The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensation Committee. No
option is exercisable more than 10 years and one month from the date as of which
an option agreement is executed. These shares become vested through various
periods not to exceed four years from the date of grant. The option price
represents the fair market value of each underlying share of Common Stock at the
date of grant, based upon the public trading price.
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
___________2001___________ ___________2002___________ ________2003________
-------------------------- -------------------------- --------------------
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 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58 294,665 $1.06-4.34 $3.50
Granted 94,000 $4.03 $4.03 - - - 200,000 $2.75 $2.75
Canceled
(6,304) $4.34-6.81 $5.91 (11,598) $3.00-4.34 $3.71 (61,531) $3.80-4.03 $3.97
Exercised - - - - - - - - -
-
Outstanding,
end of year 306,263 $1.06-4.34 $3.58 294,665 $1.06-4.34 $3.57 433,134 $1.06-4.34 $3.10
======= ======= =======
Exercisable 234,263 $1.06-4.34 $4.67 252,746 $1.06-4.34 $3.50 433,134 $1.06-4.34 $3.10
======= ======= =======
Weighted
average
remaining
contractual 3.57 years 3.68 years 3.37 years
life (years) =========== =========== ==========
Exercised in
current and
prior years (37,791) (37,791) (37,791)
======== ======== ========
Available for
future grants 116,744 128,342 -0-
======= ======= ===
In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to purchase
up to 92,160 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisers, and other persons whose
contributions are important to the success of the Company. The recipients of the
options granted under the 1992 Stock Option Plan, the number of shares to be
covered by each option, and the exercise price, vesting terms, if any, duration
and other terms of each option shall be determined by the Company's board of
directors. No option is exercisable more than 10 years and one month from the
date as of which an option agreement is executed. To date, no options have been
granted under the 1992 Stock Option Plan.
F25
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.
(ii) Stock warrants
Number of warrants exercisable into shares of common stock
___________2001___________ ___________2002__________ _______2003_______
-------------------------- ------------------------- ------------------
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 11,624,168 $1.75-12.0 $4.05 6,927,110 $1.75-16.0 $4.77 7,967,810 $1.75-16.0 $3.18
Granted 856,650 $5.00-16,00 $9.89 1,802,000 $2.00-6.00 $2.07 4,623,024 $1.68-2.57 $2.32
Canceled (3,396,508) $2.50-4.00 $3.89 (750,000) $3.50-6.00 $3.72 (276,000) $4.00-10.00 $6.54
Exercised (2,157,200) $1.75-4.00 $3.75 (11,300) $1.75-7.50 $3.30 (812,038) $1.68-1.75 $1.69
----------- -------- ---------
Outstanding 0 0 0
end 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
========= ========= ==========
Exercisable 6,927,110 $1.75-16.00 $4.77 6,345,810 $1.75-16.00 $3.48 8,635,560 $1.74-16.00 $4.11
========= ========= =========
Weighted
average
remaining
contractual
life (years) 4.05 years 4.03 years 4.04 years
========== ========== ==========
Years
exercisable 2002-2006 2003-2008 2004-2008
========= ========= =========
The following table summarizes information about stock warrants outstanding at December 31, 2003:
Exercise price range Total
$1.74-$5.00 $6.00-$9.00 $10.00-$16.00 $1.74-$16.00
---------- ------------------- --------------------- ---------------------
Outstanding warrants
Number outstanding 9,545,346 1,357,450 600,000 11,502,796
Weighted average remaining
contractual life(years)
4.84 1.51 1.46 4.04
Weighted average exercise price $2.56 $6.77 $12.33 $3.57
Exercisable warrants
Number outstanding 6,678,110 1,357,450 600,000 8,635,560
Weighted average exercise price $2.70 $6.77 $12.33 $4.11
F26
Certain of the stock warrants outstanding are subject to adjustments for stock
splits and dividends.
Warrants issued to stockholders
At December 31, 2000, there were 305,160 warrants remaining. In 2001, 73,000
were converted to common stock. At December 31, 2001 there were 232,160 warrants
remaining. In 2002, 10,000 were converted to common stock. At December 31, 2002
and 2003 there were 222,160 warrants remaining. These warrants have an exercise
price of $3.50 per share and expire in October 2004.
Other stock warrants
In addition, the Company has other issued warrants outstanding - totaling
11,280,636 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 and in 2003 35,000 of these warrants were exercised,
leaving a balance of these warrants of 1,415,200. These warrants expire June 30,
2005.
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
F27
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. These warrants are
exercisable in five years from the date of issuance.
In 2001, 2002 and 2003 the Company had non-public warrants outstanding of
2,254,650, 3,701,650 and 5,100,650 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). During 2001,
370,000 of the non public warrants were exercised and 415,000 expired without
being exercised. 2,254,650 of the non-public warrants were outstanding at
December 31, 2001. During 2002, none of these warrants were exercised and
750,000 expired. 3,701,650 of the non-public warrants were outstanding at
December 31, 2002. During 2002 the Company also extended the expiration date of
322,000 of these warrants for a period of five years to now expire in the years
ending 2007 and 2008. These stock warrants have exercise prices ranging from
$3.50 to $4.00 In accordance 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.
(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.
(f) Rights offering
On November 19, 2002, the Board of Directors of Hemispherx Biopharma, Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of Common Stock to stockholders of record at the close of business on
November 29, 2002 (the "Record Date"). Each Right entitles the registered holder
to purchase from the Company a unit consisting of one one-hundredth of a share
(a "Unit") of Series A Junior Participating Preferred Stock, par value $.01 per
share (the "Series A Preferred Stock") at a Purchase Price of $30.00 per Unit,
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") between the Company and Continental
Stock Transfer & Trust Company, as Rights Agent.
Initially, the Rights are attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. Subject to certain exceptions specified in the Rights Agreement,
F28
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)
2001 2002 2003
---------- ---------- --------
United States $274 $237 $655
Belgium 107 74 2
Other 9 30 -
------ ---------- -------
$ 390 $ 341 $ 657
===== ========== =======
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.
(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
F29
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, 2001, 2002
and 2003 the Company incurred approximately $595,000, $395,000 and $389,000
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 2001, 2002 and 2003 the
Company provided matching contributions to each employee for up to 6% of annual
pay aggregating $48,000, $38,000 and $34,000 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
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
F30
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.
In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB/Bioclones licensing agreement, a fee of .75% of
gross proceeds in the event that SAB Bioclones makes a tender offer for all or
substantially all of the Company's assets, including a merger, acquisition or
related transaction, and a fee of 1% on all products manufactured by SAB
Bioclones. The Company may prepay in full its obligation to provide commissions
within a ten year period.
On March 20, 2002, our European subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx S.A.") entered into a sales and Distribution agreement with
Laboratories Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration approval of Ampligen(R)
for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval
of the final marketing authorization for using Ampligen(R) for the treatment of
ME/CFS.
In connection with the two agreements entered into with ISI, 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 2001, 2002 and
2003 was $603,000, $620,000 and $637,000 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 2001 and
2002 no performance bonuses were granted. In 2003, bonuses of $266,100 were
granted. In 2001, certain officers were granted warrants and options to purchase
426,650 shares of Common Stock at $4.01 per share. In 2002, certain officers
were granted warrants and option to purchase 1,220,000 shares of common stock at
$2.00 - $4.03 per share. In 2003, the Chief Executive Officer of the Company was
F31
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 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 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.
(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
----------- ---------
2004. . . . . . . . . . . . . . . . . . . . 286
2005. . . . . . . . . . . . . . . . . . . . 240
2006. . . . . . . . . . . . . . . . . . . . 193
2007. . . . . . . . . . . . . . . . . . . . 65
----------
Total minimum lease payments. . . . . . . . $ 784
==========
Rent expense charged to operations for the years ended December 31, 2001, 2002
and 2003 amounted to approximately $294,000, $307,000 and $266,000 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.
F32
(14) Income Taxes
As of December 31, 2003, the Company has approximately $73,000,000 of federal
net operating loss carryforwards (expiring in the years 2004 through 2024)
available to offset future federal taxable income. The Company also has
approximately $17,000,000 of state net operating loss carryforwards (expiring in
the years 2004 through 2008) 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, 2002 and 2003.
The components of the net deferred tax asset of December 31, 2002 and 2003
consists of the following:
(000,s omitted)
Deferred tax assets: 2002 2003
---- ----
Net operating losses $22,440 $24,700
Accrued Expenses and Other (16) 12
Capitalized Research and development costs 3,763 2,825
------ ------
26,187 27,537
Less: Valuation Allowance (26,187) (27,537)
-------- --------
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 the Asensio's false and
defamatory statements. The complaint further alleged that Asensio defamed and
disparaged us in furtherance of a manipulative, deceptive and unlawful
short-selling scheme in August and September, 1998. In 1999, Asensio filed an
answer and counterclaim alleging that in response to Asensio's strong sell
F33
recommendation and other press releases, we made defamatory statements about
Asensio. We denied the material allegations of the counterclaim. In July 2000,
following dismissal in federal court for lack of subject matter jurisdiction, we
transferred the action to the Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and a trial commenced on
January 30, 2002. A jury verdict disallowed the claims against the defendants
for defamation and disparagement and the court granted us a directed verdict on
the counterclaim. On July 2, 2002 the Court entered an order granting us a new
trial against Asensio for defamation and disparagement. Thereafter, Asensio
appealed the granting of a new trial. This appeal is now pending in the Superior
Court of Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and her husband filed a
claim in the Superior Court of New Jersey, Middlesex County, against us, one of
our clinical trial investigators and others alleging that she was harmed in the
ME/CFS clinical trial as a result of negligence and breach of warranties. We
believe the claim is without merit and we are defending the claim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a claim in
Belgium, against Hemispherx Biopharma Europe, NV/SA, our Belgian subsidiary, and
one of our clinical trial investigators alleging that she was harmed in the
Belgium ME/CFS clinical trial as a result of negligence and breach of
warranties. We believe the claim is without merit and we are defending the claim
against us through our product liability insurance carrier.
In July 2002, we filed suit in the United States District Court for the Eastern
District of Pennsylvania against our insurance company seeking (1) a judicial
order declaring our rights and the obligations of our insurance carrier under
the insurance policy our insurance carrier sold to us (2) monetary damage for
breach of contract resulting from our insurance carrier refusal to fully defend
us in connection with the Asensio litigation (3) monetary damages to compensate
us for our insurance carrier breach of its fiduciary duty faith and dealing and
(4) monetary damages, interest, cost, and attorneys fees to compensate us for
violation of the Pennsylvania Bad Faith Statute. On March 31, 2003 we settled
our outstanding claim with our insurance carrier for $1,500,000 relating to
reimbursement of expenses in connection with our Asensio law suits. We realized
approximately $1,050,000 of this amount after payment of expenses related to the
settlement. Such amount was recorded during the fourth quarter 2002 as a
reduction in General and Administrative expenses in our statement of operations.
On September 16, 2003, HEB filed and subsequently served and moved for expedited
proceedings on, a complaint filed in the Court Of Chancery of the State of
Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the Inventory and
Asset Purchase Agreements with ISI. Specifically, HEB alleges that ISI has
delayed its performance pursuant to the Inventory and Asset Purchase Agreement
and, as a result, the Asset Purchase Agreement did not close within 180 days of
the date of the execution of the agreements. Paragraph 7.7 of the Asset Purchase
Agreement states that either party to the agreement may terminate the agreement
if there is no closing within 180 days of the date of the agreement. HEB
requested that the Court require ISI to specifically perform its obligations
under the agreement or, in the alternative, that paragraph 7.7 of the agreement
be eliminated or reformed to eliminate ISI's ability to terminate pursuant to
that paragraph. HEB also requested that ISI, as a result of its conduct, not be
permitted to terminate the Asset Purchase Agreement pursuant to paragraph 7.7 or
due to the passage of time. At a hearing held on September 29, 2003, the Court
set a trial of the case for January 6-7, 2004 which has been postponed at the
request of both parties until March 4-5, 2004. The parties have agreed that
neither party shall have the right to terminate the Asset Purchase Agreement
F34
pursuant to paragraph 7.7 until the date which is at least two weeks following
trial, and only then, unless the Court has ruled, upon five days written notice
to the other party.
The current court date of March 4 and 5, 2004 will be rescheduled to allow for
the ISI shareholders to meet on March 9, 2004 as now scheduled. The results of
the Shareholders Meeting and subsequent actions of ISI management will determine
if we proceed with this lawsuit.
(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 using the Black Scholes
pricing model and recorded as stock compensation expense. A Director of the
Company, lives in Paris, France and assists our European subsidiaries in their
dealings with medical institutions and the European Medical Evaluation
Authority. A Director of the Company, assists us in establishing clinical trial
protocols as well as performs other scientific work for us from time to time.
For these services, these 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, 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.
We paid $57,750, $33,450 and $18,800 for the years ending December 31, 2001,
2002 and 2003, respectively to Carter Realty for the rent of property used at
various times in years 2001, 2002 and 2003 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.
F35
(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.
2002 (2)
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenues and license
fee income $ 613 $ 134 $ 79 $ 78 $ 904
Costs and expenses 2,121 2,097 1,961 782 6,961
Net loss (1,488) (2,634) (1,891) (1,411) (7,424)
------- -------- ------- -------- -------
Basic and diluted
loss per share $(.05) $(.08) $(.06) $(.04) $(.23)
------- -------- ------- -------- -------
(2) During the fourth quarter of 2002, the Company recorded write offs of
certain investments in unconsolidated affiliates of approximately $688,000. (See
note 2(c)). Additionally, during the fourth quarter of 2002, the Company
recorded as a reduction of general and administrative expenses, an amount of
$1,050,000 representing the net settlement with its insurance carrier. (See Note
12)
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-KSB
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)) 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.
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
c. 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 29, 2004
/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-KSB
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)) 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.
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
c. 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 29, 2004
/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, 2003 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 29, 2004
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, 2003 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 29, 2004