As filed with the Securities and Exchange Commission on April 11, 1997December 12, 2003
Registration No. _________333-
--------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
HEMISPHERx--------------------
HEMISPHERX BIOPHARMA, INC.
(Name(Exact name of Issuerregistrant as specified in its charter)
Delaware 52-0845822
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) _____________
(Primary Standard Industrial Classification Code Number) 52-0845822
(I.R.S. Employee Identification
No.)
----------Number)
--------------------
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices
and principal place of business)
----------offices)
--------------------
William A. Carter, M.D., Chief Executive Officer
Hemispherx Biopharma, Inc.
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies of all communications to:
Michael H. Freedman,Richard Feiner, Esq.
Silverman Collura, ChernisSclar Shin & Balzano,Byrne P.C.
381 Park Avenue South, Suite 1601
New York, New York, 10016
(212) 779-8600
Fax (212) 779-8858
Approximate date of proposed sale to the public: As soon as practicableFrom time to time or at
any time after the effective date of this Registration Statement becomes effective.Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 as amended,("Securities Act"), other than securities offered only in connection
with dividend or reinvestment plans, check the following box:box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.[ ]
If this form is a post-effective amendment filed pursuant to 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering.[ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
================================================================================
CALCULATION OF REGISTRATION FEE
=======================================================================================================================================================================================================================================
Proposed Maximum Proposed
Maximum Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Amount of
Securities
to be Registered Be Registered(1)Registered (1) Per Share(2) OfferingShare Price Registration Fee
=============================================================================================================
Warrants andCommon Stock Options(3) 310,544 -- -- --
=============================================================================================================3,666,130(2) $ 2.405(3) $8,817,043 $713.30
==========================================================================================================================
Common Stock(4) 2,500,000 $2.91 $7,275,000 $2,204.55
=============================================================================================================Stock 454,662(4) $ 2.405(3) $1,093,462 $ 88.46
==========================================================================================================================
Common Stock(5) 640,475 $2.91 $1,863,782 $564.78
=============================================================================================================
TOTAL 3,451,019 $2.91 $9,138,782 $2,769.33
=============================================================================================================Stock 20,682(5) $ 2.405(3) $ 49,740 $ 4.02
==========================================================================================================================
Common Stock 87,500(6) $ 2.42(3) $ 211,750 $ 17.13
==========================================================================================================================
Total Registration Fee $822.91
==========================================================================================================================
(1) Includes such additional number of shares as may become issuable by reason
of anti-dilution provisions pursuantPursuant to Rule 416.
(2) Common Stock price per share calculated pursuant Rule 457(c)416 of the Securities Act of 1933, there are also being
registered an indeterminate number of additional shares of common stock as
amended.may become offered, issuable or sold to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(2) Pursuant to an agreement with the beneficial holders of these shares,
represents 135% of the shares of common stock that are issuable upon the
(a) conversion, prepayment or otherwise relating to the registrant's 6%
Senior Convertible Debentures due October 2005 issued in a private
placement on October 30, 2003 and as payment of interest thereon and (b)
exercise of warrants issued by the registrant in the private placement.
(3) WarrantsEstimated solely for the purpose of computing the registration fee in
accordance with Rules 457(c) of the Securities Act on the basis of $2.405
per share, which was the average of the high and low sales prices of the
shares of common stock options heldof the Registrant reported on the American Stock
Exchange on December 10, 2003.
(4) Represents additional shares required to be registered pursuant to an
agreement with the beneficial holders of certain shares registered on Form
S-1 Registration Statement (SEC file No. 333-108645) to increase the
number of shares registered to 135% of the shares of common stock that are
issuable upon the (a) conversion, prepayment or otherwise relating to the
registrant's 6% Senior Convertible Debentures due July 2005. As a result
of a change in the conversion rate of these debentures, the number of
shares registered in the prior registration statement had dropped to
approximately 119% from 135%.
(5) Represent shares owned by Selling Securityholders.
(4) Common Stock underlying Series E Preferred Stock held by Selling
Securityholders.
(5) Common Stock underlyingcertain selling stockholders.
(6) Represents shares of our common stock issuable upon exercise of warrants
held by Selling Securityholders.selling stockholders.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this Registration Statement also incorporates
securities originallyrelates to the remaining
unsold shares which were previously registered on Form S-1, File No. 33-03314, declared
effective on November 2, 1995.
Pursuant to Rule 429, thisby the Registrant under
Registration Statement withdraws from
registration 1,850,748 shares of Common Stock underlying Series D Preferred
Stock which were registered on Form S-1, File No. 333-08941, declared effective
on September 16, 1996.333-108645.
The Registrant hereby amends this Registration Statementregistration statement on suchthe date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration
Statementregistration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statementregistration statement shall
become effective on sucha date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
ii
HEMISPHERx BIOPHARMA, INC.
Cross-Reference Sheet to Prospectus on Form S-1
Furnished Pursuant to Item 501(b) of Regulation S-K
Item From S-1 Caption LocationThe information in Prospectus
- ---- ---------------- ----------------------
1. Forepart ofthis prospectus is not complete and may be amended. Neither
we nor the Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus Outside Front Cover Page
3. Summary Information, Risk Prospectus Summary; Selected
Factors and Ratio of Earnings Financial Data; Risk Factors
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Securityholders Resales by Selling Securityholders
8. Plan of Distribution Cover Page; Resales by Selling
Securityholders
9. Description of Securities Description of Securities;
to be Registered Shares Eligible for Future Sale
10. Interest of Named Experts Experts and Legal Matters
and Counsel
11. Information with Respect to Business; Description ofselling stockholders may sell these securities until the Registrant Securities; Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Certain Transactions;
Management; Price Range of Common
Stock; Dividends; Principal
Shareholders
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities
iii
[TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE]
[RED HERRING LEGEND]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the Securities and Exchange
Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomesCommission is effective. This Prospectus shallprospectus is not constitute an offer to
sell or the
solicitation of anythese securities and it is not soliciting an offer to
buy nor shall there be any sale of these securities in any State in which suchstate where an offer solicitation or sale
would be unlawful prioris not permitted.
Subject to registration or qualification under the securities laws of any State.
iv
PROSPECTUS
DATED APRIL __, 1997 SUBJECT TO COMPLETION
HEMISPHERxCompletion
Preliminary Prospectus Dated December 12, 2003
HEMISPHERX BIOPHARMA, INC.
310,544 WARRANTS AND STOCK OPTIONS
640,475 SHARES OF COMMON STOCK UNDERLYING WARRANTS
2,500,000 SHARES OF COMMON STOCK UNDERLYING SERIES E PREFERRED STOCK
6,213,000 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE WARRANTS
462,000 UNITS UNDERLYING A UNIT PURCHASE OPTION
462,000 SHARES OF COMMON STOCK UNDERLYING UNITS INCLUDED IN THE OPTION
462,000 CLASS A REDEEMABLE WARRANTS UNDERLYING UNITS INCLUDED IN THE OPTION
462,000 SHARES OF COMMON STOCK UNDERLYING
CLASS A REDEEMABLE WARRANTS INCLUDED IN THE OPTION11,086,341 Shares of Common Stock
---------------------------------------
This Prospectusprospectus relates to the possible resale by certain selling
securityholders ("Selling Securityholders") of up to (i) 310,544 warrants and
stock options ("C Warrants"); (ii) 179,93111,086,341 shares of Common Stock underlying
warrants ("R Warrants"); (iii) 150,000 shares of Common Stock underlying
warrants ("Series E Warrants");our common
stock that may be offered and (iv) 2,500,000 shares of Common Stock,
underlying Series E Preferred Stock, $.01 par value ("Series E Preferred") of
Hemispherx Biopharma, Inc. ("Company"), and other securities as follows: (i)
310,544 shares of Common Stock underlying C Warrants which were registered in
the Company's registration statement declared effective September 16, 1996; (ii)
6,213,000 shares of the Company's Common Stock, underlying the Company's Class A
Redeemable Warrants ("Class A Warrants"). One Class A Warrant and one share of
Common Stock comprise the Company's Units ("Units") and Bridge Units ("Bridge
Units") which were registered in the Company's initial public offering dated
November 2, 1995 ("IPO"); (ii) 462,000 Units underlying an Underwriter's Unit
Purchase Option ("Option") issued pursuant to the IPO; (iii) 462,000 shares of
Common Stock underlying Units included in the Option; (iv) 462,000 Class A
Warrants underlying the Units included in the Option; and (v) 462,000 shares of
Common Stock underlying Class A Warrants underlying the Units included in the
Option. The C Warrants, R Warrants, Series E Warrants, Class A Warrants, Option,
Series E Preferred and all Common Stock lying thereunder, respectively, are
collectively referred to herein as "Securities".
This Prospectus also withdraws from registration 1,850,748 shares of Common
Stock underlying the Company's Series D Preferred Stock, $.01 par value,
previously registered in the Company's registration statement declared effective
September 16, 1996.
The Selling Securityholders may sell their Securitiessold from time to time in
market transactions, in negotiated transactions, through the writing of options,
or a combination of such methods of sale, at fixed prices which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Securityholders
may effect such transactions by selling their Securitiesshareholders,
consisting of: (1) 135% of 2,305,518 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior Convertible
Debentures Due October 2005 ("October Debentures") and as payment of interest
thereon, 135% of 410,134 shares of common stock issuable upon the exercise of
the related warrants ("October 2008 Warrants"); (2) 135% of 2,722,965 shares of
common stock issuable upon the conversion, redemption or through
broker-dealers,other payments relating
to our 6% Senior Convertible Debentures Due July 2005 ("July Debentures") and such broker-dealers mayas
payment of interest thereon, 135% of 507,102 shares of common stock issuable
upon the exercise of the related warrants ("July 2008 Warrants") and 135% of
1,000,000 shares of common stock issuable upon the exercise of warrants issued
to the Debenture holders in June 2003 ("June 2008 Warrants"); (3) 1,113,750
shares of common stock issuable upon exercise of other warrants; and (4) 595,871
shares of common stock to be sold by certain of the selling stockholders listed
on page 65 of this prospectus. We are registering these shares of common stock
pursuant to commitments to register the securities with the selling
stockholders.
We will not receive compensation in the form of
discounts, concessions or commissionsany proceeds from the Selling Securityholders and/or
the purchasers of such Securities for whom such broker-dealer may act as agents
or to whom they may sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions.) The
Company has agreed to bear all expenses in connection with the registrationsale of the Securities to which this Prospectus relates.
The Company's Common Stock and Class A Warrants are quotedshares of common
stock by the selling stockholders other than payment of the exercise price of
the warrants.
Our common stock is listed on the Nasdaq
SmallCap Market System ("Nasdaq")American Stock Exchange under the symbols HEMX and HEMXW,
respectively. On April 4, 1997 thesymbol
HEB. The reported last sale price on the American Stock Exchange on December 10,
2003 was $2.38.
-----------------------------------------
Please see the risk factors beginning on page 6 to read about certain
factors you should consider before buying shares of the Common Stock and Class
A Warrants as reported on Nasdaq was $2.875 and $.75, respectively.
THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF RISK.
THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS
OF THEIR ENTIRE INVESTMENT (SEE "RISK FACTORS")
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is April__, 1997
2
ADDITIONAL INFORMATION
With respect to the securities offered hereby, the Company has filed with
the principal office ofcommon stock.
-----------------------------------------
Neither the Securities and Exchange Commission (the
"Commission") in Washington, D.C.,nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
Registration Statement on Form S-1 undercriminal offense.
The date of this prospectus is December __, 2003
PROSPECTUS SUMMARY
In the Securities Act of 1933, as amended. For purposes hereof,following summary, we have highlighted information that we believe
is the term
"Registration Statement" means the original Registration Statement and any and
all amendments thereto. This Prospectus doesmost important about us. However, because this is a summary, it may not
contain all ofinformation that may be important to you. You should read this
entire prospectus, including the information
set forth in the Registration Statement and the exhibits thereto, to which
reference hereby is made. Each statement made in this Prospectus concerning a
document filed as an exhibit to the Registration Statement is not necessarily
complete and is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. The Company is subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and in accordance therewith files reports and other information with the
Commission. Any interested party may inspect the Registration Statement and its
exhibits and other reports and information filed by the Company with the
Commission without charge, or obtain a copy of all or any portion thereof, at
prescribed rates, at the public reference facilities of the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. The Registration Statement and exhibits may also be
inspected at the Commission's regional offices at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7
World Trade Center, Suite 1300, New York, New York 10048.
3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere or incorporated by reference elsewhere in this Prospectus,
including information under "Risk Factors". See "Glossary of Terms" forand the
definition of certain termsfinancial data and related notes, before making an investment decision. When
used in this Prospectus.
THE COMPANYprospectus, the terms "we," "our" and "us" refer to Hemispherx BioPharma, Inc. (the "Company") isand
not to the selling stockholders.
About Hemispherx
In the course of almost three decades, we have established a biopharmaceutical company
usingstrong
foundation of laboratory, pre-clinical and clinical data with respect to the
development of nucleic acid technologiesacids to developenhance the natural antiviral defense system of
the human body and the development of therapeutic products for the treatment of
viral diseases and certain cancers. Nucleic acid compounds
represent a new class of pharmaceutical products that are designed to act at the
molecular level for the treatment of human disease. The Company's drug
technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the
Company's double stranded RNA drug products, trademarked Ampligen, a parenteral
drug product, is in advanced human clinical development for various therapeutic
indications. Based on the results of pre-clinical studies and clinical trials,
the Company believes that Ampligen may have broad-spectrum anti-viral and
anti-cancer activities. Over 300 patients have received Ampligen in clinical
trials authorized by the U.S. Food and Drug Administration ("FDA") at over
twenty clinical trial sites across the United States, representing the
administration of more than 40,000 doses of this drug. Sales on a pre-approval,
cost recovery basis have been initiated in Belgium and are expected to start in
Canada during the second Quarter of 1997. The Company is presently exploring
additional distributor relationships for Europe and the United States to set the
stage for wider market penetration. SAB/Bioclones, the Company's partner in
certain countries, is initiating trials of Ampligen in South Africa and
Australia.
Ampligen is being developed clinically for use in treating three anti-viral
indications: chronic hepatitis B virus ("HBV") infection (Phase I/II clinical
trial), human immunodeficiency virus ("HIV") associated disorders (Phase II),
and myalgic encephalomyelitis, also know as chronic fatigue syndrome ("ME/CFS")
(Phase II/III). The Company's businessdiseases. Our strategy is designed around seekingto obtain the required regulatory approvals
which will allow the progressive introduction of AmpligenAmpligen(R) (our proprietary
drug) for treating Myalgic Encephalomyelitis/ Chronic Fatigue Syndrome
("ME/CFS"), HIV, Hepatitis C ("HCV") and ME/CFS followed by HBVHepatitis B ("HBV") in the U.S.,
Canada, Europe and Japan. Ampligen has also received Orphan Drug designation from the FDA for four
indications (AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive
malignant melanoma). The CompanyAmpligen(R) is also developing a second generation RNA drug
technology, termed Oragen compounds, which the Company believes offers the
potential for broad spectrum antiviral activity by oral administration.
The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. Incurrently in phase III clinical trials
in the U.S. alone, there are an estimated 1.25 million carriers. HBVfor use in treatment of ME/CFS and is one of several
viruses that cause human hepatitis, or inflammation of the liver. The Company
has been conducting ain Phase I/II clinical trial of AmpligenIIb Clinical Trials
in the U.S. for the treatment of chronic HBV infection at Stanford Universitynewly emerging multi-drug resistant HIV, and
for the Universityinduction of Pennsylvania. A significant reductioncell mediated immunity in viral componentsHIV patients that are under
control using potentially toxic drug cocktails.
Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and improvementis protected by more than 350 patents worldwide,
with over 60 additional patent applications pending to provide further
proprietary protection in liver function was noted duringvarious international markets. Certain patents apply
to the courseuse of Ampligen(R) alone and certain patents apply to the Phase I/II clinical trialuse of
Ampligen(R) in combination with certain other drugs. Some compositions of matter
patents pertain to dateother new RNA compounds, which have a similar mechanism of
action.
We have obtained from Interferon Sciences, Inc. ("ISI") all of its raw
materials, work-in-progress and the drugfinished product ALFERON N Injection(R),
together with a limited license to sell ALFERON N Injection(R), a natural alpha
interferon that has been generally well tolerated. At present,
interferon-alpha is the only approved productfor commercial sale for the intralesional
treatment of this disease;
however, 60% to 75%refractory or recurring external condylomata acuminata ("genital
warts") in patients 18 years of patients with chronic HBV ultimately fail to respond to
interferon-alpha. The global sales of interferon are presently estimated at more
than $1 billion, largely for its use in liver infections.
4
The Centers for Disease Control ("CDC") has estimated that approximately
one million peopleage or older in the U.S. are infected with HIV, excluding patients who
have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwide by the year 2000. The Company
is currently conducting a Phase II clinical trial of Ampligen in the U.S. for
the treatment of HIV infection. The drug technology is designed to enhance the
patient's own immune system, thereby fighting the invasive viral agent more
effectively and resulting in more durable long term benefits.
ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 500,000 cases. The Company has entered into an agreement
with a Canadian pharmaceutical firm pursuant to which the Canadian company will
provide various services in connection with the distribution of Ampligen on a
cost recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligen to
patients in an open label clinical trial being conducted in Belgium. The Company
is currently discussing open-label and placebo controlled trials with the FDA.
The Company is unaware of any other new drugs whichUnited States. We are under
development for
treatmentcontract to purchase from ISI the balance of ME/CFS. Today, ME/CFS accounts for a significant portion of people
entering chronic disability status, especially in the western U.S. Thus, this
presently untreatable illness constitutes a significant impact on the overall
cost of health care.
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company anticipates that approximately 25,000 new cases of renal cell
carcinoma will be diagnosed in the U.S. in 1996. The Company was authorized by
the FDA, in the U.S., and the HPB, in Canada,ISI's rights to initiate a Phase II/III
clinical trial of Ampligen in renal cell carcinoma patients. The HPB has
authorized the Company to charge patients for the cost of the Ampligen
administered to renal cell patients in the context of clinical trials. Based on
estimates prepared by the American Cancer Society, the Company anticipates that
approximately 34,000 new cases of malignant melanoma will be diagnosed in the
U.S. in 1996. Data from the American Cancer Society and the World Health
Organization indicate that both the incidence and mortality from malignant
melanoma are rising steadily among white populations throughout the world. In
the past decade, the incidence of melanoma has increased faster than that of any
other cancer except lung cancer in women.
In March 1997, the Company sold 5,000 shares of Series E Preferred at
$1,000 per share in a private transaction pursuant to Regulation D of the
Securities Act of 1933, as amended ("Securities Act") and Rule 506 promulgated
thereunder. The proceeds from such offering were used to retire all outstanding
shares of the Company's Series D Preferred Stock.
In July 1996, the Company sold 6,000 shares of Series D Preferred Stock at
$1,000 per share in a private transaction pursuant to Regulation D of the
Securities Act and Rule 506 promulgated thereunder. The Company filed a
registration statement on Form S-1, which was declared effective by the
Commission on September 16, 1996, registering 2,427,275 Shares underlying the
Series D Preferred Stock and 890,543 shares of Common Stock underlying certain
other warrants and options.
5
In November 1995, the Company sold 5,313,000 Units at $3.50 per Unit in its initial public offering. Each Unit consists of one share of Common Stock and one
Class A Warrant.
In February 1996, the Company entered into an agreement with Rivex Pharma,
Inc., a Canadian-based pharmaceutical company ("Rivex"), pursuant to which Rivex
will provide various services in connection with the exclusive distribution of
Ampligen in Canada on an emergency drug release basis. Under the terms of this
agreement, the Company will supply and Rivex will purchase as much Ampligen as
necessary to satisfy Rivex's customers at a mutually agreed upon cost. In
return, Rivex will retain the exclusive right to distribute Ampligen in Canada.
In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
associated with The South African Breweries Limited ("SAB" and, together with
Bioclones, "SAB/Bioclones") with respect to codevelopment of various RNA drugs,
including Ampligen, for which the Company has previously obtained international
patent protection. The licensing agreement, as amended (the "SAB Agreement")
provides that the Company will provide SAB/Bioclones with an exclusive
manufacturing and marketing license for certain Southern hemisphere countries
(including certain countries in South America)product as well
as ISI's production facility. We intend to market the ALFERON N Injection(R) in
the United Kingdom,
Ireland, Africa, Australia, Tasmania, New ZealandState through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection(R) in multiple sclerosis and certain other countrieschronic viral diseases.
We were incorporated in Maryland in 1966 under the name HEM Research,
Inc., and territories. In exchange for these marketing and distribution rights,originally served as a supplier of research support products. Our
business was redirected in the SAB Agreement provides for: (a) a $3 million cash paymentearly 1980's to the Company,
payable in installments upon the occurrencedevelopment of certain milestones, including the
transfer of certain technical documents which have already been transferred; (b)
the formation and issuance to the Company of 24.9% of the capital stock of a
company which is developing and operating a new manufacturing facility for RNA
drugs constructed by SAB/Bioclones; and (c) royalties on all sales of the
Company's product in the licensed territories after the first $50 million of
sales. In addition, SAB/Bioclones has agreed to use reasonable efforts to pursue
the marketing approval of Ampligen for hepatitis B in Australia, South Africa,
Brazil,nucleic acid
pharmaceutical technology and the United Kingdom, as well ascommercialization of RNA drugs. We were
reincorporated in Delaware and changed our name to perform (at its own expense) a
phase III studyHEM 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
Ampligen for chronic HBV infectionwhich are incorporated in South Africa, which
clinical study is to be performed pursuant to U.S. FDA good clinical practiceDelaware. Our foreign subsidiaries include Hemispherx
Biopharma Europe N.V./S.A. established in Belgium in 1998 and good laboratory practiceHemispherx
Biopharma Europe S.A. ("GLP"Hemispherx, S.A.") guidelines and standards. SAB/Bioclones
will be granted a right of first refusal to manufacture and supply to the
Company the drug product required for not less than one-third of its world-wide
sales of Ampligen (after deducting SAB/Bioclones-related sales). To date, the
Company has received approximately $3,000,000 pursuant to the SAB Agreement.
In September 1994, the Company formed three subsidiaries and granted
licenses to the subsidiaries for the purpose of developing its technology for
ultimate sale into certain non-pharmaceutical specialty consumer markets, such
as the tobacco market, the market for skincare products and the market for
diagnostic devices. The Company intends to issue equityincorporated in one of such
subsidiaries and has granted options to certain of its officers and directors.
See "Business--Subsidiary Companies." No assurance can be given that any of
these companies will be able to complete testingLuxembourg in these areas, develop any
products or successfully produce and market any products in the targeted
specialty consumer markets.
The Company's corporate headquarters2002.
Our principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103. The Company's19103, and its telephone number is
(215)
988-0080.
6215-988-0080.
2
AsTHE OFFERING
Common stock to be offered
by the selling stockholders ........ 11,086,341 Shares
Common stock outstanding
prior to this offering ............. 38,626,456 Shares
Use of March 19, 1997
Securities Outstanding(1)(2)(3) Common Stock 16,353,086
Class A Warrants 6,313,000
Series E Preferred 5,000
Risk Factors AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS".
Nasdaq Symbols
for Common Stock HEMX
for Class A Warrants HEMXW
(1) Excludes: (i) 460,798Proceeds .................... We will not receive any of the proceeds
from the sale of the shares of Commoncommon
stock because they are being offered by
the selling stockholders and we are not
offering any shares for sale under this
prospectus, but we may receive proceeds
from the exercise of warrants held by
certain of the selling stockholders. We
will apply such proceeds, if any, toward
funding our research and development
efforts, working capital and, possibly,
acquisitions. See "Use of Proceeds".
American Stock reserved for issuanceExchange symbol ..... HEB
The 11,086,341 shares of our common stock offered consist of:
o 135% of 2,305,518 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due October 2005 ("October Debentures") and
as payment of interest thereon;
o 135% of 410,134 shares of common stock issuable upon the exercise of
the related warrants ("October 2008 Warrants");
o 135% of 2,722,965 shares of common stock issuable upon the
conversion, redemption or other payments relating to our 6% Senior
Convertible Debentures Due July 2005 ("July Debentures") and as
payment of interest thereon;
o 135% of 507,102 shares of common stock issuable upon the exercise of
the related warrants ("July 2008 Warrants");
o 135% of 1,000,000 shares of common stock issuable upon the exercise
of warrants issued to the Debenture holders in June 2003 ("June 2008
Warrants");
o 1,113,750 shares of common stock issuable upon exercise of other
warrants; and
o 595,871 shares of common stock owned by certain of the selling
stockholders.
We are registering these shares of common stock pursuant to commitments to
register the Company's 1990 Stock Option Plan under which options to purchase
234,953 sharessecurities with the selling stockholders
Summary Consolidated Financial Data
In the table below, we provide you with our summary historical financial
data. We have been granted; (ii) 92,160 shares of Common Stock
reservedprepared this information using our audited financial statements
for issuance pursuant to the Company's 1992 Stock Option Plan
under which no options or other rights to purchase shares have been
granted; (iii) 138,240 shares of Common Stock reserved for issuance
pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to
which no rights to purchase shares have been granted; (iv) 3,213,797 shares
of Common Stock reserved for issuance pursuant to certain outstanding
warrants with an average weighted exercise price of $3.53; (v) 2,080,000
warrants to purchase Common Stockeach of the Company issued to officers,
directorsfive years in the period ended December 31, 2002, and consultantsour
unaudited financial statements for the nine months ended September 30, 2002 and
September 30, 2003. Operating results for the nine months ended September 30,
2003 are not necessarily indicative of the Companyresults that may be expected for the
year ending December 31, 2003.
It is important that you read this summary historical financial data in
reliance upon Rule 701 of the
Securities Act, at an exercise price of $3.50 per share ("Rule 701
Warrants"); (vi) 2,750,000 warrants to purchase Common Stock at an exercise
price of $1.75 per share issued in accordanceconjunction with the terms of the 1995
Standby Financing Agreement; (vii) 462,000 Units underlying the Option,
462,000 shares of Common Stock underlying the Units included in the Option,
462,000 Class A Warrants underlying the Option,our historical financial statements and 462,000 shares of
Common Stock underlying the Class A Warrants underlying the Units included
in the Option. Seerelated notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--1992 Stock Option Plan,"
"--1990 Stock Option Plan" and "--Employee Stock Purchase Plan,"
"Description of Securities--Warrants"
(2) Does not include 6,313,000 shares of Common Stock issuable upon the
exercise of the Class A Warrants at an exercise price of $4.00 per share.
(3) Does not include 2,500,000 shares of Common Stock reserved for issuance
upon conversion of the Series E Preferred.
7
SUMMARY FINANCIAL INFORMATION
(in thousands, except share and per share data)
The data set forth below should be read in conjunction with the
Consolidated Financial Statements, related Notes and other financial information
included or incorporated by referenceOperations" appearing elsewhere in this Prospectus.prospectus.
3
(in thousands except share and per share data) Pro Forma for
Consolidated Asset Acquisition
Statements Year ended December 31, ------------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------Nine Months Ended Nine
of Operations -------------------------------------------------------------- September 30, Year ended Months
Data: ----------------------- December 31, Ended
1998 1999 2000 2001 2002 2002 2003 2002(4) 2003(4)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
Consolidated Statements
of Operations Data:
Revenues
Research and Development
Revenues:
Clinical $ --401 $ 48678 $ 76788 $ 66390 $ 32341 $ 263 $ 118 $ 341 $ 118
Treatment
Programs
License feeFees -- -- 100 2,900 -- -- 563 563 -- 563 --
Income
Sale of
Products -- -- -- -- -- -- 236 1,926 478
------------------------------------------------------------------------------------------------------------------
Total Revenues 401 678 788 390 904 826 354 2,830 596
Cost & Expenses:
Production Costs 224 1,505 583
Research & 4,562 4,737 6,136 5,780 4,946 3,732 2,574 6,428 2,763
Development
General & 3,753 8,721 3,695 3,412 2,015 2,447 2,550 3,921 2,844
Administrative(1)
Total Cost and 8,315 13,458 9,831 9,192 6,961 6,179 5,348 11,854 6,190
Expenses
Interest and 590 482 572 284 103 90 61 103 61
Other Income
Interest Expense -- -- -- -- -- -- (5,795) (3,160) (4,945)
Other Expense -- -- (81) (565) (1,470) (750) (0) (1,470) (0)
Net Loss $ (7,324) $ (12,298) $ (8,552) $ (9,083) $ (7,424) $ (6,013) $ (10,728) $ (13,551) $ (10,481)
Basic and
Diluted $ (.32) $ (.47) $ (.29) $ (.29) $ (.23) $ (.19) $ (.31) $ (.40) $ (.29)
Loss Per
Share
Basic and
Diluted 26,380,351 31,443,208 32,083,957 33,641,776
Weighted
Average 22,724,913 29,251,846 32,095,776 34,210,987 35,671,997
Shares
Outstanding
Other Cash Flow
Data
Cash Used in
Operating $ (5,853) $ (6,990) $ (8,074) $ (7,281) $ (6,409) $ (4,927) $ (4,926)
Activities
Capital (151) (251) (171) -- -- -- --
Expenditures
4
Balance Sheet Data: December 31, September 30, Pro Forma Adjustment
----------------------------------------------- --------------------- For Asset Acquisitions
1998 1999 2000 2001 2002 2002 2003(2)(3) 2003(4)(5)
------- ------- ------- ------- ------- ------- ---------- ----------------------
(unaudited) (unaudited) (unaudited)
Working Capital $12,587 $ 9,507 $ 7,550 $ 7,534 $ 2,925 $ 3,484 $ 5,993 $ 5,630
Total Revenues -- 48 176 2,966 32
Cost and expenses:
Research and development 4,734 2,119 1,638 1,029 1,902
General and administrative 2,825 3,347 2,618 2,880 3,024
------- ------- ------- ------- -------
Total costs and expenses 7,559 5,466 4,256 3,909 4,926
Debt conversion expenses -- (1,215) (10) (149) --
Net interest income (expense) (322) (1,069) (1,043) (748) 339
------- ------- ------- ------- -------
Net loss $(7,881) $(7,702) $(5,133) $(1,840) $(4,555)
======= ======= ======= ======= =======
Net loss per share -- -- $ (.44)(1) $ (.13)(1) $ (.29)
Weighted average
number of shares outstanding
used in computing
net loss per share -- -- 11,536,276(1) 14,199,701(1) 15,718,316Assets 16,327 14,168 13,067 12,035 6,040 6,863 11,992 13,193
Shareholders' 15,185 12,657 11,572 10,763 3,630 4,983 7,360 7,573
Equity
(1) General and Administrative expenses include stock compensation expense
totaling $795, $4,618, $397, $673, $132, $132 and $0 for the years ended
December 31, 1996
-----------------
Consolidated Balance Sheet Data:
Current1998, 1999, 2000, 2001, and 2002 and for the nine months
ended September 30, 2002 and 2003, respectively.
(2) For information concerning recent acquisitions of certain assets $ 5,385
Current liabilities 1,146
Total assets 6,999
Long-term obligations 0
Accumulated deficit (48,243)
Stockholders' equity 5,853
(1) Computed on a proforma basis describedof
Interferon Sciences, Inc. ("ISI") and related financing see notes 8 and 9
to our consolidated financial statements for the nine months ended
September 30, 2003 and notes 1 and 16 to our consolidated financial
statements for the year ended December 31, 2002, contained elsewhere in
Note 2(e)this prospectus.
(3) In accounting for the March 12, 2003 and July 10, 2003 ($5,426,000 each)
issuances of 6% Senior Convertible Debentures and related embedded
conversion features and warrant issuances, we recorded debt discounts of
approximately $9.0 million, which in effect reduced the carrying value of
the debt to $1.3 million. Excluding the application of related accounting
standards, our debt outstanding as of September 30, 2003 totaled
approximately $4.8 million. For additional information refer to note 9 to
our consolidated financial statements for the nine months ended September
30, 2003 and note 16 to our consolidated financial statements for the year
ended December 31, 2002, contained elsewhere in this prospectus.
(4) The unaudited Pro Forma consolidated statements of operations data for the
year ended December 31, 2002 and the nine months ended September 30, 2003
have been prepared giving effect to the Consolidated
Financial Statements.
8acquisition of certain assets of
ISI and the related funding of the transaction, by our March 12, 2003 6%
senior convertible debentures, as if they occurred on January 1, 2002.
The unaudited Pro Forma consolidated balance sheet data has been prepared
as if the second portion of the acquisition of certain assets of ISI had
occurred on September 30, 2003.
The unaudited pro-forma financial statements give effect to the second
asset acquisition agreement with ISI irrespective of the fact that it
remains unconsummated and is contingent on the ISI stockholders approving
the transaction. For additional information, see the pro forma
consolidated financial statements contained elsewhere in the prospectus.
(5) Does not reflect the issuance of the October 29, 2003 $4,142,357 6% senior
convertible debentures resulting in net cash proceeds to us of $1.7
million which are non-inclusive of approximately $1.6 million of proceeds
held back contingent upon us acquiring of ISI's facility.
5
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
DependenceSpecial Note Regarding Forward-Looking Statements
Certain statements in this prospectus constitute "forwarding-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities and Exchange 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
prospectus 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, including but not limited to, the risk factors
discussed below, which may cause the actual results, performance or achievements
of Hemispherx and its subsidiaries 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 prospectus. We
do not undertake and specifically decline 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.
The following cautionary statements identify important factors that could
cause our actual result to differ materially form those projected in the
forward-looking statements made in this prospectus. Among the key factors that
have a direct bearing on Ampligen; Non-Exclusive Rightour 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 Manufacturea number of Ampligen;
Expirationsignificant 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 Patents.
The Company'sthird 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, or 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.
6
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
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 plans
to conduct these additional studies at this time. Our principal development
efforts are currently focused on Ampligen. While most clinical trialsAmpligen(R), which has not been approved for
commercial use.
Our products, including Ampligen(R), are subject to extensive regulation
by numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the FDA in the U.S., the Health Protection Branch ("HPB") of
Ampligen haveCanada, 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 date produced favorable
results, additional trials sponsored byobtain final regulatory
approval of a new drug, we must demonstrate to the Company are planned, and no
assurance can be givensatisfaction of the
regulatory agency that the drugproduct 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 has beenAmpligen(R) is authorized for use
in clinical trials in the United States and other countries, no assurance can be
givenwe cannot assure
you that additional clinical trialstrial approvals will be authorized in the United
States or in other countries, in a timely fashion or at all, or that suchwe will
complete these clinical trials will be completed by the Company. The Company has never commercially
introduced a product, and no assurance can be given that commercializationtrials. If Ampligen(R) or one of Ampligen in any countries where Ampligen may be approved will prove successful.
In addition, the Companyour other products does
not have exclusive rights to manufacture Ampligen.
Competitors of the Company are currently able to manufacture Ampligen. The
Company believes, however, that its extensive patent estate may hinder such
competitors from testing and developing Ampligen for particular indications
since the Company has patented the use of Ampligen for many disease indications.
The Company further believes that the available market for non-patented disease
indications for Ampligen which might be available to competitors is minimal
since the Company believes, based on laboratory tests, that Ampligen may not be
effective against such disease indications; however, no assurances can be given.
Willful infringement of the Company's patents by a competitor could result in
significant monetary damages to the Company in the event that such infringement
was not enjoined by a court of law. See "Business - Patent Rights."
Nevertheless, in the event that the Company's patent protection is not adequate
for all relevant disease indications, competitors might be able to test, develop
and commercialize Ampligen. Additionally, as a result of the Company's
dependence on Ampligen, the failure to demonstrate the drug's safety and
efficacy in planned clinical trials, to conduct the planned clinical trials, to
obtain additional approvals for the drug or to successfully commercialize the
drug would have a materially adverse effect on the Company.
No Assurance of Regulatory Approval; Government Regulation.
The Company's research, preclinical development, clinical trials, and the
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authoritiesreceive regulatory approval in the U.S. or elsewhere, our operations will be
materially adversely effected.
We may continue to incur substantial losses and other countries, including,
butour 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 September
30, 2003 our accumulated deficit was approximately $110,000,000. We have not limited to, the Foodyet
generated significant revenues from our products and Drug Administration ("FDA")may incur substantial and
increased losses in the U.S. and the
Health Protection Branch of Canada's Department of Health and Welfare ("HPB"), a
federal regulatory agency in Canada. None of the Company's products has been
approved for commercial sale by the FDA, the HPBfuture. We cannot assure that we will ever achieve
significant revenues from product sales or any other foreign regulatory
authority and the Company does not expect to achieve profitable operations
unless Ampligen receives FDA approval and is commercialized successfully. In
order to obtain FDA
9
approval of a new drug product for an indication, the Company must demonstrate
to the satisfaction of the FDA that such product is safe and effective for its
intended uses and that the Company is capable of manufacturing the product to
the applicable regulatory standards. The process of obtaining FDA and other
required regulatory approvals (including those of the HPB) is rigorous and
lengthy and has requiredbecome profitable. We require, and
will continue to require, the expenditurecommitment of substantial resources. There can be no assuranceresources to develop our
products. We cannot assure that the Companyour product development efforts will be
able
to obtain the necessary regulatory approvals. Unsatisfactory clinical trial
results, clinical trials not conducted in accordance with applicable protocol
requirements and/successfully completed or delays in obtainingthat required regulatory approvals would prevent the
marketing ofwill be obtained or
that any products developed by the Company,will be manufactured and pending the receipt of such
approvals, the Companymarketed successfully, or be
profitable.
We most likely will require additional financing which may not receive product revenues or royalties.
Pharmaceutical products and their manufacture are subject to continued
review following regulatory approval, and later discovery of previously unknown
problems may result in the imposition of restrictions on such products or their
manufacture, including withdrawal of the products from the market. Failure to
comply with applicable regulatory requirements could, among other things, result
in fines, suspension of regulatory approvals, operating restrictions and
criminal prosecution. The Company cannot predict the extent to which current or
future government regulations might have a materially adverse effect on the
production, marketing and sale of the Company's products. Such regulations may
delay or prevent clinical trials, regulatory approval, and the manufacture or
marketing of the Company's potential products. In addition, such regulation may
impose costly procedures upon the Company's activities or furnish a competitive
advantage to other companies more experienced in regulatory affairs than the
Company and may deplete the Company's liquidity and capital resources. See
"Business - Government Regulation."
Additional Financing Requirements.be available.
The development of the Company'sour products has required and will continue to require the commitment of substantial
resources to conduct the time-consuming research, preclinical development, and
clinical trials that are necessary to bring pharmaceutical products to market and to establish commercial-sale
production and marketing capabilities.market.
Based on itsour current operating plan,projections, we may need $2.0 million in additional
financing to fund operations and debt service over the Company anticipatesnext twelve months
subsequent to September 30, 2003. Our projections assume that our debenture
holders do not continue to convert the remaining debt into common stock and that
we will need cash to repay the debt as scheduled. If the
7
debenture holders continue to periodically convert the debentures into our
common stock, we may not need additional funds. Also, sales of Alferon N
Injection(R) could exceed our projection and reduce the need for additional
financing during this period. Between March and the end of October 2003, we
received approximately $10.3 million in net proceeds from the sale of all three
sets of debentures and the exercise of warrants issued in conjunction with the
Debentures due January 2005. Pursuant to the terms of the October Debentures, if
and when we close on the second ISI asset acquisition, we will receive
additional net proceeds of $1.55 million. As of September 30, 2003, we had
approximately $5.1 million in cash and short term investments. We believe that
these funds plus 1) the initial net proceeds of approximately $1.7 million from
October Debenture placement, 2) the release of the remaining $1.55 million in
net proceeds from the July Debentures, 3) the anticipated infusion of
approximately $1.55 million in remaining net proceeds from the October
Debentures and 4) the projected net cash flow from operations and currently
available financing arrangements willthe sale of ALFERON N
Injection(R) should be sufficient to meet our operating requirement for the Company's
capital requirements for approximately 10 months from the date of this
Prospectus. It is not expected that the Company's current cash flow will be
sufficient to enable the Company to complete the necessary clinical trials or
regulatory approval process for Ampligen for any indication or, if any such
approval were obtained, to begin manufacturing or marketing Ampligen on a
commercial basis. Accordingly, the Companynext
12 months. We may need to raise substantial additional funds through additional equity or
debt financing, collaborative
arrangements with corporate partners, off balance sheet financing or from other sources in order to complete the necessary clinical
trials and the regulatory approval processes and begin commercializing
itsAmpligen(R) products. If adequate funds are
not available from operations, as is anticipated, and if the Company is not able
to secure additional sources of financing on acceptable terms, the Company's
business will be materially adversely affected.
Moreover, because of the Company's long-term capital requirements, it may
seek to access the public equity market whenever conditions are favorable, even
if it does not have an immediate need for additional capital at that time. There can be no assuranceassurances that any additional fundingwe will raise adequate
funds from these or other sources, which may have a material effect on our
ability to develop our products. 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 availableadversely affected.
In March, 2003 we executed two agreements with Interferon Sciences, Inc.
("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 October 29, 2003 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 and certain
environmental approvals with regard to the Companysale of the facility. As of the date
hereof, ISI has filed with the Securities and Exchange Commission a preliminary
proxy statement for a special meeting of its stockholders at which approval of
the second acquisition will be sought. ISI has received written environmental
approval from the state of New Jersey.
Due to ongoing delays on terms acceptablethe 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 Company,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 "Legal Proceedings" in "Our Business" below. It is possible that
that this lawsuit could further delay the closing of the second asset
acquisition.
In addition, pursuant to the agreements, we have been paying certain
expenses of ISI. Given ISI's precarious financial condition, if at all. Any
10we stop making
these payments, ISI could declare bankruptcy.
8
This would most likely further delay and possibly jeopardize a closing under the
second asset purchase agreement.
Our failure to complete the acquisition within the 90 day period will be a
technical default of the terms of the October Debentures and, absent consent
from the holders of these debentures for additional funding maytime, most likely would
result in significant dilutionour having to redeem the securities. If we do not receive the
additional funds from the October Debentures as planned and, could involveespecially 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 or all of these 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, 18 or
24 months after the dates of issuance of securities with rights whichthe 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.
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, 18 or 24 months after the dates of issuance of
the guaranteed shares, our financial condition could be adversely affected.
In March 2003 we issued 487,028 shares to Interferon Sciences and, upon
the consummation of the second Interferon Sciences asset acquisition, we will
issue an additional 487,028 shares to Interferon Sciences. In May 2003 we issued
an aggregate of 581,761 shares to two of Interferon Sciences' creditors. We
anticipate, but cannot assure, that we will close the second Interferon Sciences
asset acquisition sometime at the end of December 2003 or in January 2004. We
have guaranteed the value of up to 1,430,817 of these shares, including the
487,028 shares to be issued to Interferon Sciences, to be $1.59 per share or
$2,275,000 in the aggregate on the relevant termination dates. As of December
10, 2003, 931,217 of the 1,430,817 shares have not been sold The termination
dates are senior24 months after the dates of issuance and delivery of the guaranteed
shares to ISI, 18 months after the date of issuance of the guaranteed shares to
GP Strategies and 12 months after the date of issuance of the guaranteed shares
to the American National Red Cross. The guarantee relates only to those of existing
stockholders. The Company may also need additional funding earlier than
anticipated,shares
still held by Interferon Sciences and the Company's cash requirements in general may vary materially
from those now planned, for reasons including, but not limited to, changes intwo creditors on the Company's research and development programs, clinical trials, competitive
and technological advances,applicable
termination date. If, within 30 days after the regulatory process, and higher than anticipated
expenses and lower than anticipated revenues from certainrelevant termination date,
holders of the Company's
clinical trials asguaranteed 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 931,217 shares are still
held on the relevant termination dates, we would be obligated to which cost recovery from participants has been approved.
Uncertainty Regarding Patentspay to
Interferon Sciences and Proprietary Rights.these two creditors an aggregate of $1,480,635. The
Company's successreported last sale price for our common stock on the American Stock Exchange on
December 10, 2003 was $2.38 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 number of guaranteed shares still outstanding on the
relevant termination dates will depend, in large part, on its ability to obtain
patent protection for its productsbe a factor of the market price and to obtainsales volume
of our common stock during the 24, 18 and preserve proprietary
information and trade secrets. The Company does not have exclusive rights12 month periods prior to the manufacturerelevant
termination date.
If the holders of Ampligen. Consequently, the Company's abilityguaranteed 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
9
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 is subjectAmpligen(R) for such disease. If and when we obtain all
rights to the Company's
acquisition ofALFERON N Injection(R), we will need to preserve and acquire
enforceable patents covering theits use of the drug for a particular indication. The Company hasdisease 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
aloneAmpligen(R) and AmpligenAmpligen(R) in combination
with certain other drugs for the treatment of human immunodeficiency virus ("HIV"). The Company hasHIV. We also have been issued
a patentpatents on the use of AmpligenAmpligen(R) in combination with certain other drugs for
the treatment of chronic hepatitisHepatitis B virus, ("HBV") and chronic hepatitisHepatitis C virus, ("HCV") and a
patent which affords protection on the use of AmpligenAmpligen(R) in patients with
myalgic
encephalomyetis, also know as chronic fatigue syndrome ("ME/CFS"). To date, the
Company hasChronic Fatigue Syndrome. We have not yet been issued any patents in the U.S.United
States for the use of AmpligenAmpligen(R) as monotherapy for HBV ora sole treatment for any of the cancers,
which the Company haswe have sought to target. The Company'sWith regard to ALFERON N Injection(R),
Interferon Sciences, Inc. has a patent for natural alpha interferon produced
from human peripheral blood leukocytes and its production process and has
additional patent applications for U.S. patents forpending. We will acquire this patent and related
patent applications if and when we close on the use of Ampligen as
monotherapy for HBV and in the treatment of renal cell carcinoma and lung cancer
are currently pending, although no assurances can be givensecond Interferon Sciences asset
acquisition. We cannot assure you that any of suchthese applications will be
approved. No assurances can be givenapproved or that our competitors will not seek and obtain patents regarding the
use of Ampligenour products in combination with various other agents, (including AZT) for a particular
target indication prior to us. If we cannot protect our patents covering the Company. Although the Company's licenseuse
of our products for a particular disease, or obtain additional pending patents,
we may not be able to manufacture Ampligen is
non-exclusive, the Company believes that the existence of the Company's
treatment indication patents precludes a competitor from selling an identical or
similar product for the same treatment indication without infringing upon the
Company's issued patents. No assurance can be given, however, that the Company's
patent protection will be adequate to prevent the entry into thesuccessfully market of
competitors for all of the Company's treatment indications.
The Company has been unable to secure Orphan Drug designation from the FDA
for treatment of HBV in the U.S. In the event that the Company is unable to
obtain adequate patent protection for the indication, it would be unable to
maintain a competitive advantage over other drug manufacturers which could enter
the market immediately.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. Accordingly, thereThere can be no
assurance that new patent applications relating to the Company'sour 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 other intellectual property rights and that suchrights. Such litigation could consumerequire
substantial resources offrom us and we may not have the 11
Company.financial resources
necessary to enforce the patent rights that we hold. No assurance can be givenmade
that the Company'sour patents will provide competitive advantages for itsour products or will
not be successfully challenged or circumvented by its competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on the Company'sour ability to develop or market itsour products or to obtain or maintain
any competitive position the Companywe may achieve with respect to itsour products. The
Company'sOur
patents also may not prevent others from developing competitive products using
related technology.
Other companies obtaining patents covering
products or processes useful to the Company may bring infringement actions
against the Company.10
There can be no assurance that the Companywe will have the
financial resourcesbe able to obtain necessary tolicenses if
we cannot enforce patent rights itwe may hold. As a result,In addition, the Companyfailure of third
parties from whom we currently license certain proprietary information or may be
required to obtain such licenses in the future, to adequately enforce their
rights to such proprietary information, could adversely affect the value of such
licenses to us.
If we cannot enforce the patent rights we currently hold we may be
required to obtain licenses from others to develop, manufacture or market itsour
products. There can be no assurance that the Companywe would be able to obtain any such
licenses on commercially reasonable terms, if at all. The Company licensesWe currently license
certain patents and proprietary information from third parties, some of which patents and proprietary information may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the patents/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 the Company'sour license.
Certain of the
Company's know-how and technologyThere is no guarantee that our trade secrets will not patentable, particularly the procedures
for the manufacture of the Company's drug product which are carried out
according to standard operating procedure manuals.be disclosed or known by
our competitors.
To protect itsour rights, the
Company has since 1991 requiredwe require certain employees and consultants to
enter into confidentiality agreements with the Company.us. There can be no assurance that
these agreements will not be breached, that the Companywe would have adequate and
enforceable remedies for any breach, or that any trade secrets of the Companyours will not
otherwise become known or be independently developed by competitors.
See "Business - Patent Rights."
DisputesIf our distributors do not market our products successfully, we may not generate
significant revenues or become profitable.
We have limited marketing and Legal Proceedings Relatedsales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to Patent Rights.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 Gentiva Health Services 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 our foreign marketing partners will
be able to successfully distribute our products, or that we will be able to
establish future marketing or third party distribution agreements on terms
acceptable to us, or that the cost of establishing these arrangements will not
exceed any product revenues. The Company's ownership of one of its patents for the use of Ampligen for
the treatment of HIV is the subject of a dispute. Vanderbilt University has
advised the Company of its position that employees of the University were the
inventors of the patent at issue. The Company does not believe the University's
positionfailure to have merit, and if the University filed a claim against the Company,
the Company would vigorously defend againstcontinue these arrangements or to
achieve other such an action. If such a claim were
filed and if such a claim were found to have merit, the loss of the patent at
issue would notarrangements on satisfactory terms could have a materially
adverse effect on us.
No guaranteed source of required materials. If we are unable to obtain the
Company's long range
business since the University wouldrequired raw materials, we may be ablerequired to limitscale back our operations or prevent only the
Company's usestop
manufacturing ALFERON N Injection.
A number of Ampligen in combination with AZTessential materials are used in the treatmentproduction of HIV. In
the event that the University obtained ownershipALFERON N
Injection(R), including human white blood cells, and we have a limited number of
the disputed patent, the
University could license a third entitysources from which to sell Ampligen for a specific
combinational treatment. However, without the Company's consent, the Company
believes that the commercialization process by a third party would require
substantial expenditure to repeat clinical trials and establish a new
manufacturing protocol acceptable to regulatory agencies and would require a
license from the Companyobtain such materials. We do not have long-term agreements
for the usesupply of Ampligen as a componentany of the
combinational requirement. Furthermore, the loss of this patent would not affect
the Company's ability to market Ampligen as a monotherapy for HIV which
treatment the Company has tested and expects to continue to develop. See
"Business - Patent Rights" and "Business - Legal Proceedings."
12
History of Losses; Future Profitability Uncertain.
The Company began operations in 1966 and has reported net profit only from
1985 through 1987. Since 1987, the Company has incurred substantial operating
losses and as of December 31, 1996, the Company's accumulated deficit was
approximately $48 million. The Company has not generated significant revenues
from its products and could incur substantial and increased losses over the next
several years. Such losses may fluctuate significantly from quarter to quarter.such materials. There can be no assurance thatwe can enter
into long-term supply agreements covering essential materials on commercially
reasonable terms, if at all. If we are unable to obtain the Company will ever achieve significant
revenues from product salesrequired raw
materials, we may be required to scale back our operations or become profitable.stop manufacturing
ALFERON N Injection(R). The Company's abilitycosts 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 achieve profitable operations is dependent, in large part, on successfully
developing products, obtaining regulatory approvalsfluctuation depending on a
timely basis,variety of factors beyond our control, including competitive factors, changes in
technology, and making the transition from a researchFDA and development firm to an organization
producing commercial products or entering into joint ventures or other licensing
arrangements. No assurancegovernmental
11
regulations and there can be givenno assurance that the Company's product development
effortswe will be successfully completed, required regulatory approvalsable to obtain such
products and materials on terms acceptable to us or at all.
There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will be
obtained, any products will be manufactured and marketed successfully, or
profitability will be achieved. See "Selected Financial Data," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
No Assurance of Successful Product Development.
The development of new pharmaceutical products is subjectlead to a numbersuccessful transition to
commercial, large-scale production.
Small changes in methods of significant risks. Potential products that appear to be promising at an early
stagemanufacturing may affect the chemical
structure of research or developmentAmpligen(R) and other RNA drugs, as well as their safety and
efficacy. Changes in methods of manufacture, including commercial scale-up may
not reachaffect the market for a numberchemical structure of reasons. Potential products may be found to be ineffective or to have adverse
side effects, fail to receive necessary regulatory clearances, be difficult to
manufacture on a commercial scale, be uneconomical to market or be precluded
from commercialization by proprietary rights of third parties. The Company's
products are in various stages of clinicalAmpligen(R) and pre-clinical development; each
will need to progress through furthercan, among other things,
require new clinical studies and appropriate
regulatory approval processes beforeaffect orphan drug status, particularly, market
exclusivity rights, if any, such products can be marketed. Ampligen
is not expected to be generally available for commercial sale for any indication
for at leastunder the next several years, if at all. Generally, only a small
percentage of potential therapeutic products are eventually approved by the FDA
for commercial sale.Orphan Drug Act. The transition from
limited production of pre-clinical and clinical research quantities to
production of commercial quantities of the
Company'sour 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 the Company's effortsour 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.
See
"Business."
Limited Manufacturing ExperienceWe have limited manufacturing experience and Capacity.
Ampligencapacity.
Ampligen(R) is currently produced only in limited quantities for use in
itsour clinical trials. Totrials 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, the Company'sour products must be manufactured in commercial
quantities in compliance with regulatory requirements and at acceptable costs.
Although the Company has entered into an agreement with
Bioclones Proprietary, Ltd. ("Bioclones"), a biopharmaceutical company which is
associated with South African Breweries, Ltd. (together with Bioclones,
"SAB")(the "SAB Agreement") which provides for the construction of a new
commercial manufacturing facility by a company which is 24.9% owned by the
Company, no assurance can be given as to the timing of such construction, and
therefore the Company may continue to be
13
dependent on third parties for a considerable portion of the manufacturing and
production process. A pilot facility in South Africa is being expanded to
provide a limited supply of Ampligen raw material. While the Company believes
that construction of the commercial facility will begin in 1997, the
construction is dependent upon the regulatory status of Ampligen in various
global markets, and no assurance can be given with respect to when, and if,
construction will occur. To the extent the Company iswe are involved in the production process, the Company'sour current facilities
are not adequate for the production of itsour proposed products for large-scale
commercialization, and the Companywe currently doesdo not have adequate personnel to conduct
commercial-scale manufacturing. The Company intendsWe intend to utilize third-party facilities if
and when the need arises or, if it iswe are unable to do so, to build or acquire
commercial-scale manufacturing facilities. The CompanyWe will need to comply with
regulatory requirements for such facilities, including those of the FDA and HPB
pertaining to current Good Manufacturing Practices ("GMP"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 the Company'sour long-term needs.
Moreover, thereThe purified drug concentrate utilized in the formulation of ALFERON N
Injection(R) is no assurance that
successfulmanufactured 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.
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 of a drug on a limited scale basisour products in compliance with regulatory
requirements in large commercial quantities and at acceptable costs in order for
investigational
use will leadus to a successful transitionbe profitable. We intend to commercial, large-scale production.
Small changes in methods of manufacture may affectutilize third-party manufacturers and/or
facilities if and when the chemical structure of
Ampligen and other such RNA drugs, as well as their safety and efficacy. Changes
in methods of manufacture, including commercial scale-up, can, among other
things, require new clinical studies and affect orphan drug status,
particularly, market exclusivity rights,need arises or, if any, under the Orphan Drug Act. See
"Business - Manufacturing" and "Business - Government Regulation."
Lack of Marketing Experience and Capacity.
The Company currently has limited marketing or sales capability and does
not expect to establish a significant direct sales capability for at least the
next several years. To the extent that the Company determines not, or iswe 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 marketing agreements or third party distribution agreements for
its products, significant additional resourcesmanufacture at costs acceptable to us, our operations will be requiredsignificantly
affected. Also, each production lots of Alferon N Injection(R) is subject to developFDA
review and approval prior to releasing the lots
12
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 sales force and distribution organization. Pursuant to the SAB Agreement, the
corporate partner will be responsible for fielding an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand. Nevertheless,
there can be no assurance that the Company will be able to establish such
arrangements, under the SAB Agreementshelf life of 18 months after having been bottled.
Rapid technological change may render our products obsolete or otherwise, on terms acceptable to the
Company, if at all, or that the cost of establishing such arrangements will not
exceed any product revenues, or that such arrangements will be successful. To
the extent that the Company enters into co-marketing or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties, and there can be no assurance that such efforts will
be successful. See "Business Marketing."
Rapid Technological Change and Substantial Competition.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 the Company,us, as well as substantial marketing, financial and managerial resources,
and represent significant competition for the Company. Acquisition
of, or investments in, competing companies by large pharmaceutical companies
could increase such
14
competitors' financial, marketing and other resources.us. There can be no assurance that
developments by others will not render the Company'sour products or technologies obsolete or
noncompetitive or that the Companywe will be able to keep pace with technological
developments.
Our products may be subject to substantial competition.
Ampligen(R). Competitors have developed or are in the
process ofmay 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 the Company.us. These competing
products may be more effective and less costly than the Company'sour products. In addition,
conventional drug therapy, surgery and other more familiar treatments willmay offer
competition to the
Company'sour products. Furthermore, many of the Company'sour competitors have
significantly greater experience than the Companyus in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, the Company'sour competitors may succeed in
obtaining FDA, and HPB or other regulatory product approvals more rapidly than the
Company. If any of the Company's products receive regulatory approvalsus.
There are no drugs approved for any
indication and the Company commences commercial sales of its products, it will
also be competingsale 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 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 efficiency and marketing capabilities areasthan we have.
Although we believe our principal advantage is the unique mechanism action of
Ampligen(R) on the immune system, we cannot assure that we will be able to
compete.
ALFERON N Injection(R). Many potential competitors are among the largest
pharmaceutical companies in which it has no experience. The Company'sthe 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 possessdevelop products (containing either
alpha or obtain patent protectionbeta interferon or other intellectual property rights that
prevent, limittherapeutic compounds) or otherwise adversely affectother treatment
modalities for those uses. In the Company's ability to develop or
exploit its products. See "Business - Competition."
Dependence upon Qualified and Key Personnel.
BecauseUnited States, three recombinant forms of beta
interferon have been approved for the specialized naturetreatment of the Company's business, the Company's
success will depend, among other things, on its ability to attract and retain
qualified management and scientific personnel. Competition for such personnel is
intense.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 Companytreatment of new indications, we will
be able to continue to
attract or retain such persons. The Company currently depends upon the services
of Dr. William A. Carter, its President, Chief Executive Officer and Chairman of
the Board, Robert E. Peterson, its Chief Financial Officer and Dr. Carol A.
Smith, the Company's Director of Manufacturing and Process Development. Certain
key individuals upon whom the Company currently depends, including but not
limited to the Company's Medical Director, Dr. David Strayer,achieve any significant penetration into those markets. In addition,
because certain competitive products are not employees
of the Company, but instead are employees of an institution with whom the
Company has a collaborative at will arrangement. R. Douglas Hulse, Chief
Operating Officer, is an employee of The Sage Group and serves in his position
under a written agreement. In addition, Dr. Smith and Mr. Peterson do not have
written employment agreements with the Company. The continued availability to
the Company of the services of these individuals is subject to the policies of
the institution which employs them; any change in such policies may have an
adverse effect upon the Company's continued retention of the services of these
individuals. While the Company has an employment agreement with Dr. William A.
Carter, and has secured key man life insurance in the amount of $2 million on
the life of Dr. Carter, the loss of Dr. Carter or other key personnel or of the
services of such employees of collaborators or the failure to recruit additional
personnel as needed could have a materially adverse effect on the Company's
ability to achieve its objectives. See "Business" and "Management."
Dependence on Third Parties.
The Company's strategy for research, development and commercialization is
to rely in part upon collaborative arrangements with third parties in
appropriate circumstances. The Company's strategy has led it to enter into
various arrangements with universities, research
15
groups, licensors and others. The Company is dependent on a numbersource of important
arrangements with third parties. In particular,human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than
13
ALFERON N Injection(R). Currently, our wholesale price on a per unit basis of
ALFERON N Injection(R) is substantially higher than that of the Company utilizescompetitive
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 services of employees of and regularly makes use of certain equipment and
facilities at Hahnemann University and has obtained certain of its technology
for OragenFDA more rapidly than we
do, or developing products through a license with Temple University. Therethat 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 the Company will be able to negotiate additional third party
arrangements or continue any existing arrangements on terms acceptable to the
Company, if at all, or that key researchers upon whom the Company is dependent
will continue to be associated with such universities and/or to work on the
Company's products. The loss of any such existing arrangement or key researcher
could have a materially adverse effect on the Company. The Company may seek a
significant portion of its future capital requirements from arrangements with
pharmaceutical companies or others pursuant to arrangements under which, among
other things, the Company would receive payment for certain research and development activitiesby
others or other medical advances will not render our technology or products
obsolete or non-competitive or result in exchangetreatments or cures superior to any
therapy we develop.
Possible side effects from the use of Ampligen(R) or ALFERON N Injection(R)
could adversely effect potential revenues and physician/patient acceptability of
our product.
Ampligen(R). We believe that Ampligen(R) has been generally well tolerated
with a low incidence of clinical toxicity, particularly given the severely
debilitating or life threatening diseases that have been treated. A mild
flushing reaction has been observed in approximately 15% of patients treated in
our various studies. This reaction is occasionally accompanied by a rapid heart
beat, a tightness of the chest, urticaria (swelling of the skin), anxiety,
shortness of breath, subjective reports of "feeling hot," sweating and nausea.
The reaction is usually infusion-rate related and can generally be controlled by
slowing the infusion rate. Other adverse side effects include liver enzyme level
elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash,
transient visual disturbances, 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 effect potential revenues and physician/patient acceptability of our
product.
ALFERON N Injection(R). At present, ALFERON N Injection(R) is only
approved for future royalty payments. Therethe 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
anyunexpected 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 arrangements will be established on a basis acceptable
to the Company, if at all, or if established, will be scientifically or
commercially successful. The failure to achieve such arrangements on
satisfactory terms could have a materially adverse effect on the Company. The
Company is dependent upon certain third party suppliers for key components of
its proposed products and for substantially all of the production process. The
failure to continue arrangements with such third parties or obtain satisfactory
substitute arrangements could have a materially adverse effect on the Company.
See "Business - Employees and Consultants" and Management - Employment
Agreements."
Impact of Potential Nasdaq Delisting on Marketability of Securities;
Broker-Dealer Sales of the Company's Securities.
The Company's Common Stock and Class A Warrants trade on Nasdaq. The NASD
has rules which establish criteria for the initial and continued listing of
securities on Nasdaq. Under the rules for initial listing, a company must have
at least $4,000,000 in total assets, at least $2,000,000 in total stockholders'
equity, and a minimum bid price of $3.00 per share. For continued listing on
Nasdaq, a company must maintain at least $2,000,000 in total assets, at least
$1,000,000 in shareholders' equity, and a minimum bid price of $1.00 per share.
As of December 31, 1996, the Company had approximately $6,999,000 in total
assets and approximately $5,853,000 in total shareholders' equity.
If the Company were to continue to incur operating losses, it might be
unable to maintain the standards for continued listing and the listed securities
couldproduct's usefulness.
We may be subject to delistingproduct liability claims from Nasdaq. If the Company's securities are
delisted, trading in the delisted securitiesuse of Ampligen(R) or
other of our products which could thereafter be conducted on
the NASD Bulletin Board or in the over-the-counter market in what is commonly
referred to as the "pink sheets." If this were to occur, an investor would find
it more difficult to dispose of the Company's securities or to obtain accurate
quotations as to the price of the Company's securities and it could have an
adverse effect on the coverage of news concerning the Company. In addition, if
the Company's securities were delisted, they would be subject to a rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(accredited investors are generally persons having net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale, as well as
disclosing certain information concerning the risks of purchasing low-priced
securities on the market for such securities. Consequently, delisting, if it
occurred, would adverselynegatively affect the ability of
16
broker-dealers to sell the Company's securities and would make subsequent
financing more difficult.
In order for the Company's securities to be included for trading on Nasdaq,
there must exist market makers and specialists, respectively, to support trading
in such securities. As of the date of this Prospectus, several brokerage firms,
sufficient to satisfy the requirements of Nasdaq are engaged in market making
activities with respect to the securities. There is no obligation on the part of
the brokerage firm to continue to act as market makers. In the event that the
market makers and specialists cease to function as such, public trading in the
securities will be adversely affected or may cease entirely.
Product Liability Exposure.
The Company facesour future operations.
We face an inherent business risk of exposure to product liability claims
in the event that the use of itsAmpligen(R) or other of our products results in
adverse effects. SuchThis liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing suchthese products on behalf ofour behalf. Our future operations may
be negatively effected from the Company.litigation costs, settlement expenses and lost
product sales inherent to these claims. While the Companywe 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 itthis insurance will avoid significantprovide
adequate coverage against product liability exposure. The Company currently
maintain worldwideclaims. A successful product
liability claim against us in excess of our $1,000,000 in insurance coverage. See "Business -
Ampligen Safety Profile."coverage or
for which coverage is not provided could have a negative effect on our business
and financial condition.
14
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 and Potential Legislation.
The Company'shealth care reimbursement for our products.
Our ability to successfully commercialize itsour 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. The CompanyWe cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on the Company. Reimbursement from government
agencies may become more restricted in the future. The Company also understands
that there is increasing political pressure in Canada to limit health care
costs; no assurances can be given that the legislative or regulatory results, if
any, of such pressure will not have an adverse impact on the Company.
Furthermore, thereus. There can be no assurance that third party insurance
companies will allow the Companyus to charge and receive payments for its products sufficient
to realize an appropriate return on itsour investment in product development.
The
Company's potential products represent a new modeThere are risks of therapy, and the Company
expects that the costsliabilities associated with purchasinghandling and administering its products
will be substantial. There can be no assurance that the Company's proposed
products, if successfully developed, will be considered cost effective to
third-party payors, that reimbursement will be available or, if available, that
the timing and amountdisposing of
such payors' reimbursement will not adversely affect
the Company's ability to sell its products on a profitable basis.
Legal Proceedings
In February 1991, Vanderbilt University advised the Company of its position
that University employees were the inventors of an issued U.S. patent regarding
the use of Ampligen in combination with various other agents (including AZT) for
the treatment of HIV infection.
17
While the Company intends to vigorously prosecute or defend against any
potential litigation described above, no assurance can be given as to the
ultimate outcome or the Company's costs in bringing or defending the potential
litigation. See "Risk Factors - Disputes and Legal Proceedings Related to Patent
Rights" and "Business - Legal Proceedings."
Hazardous Materials.
The Company'shazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although the Company
believeswe believe
that itsour 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, the Companywe could be held liable for any damages
that result, and any such liability could be significant. The Company
doesWe do not maintain
insurance coverage against such liabilities.
The Company is
also subject to a varietymarket price of laws and regulations relating to occupational
health and safety, environmental protection, hazardous substance control, and
waste management and disposal. The failure to comply with any of such
regulations could subject the Company to, among other things, third party damage
claims, civil penalties and criminal liability.
Possible Volatility of Stock Price.
Theour stock market in general and biotechnology and pharmaceutical stocks in
particular have from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies.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
Securities, likeprice and trading volume of our stock could fluctuate widely in response to many
factors, including:
o announcements of the stock pricesresults of many
publicly traded biotechnology and smaller pharmaceutical companies, may be
highly volatile. Announcementsclinical 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 regulatory mattersby us or our competitors;
o announcements of new products or new commercial productscontracts by the Companyus or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regardingour
competitors;
15
o actual or potential medicalanticipated variations in our operating results relating to products under development by the Company
or its competitors, regulatory developments in both the U.S. and foreign
countries, public concern asdue to the
safetylevel of pharmaceutical products, economicdevelopment expenses and other external factors, and period-to-period fluctuationsfactors;
o changes in financial results,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 October 31, 2003, the price of our common stock
has ranged from $.74 to $3.35. 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 haveaffect the ability of our stockholders to sell their
shares in the public market at prevailing prices and a significant impact onmore active market may
never develop.
In the past, following periods of volatility in the market price of the
Securities.
Shares Eligible for Future Sale; Registration Rights.
Approximately 9,467,968 outstandingsecurities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares,
primarily those registered herein and in a prior registration statement, are
sold in the public market.
As of December 10, 2003, approximately 595,871 shares of the Company's Common Stock
are restricted securities,our common stock,
constituted "restricted securities" as that term is defined in Rule 144 promulgated under the Securities
Act ("Rule 144"). Absentof 1933. All of these shares are registered herein or in a prior
registration understatement pursuant to agreements between us and the Securities Act orholders of
these shares. In addition, we have registered 10,490,470 shares issuable (i)
upon conversion of approximately 135% of the availabilityOctober Debentures and the July
Debentures; (ii) as payment of an exemption under135% of the Securities Act,interest on all of the Debentures;
(iii) upon exercise of 135% of the October 2008 Warrants, the July 2008 Warrants
and the 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 suchthe shares is subject toin the open market or in privately
negotiated transactions without compliance with the requirements of Rule 144. In general, under Rule 144, subject toTo
the satisfaction of certain other conditions, a person, including an affiliateextent the exercise price of the Company, who has beneficially owned restricted shares of Common Stock for at
least two yearswarrants is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class, if the Common Stock is quoted on NASDAQ or a stock
exchange, the average weekly trading volume during the four calendar weeks
preceding the sale. A person who presently is not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least
three years is entitled to sell such
18
shares under Rule 144(k), without regard to any of the volume limitations
described above. There are approximately 5,722,664 Rule 144(k) restricted shares
currently outstanding. In addition, the Company has issued warrants to purchase
2,080,000 shares of Common Stock ("Rule 701 Warrants") in reliance upon the
provisions of Rule 701 of the Securities Act, pursuant to which, in certain
circumstances, such Rule 701 Warrants may be sold. Certain holders of Common
Stock have executed lock up agreements with the Company. The sale, or
availability for sale, of substantial amounts of the Company's securities in the
public market subsequent to this Prospectus, including the securities issued
pursuant to Rule 144, Rule 701 or otherwise, could adversely affectless than the market price of
the Common Stockcommon 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 impairbe 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 Company'ssecond 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 additional capital through the saleissuance of itsadditional
shares of common stock or other equity securitiessecurities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or debt financing.
The availabilitydelay offers to acquire us.
Provisions of Rule 144our Certificate of Incorporation and Rule 701Delaware 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
16
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 restricted
securitiescommon stock and the
right to the redemption of the Company would be conditioned on, among other factors,shares, together with a premium, prior to the
availabilityredemption of certain public information concerning the Company. See
"Description of Securities."
Current Prospectusour common stock. In this regard, in November, 2002 we adopted a
shareholder rights plan and, State Registration Required to Exercise Class A
Warrants.
The Class A Warrants may not be exercised by the holders thereof unless at
the time of exercise a registration statement covering the shares of Common
Stock issuable upon exercise of the Class A Warrants is effective and such
shares of Common Stock have been registered under the Securities Act and
qualified, or deemed to be exempt, under the securities lawsPlan, our Board of the statesDirectors declared a
dividend distribution of residence of the respective holders of such Class A Warrants. While the Class A
Warrants are being registered herewith, there can be no assurance, however, that
such registration statement will remain current or that such Class A Warrants
will be properly qualified under applicable state securities laws, the failure
of which may result in the exercise of the Class A Warrants and the resale or
other disposition of Common Stock issued upon such exercise becoming unlawful.
See "Description of Securities -- Class A Redeemable Warrants."
Potential Adverse Effect of Redemption of Class A Warrants.
The Class A Warrants may be redeemed by the Company at any time commencing
two years from the date of this Prospectus and ending five years from the date
of this Prospectus, at a redemption price of $.05 per Class A Warrant upon 30
days' prior written notice provided the closing bid price of the Common Stock on
Nasdaq (or another national securities exchange) for 20 consecutive trading days
ending within 10 days of the notice of redemption equals or exceeds $9.00 per
share subject to adjustment. Redemption of the Class A Warrants could force the
holders to exercise the Class A Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Class A
Warrants at the then current market price when they might otherwise wish to hold
the Class A Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Class A Warrants at the time of
redemption. See "Description of Securities -- Class A Warrants."
Exercise of Class A Warrants and Warrants May Have Dilutive Effect on
Market.
The Class A Warrants issued in connection with the IPO will provide, during
their term, an opportunity for the holder to profit from a rise in the market
price, of which there is no assurance, with resulting dilution in the ownership
interest in the Company held by the then present stockholders. Holders of the
Class A Warrants and Warrants most likely would exercise the Class A Warrants
and Warrants and purchase the underlying Common Stock at a time when the Company
may be able to obtain capital by a new offering of securities on terms more
19
favorable than those provided by such Class A Warrants and Warrants, in which
event the terms on which the Company may be able to obtain additional capital
would be affected adversely.
Adverse Consequences Associated with Substantial Shares of Common Stock
Reserved for Issuance Pursuant to Outstanding Warrants, Options and Conversion
of the Series E Preferred.
The Company has reserved an aggregate of up to 18,015,750 shares of Common
Stock for issuance upon exercise of the Class A Warrants, warrants, stock
options and upon conversion of the Series E Preferred. Holders of these Class A
Warrants, warrants, options and Series E Preferred are likely to exercise and
convert them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided by such convertible
securities. Furthermore, while the convertible securities are outstanding, they
may adversely affect the terms on which the Company could obtain additional
capital. Should a significant portion of such convertible securities be
exercised, the resulting increase in the amount of the Common Stock in the
public market may have the effect of reducing the market price thereof.
Conflicts of Interest.
All of the members of the Company's Scientific Advisory Board are employed
other than by the Company and may have commitments to or consulting or advisory
contracts with other entities (which may include competitors of the Company)
that may limit their availability to the Company. While each member of the
Company's Scientific Advisory Board does execute a non-disclosure and
non-competition agreement with respect to proprietary data that he or she
receives from the Company, there can be no assurance that these agreements will
absolutely protect the Company from the results of such data being revealed,
accidentally or otherwise, by a member of its Scientific Advisory Board. See
"Business - Scientific Advisory Board."
Absence of Dividends.
The Company intends to retain future earnings, if any, to provide funds for
the operations of its business and, accordingly, does not anticipate paying any
dividends on its Common Stock in the reasonably foreseeable future. See
"Dividends."
20
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996. This table should be read in conjunction with the
Consolidated Financial Statements and related Notes appearing elsewhere in this
Prospectus.
December 31, 1996
-----------------
(in thousands except
share data)
(unaudited)
Notes Payable and Stockholder Loans
(including accrued related interest) $ 0
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 5,000,000 shares authorized;
5,000 issued and outstanding **
Common Stock, $.001 par value, 50,000,000 shares authorized;
16,160,205 issued and outstanding 16
Additional paid-in capital 54,080
Accumulated deficit (48,243)
Total stockholders' equity 5,853
Total capitalization 5,853
- ----------
** Less than $100
(1) Excludes: (i) 460,798 shares of Common Stock reserved for issuance pursuant
to the Company's 1990 Stock Option Plan under which options to purchase
234,953 shares have been granted; (ii) 92,160 shares of Common Stock
reserved for issuance pursuant to the Company's 1992 Stock Option Plan
under which no options or other rights to purchase shares have been
granted; (iii) 138,240 shares of Common Stock reserved for issuance
pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to
which no rights to purchase shares have been granted; (iv) 3,213,797 shares
of Common Stock reserved for issuance pursuant to certain outstanding
warrants with an average weighted exercise price of $3.53; (v) 2,080,000
warrants to purchase Common Stock of the Company issued to officers,
directors and consultants of the Company in reliance upon Rule 701 of the
Securities Act, at an exercise price of $3.50 per share ("Rule 701
Warrants"); (vi) 2,750,000 warrants to purchase Common Stock at an exercise
price of $1.75 per share issued in accordance with the terms of the 1995
Standby Financing Agreement; (vii) 462,000 Units underlying the Option,
462,000 shares of Common Stock underlying the Units included in the Option,
462,000 Class A Warrants underlying the Option, and 462,000 shares of
Common Stock underlying the Class A Warrants underlying the Units included
in the Option. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Management--1992 Stock Option Plan,"
"--1990 Stock Option Plan" and "--Employee Stock Purchase Plan,"
"Description of Securities--Warrants"
21
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
The selected financial data should be read in conjunction with the
Consolidated Financial Statements as of December 31, 1995 and 1996 andone Right for each of the years in the three year period ended December 31, 1996, the related notes
and the independent auditors' report. The consolidated statements of operations
data for the years ended December 31, 1992 and 1993, and the consolidated
balance sheet data at December 31, 1992, 1993 and 1994 are derived from audited
Consolidated Financial Statements not included in this Prospectus.
December,31
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
Consolidated Statements of
Operations Data:
Revenues
Research and Development $ -- $ 48 $ 76 $ 66 $ 32
License fee -- -- 100 2,900 --
------------ ------------ ------------ ------------ ------------
Total Revenues -- 48 176 2,966 32
Cost and expenses:
Research and development 4,734 2,119 1,638 1,029 1,902
General and administrative 2,825 3,347 2,618 2,880 3,024
------------ ------------ ------------ ------------ ------------
Total costs and expenses 7,559 5,466 4,256 3,909 4,926
Debt conversion expenses -- (1,215) (10) (149) --
Net interest income (expense) (322) (1,069) (1,043) (748) 339
------------ ------------ ------------ ------------ ------------
Net loss $ (7,881) $ (7,702) $ (5,133) $ (1,840) $ (4,554)
============ ============ ============ ============ ============
Net loss per share
Weighted average -- -- $ (.44)(1) $ (.13)(1) $ (.29)
Number of shares outstanding
used in computing net loss per
share (1) -- -- 11,536,276(1) 14,199,701(1) 15,718,136
(1) Computed on a proforma basis described in Note 2(e) to the Consolidated
Financial Statements.
22
December 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
Consolidated Balance
Sheet Data:
Current assets $ 2,282 $ 6 $ 64 $ 11,354 $ 5,385
Current liabilities 2,750 10,599 13,043 8,279 1,146
Total assets 4,415 1,916 1,651 12,700 6,999
Long-term obligations 6,950 30 --- --- ---
Redeemable preferred stock 2,536 2,866 3,238 --- ---
Accumulated deficit (28,869) (36,571) (41,704) (43,544) (48,243)
Stockholders' equity (deficit) $ (7,821) $ (11,579) $ (14,630) $ 4,421 $ 5,853
23
PRICE RANGE OF COMMON STOCK
The Company's Common Stock and Class A Warrants are traded on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") under
the symbols HEMX and HEMXW, respectively. The Company's Units, each Unit
consisting of one share of Common Stock and one Class A Warrant (the "Units"),
traded on Nasdaq during the period from November 2, 1995 to
August 16, 1996, at
which time it was delisted. The Company's Common Stock and Class A Warrants were
listed for trading on Nasdaq on July 12, 1996. The following table sets forth
the high and low bid prices for the Company's Units for the periods indicated as
reported by the NASDAQ. On April 4, 1997, the high and low bid price for the
Common Stock was $2.90625 and $2.8125, respectively. The high and low bid price
for the Class A Warrants on such date was $.71875 and $.71875, respectively.
UNITS (HEMXU)
High Low
---- ---
Time Period:
November 2, 1995 through
December 31, 1995
$ 8.62 $ 2.00
January 1, 1996 through
March 31, 1996
3.68 1.750
April 1, 1996 through
June 30, 1996
6.12 2.687
July 1, 1996 through
August 15, 1996 (Trading 4.18 2.188
ceased on August 16, 1996)
COMMON STOCK (HEMX)
High Low
---- ---
Time Period:
July 15, 1996 through
September 30, 1996
$ 5.1 $ 1.625
October 1, 1996 through
December 31, 1996
4.81 2.063
24
WARRANTS (HEMXW)
High Low
---- ---
Time Period:
July 15, 1996 through
September 30, 1996
$ 1.875 $ 0.500
October 1, 1996 through
December 31, 1996
1.813 0.625
On March 19, 1997, there were approximately 355 holdersstockholders of record at the close of business on November 29, 2002. Each Right
initially entitles holders to buy one unit of preferred stock for $30.00. The
Rights generally are not transferable apart from the common stock and will not
be exercisable unless and until a person or group acquires or commences a tender
or exchange offer to acquire, beneficial ownership of 15% or more of our common
stock. However, for Dr. Carter, our chief executive officer, who already
beneficially owns 12.9% of our common stock, the Plan's threshold will be 20%,
instead of 15%. The Rights will expire on November 19, 2012, and may be redeemed
prior thereto at $.01 per Right under certain circumstances.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the Company's Common Stock. The numberdate 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
record holders dounanticipated events. New factors emerge from time to time, and it is not
include holders
whose securities are heldpossible 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 street name.
The Company has never paid any dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
The holders of its Series E Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board of Directors.
USE OF PROCEEDS
The Company intends to utilize the proceeds received from the exercise of
the C Warrants, R Warrants and Series E Warrants of $2,608,659 if all such
warrants are exercisedforward-looking statements. Our research in full, for general corporate and working capital
purposes. There can be no assurance that any of the C Warrants, R Warrants and
Series E Warrants will be exercised. The foregoing represents the Company's best
estimate of its use of proceeds generated from the possible exercise of C
Warrants, R Warrants and Series E Warrants based upon the current state of its
business operations, its current plans and current economic and industry
conditions. Any changes in the use of proceeds will be made at the sole
discretion of the Board of Directors of the Company.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related notes contained elsewhere in
this Prospectus.
GENERAL
The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support products.
The Company's business was redirected in the early 1980's to the development of
nucleic acid pharmaceutical technology and the commercialization of RNA drugs.
The Company was reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp. in 1991 and to Hemispherx BioPharma, Inc. in June 1995.
The Company has three subsidiaries-BioPro Corp., BioAegean Corp. and Core
BioTech Corp., all of which were incorporated in Delaware in 1994. The Company
has reported net profit only from 1985 through 1987. Since 1987, the Company has
incurred substantial operating losses. Prior to completing an Initial Public
Offering ("IPO") in November 1995, the Company financed operations primarily
through the private placement of equity and debt securities, equipment lease
financing, interest income and revenues from licensing and royalty agreements.
The IPO completed in November 1995 produced net proceeds of approximately
$16,000,000. These funds plus the conversion of $3,447,000 in redeemable
preferred stock to equity at the time of the IPO improved stockholders equity by
some $19,000,000. The cash proceeds from the IPO were used to retire debt and
other liabilities and establish a fund for future operations.
The development of the Company's products has required and will continue to
require the commitment of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials necessary to bring
pharmaceutical products to market and establish commercial production and
marketing capabilities. Accordingly, the Company will need to raise additional
funds through additional equity or debt financing, collaborative arrangements
with corporate partners, off balance sheet financing or from other sources in
order to complete the necessary clinical trials and the regulatory approval
processes and begin commercializing its products.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale into
certain nonpharmaceutical specially consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.
During fiscal 1994 and 1995, the Company focused on negotiating and
executing the SAB Agreement, exploring potential partnerships to pursue
additional clinical trials with special emphasis on the HBV disease indication,
restructuring certain of its outstanding debt, conducting the 1994 Common Stock
Financing and the Bridge Financing and completing its IPO. In 1996, the Company
reviewed and restructured the Ampligen manufacturing process. Second sources
26
were established to procure raw materials, lyophilization services and release
testing. In the areas of research and clinical efforts
the Company established
with the FDA a roadmap of research and clinical studies to be completed. These
studies include animal toxicity and clinical studies in HIV and CFS. One HIV
clinical study was approved by the FDA and started in late 1996. Certain animal
toxicity studies began. In addition, the Company shipped the initial inventory
of Ampligen to Canada to use in its cost recovery program there.
The Company expects tomay continue its research and clinical efforts for the next several years with some benefit of certain revenues from cost recovery
programs, notably in Canada and Belgium. Beginning in October, 1993, limited
revenues were initiated in Belgium from sales under the cost recovery provision
for conducting clinical tests in ME/CFS. The Company expectswe may continue to continue
incurringincur losses over the next several years due
to clinical costs which are
only partially offset by revenues and potential licensing fees. Suchincurred 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 revenues.cost recovery treatment revenues in Europe, Canada and in
the United States.
USE OF PROCEEDS
Proceeds, if any, from stockholders exercising some or all of the Warrants
will be used to fund our research and development efforts, working capital and
possible acquisitions.
DIVIDEND POLICY
We have not paid any cash dividends since our inception and do not
anticipate paying cash dividends in the foreseeable future.
17
PRICE RANGE OF COMMON STOCK
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 sales prices for our Common Stock for the last two fiscal
years and the first two quarters of fiscal 2003 as reported by the AMEX.
COMMON STOCK High Low
---- ---
Year Ended December 31, 2001
First Quarter $5.75 $3.01
Second Quarter 7.15 3.96
Third Quarter 6.85 3.89
Fourth Quarter 5.29 3.41
Year Ended December 31, 2002
First Quarter 4.76 3.45
Second Quarter 3.97 2.50
Third Quarter 2.63 .80
Fourth Quarter 2.86 1.40
Year Ending December 31, 2003
First Quarter 2.20 1.33
Second Quarter 3.15 1.33
Third Quarter 2.35 1.85
On December 10, 2003, the closing sale price of our common stock as
reported on the AMEX was $2.38 per share. As of December 10, 2003, there were
approximately 260 holders of record of our common stock not including holders in
street name. We estimate that there are some 3,000 holders if you include shares
held in street name.
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected historical consolidated financial information presented as of
December 31, 1998, 1999, 2000, 2001 and 2002 and for each of the five years
ended December 31, 2002 was derived from our audited consolidated financial
statements. Our selected historical consolidated financial information presented
as of September 30, 2002 and 2003 and for the nine month periods ended September
30, 2002 and 2003 are unaudited. Operating results for the nine months ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for fair presentation have been included.
This information should be read in conjunction with the historical
financial statements and related notes included herein, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
18
(in thousands except share and per share data)
Consolidated
Statements Year ended December 31, Nine Months Ended
of Operations ---------------------------------------------------------------------- September 30,
Data: -------------------------
1998 1999 2000 2001 2002 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
Revenues:
Clinical $ 401 $ 678 $ 788 $ 390 $ 341 $ 263 $ 118
Treatment
Programs
License Fees -- -- -- -- 563 563 --
Income
Sale of Products -- -- -- -- -- -- 236
-----------------------------------------------------------------------------------------------------
Total Revenues 401 678 788 390 904 826 354
Cost & Expenses:
Production Costs 224
Research & 4,562 4,737 6,136 5,780 4,946 3,732 2,574
Development
General & 3,753 8,721 3,695 3,412 2,015 2,447 2,550
Ad-ministrative(1)
Total Cost and 8,315 13,458 9,831 9,192 6,961 6,179 5,348
Expenses
Interest and 590 482 572 284 103 90 61
Other Income
Interest Expense -- -- -- -- -- -- (5,795)
Other Expense -- -- (81) (565) (1,470) (750) (0)
Net Loss $ (7,324) $ (12,298) $ (8,552) $ (9,083) $ (7,424) $ (6,013) $ (10,728)
Basic and $ (.32) $ (.47) $ (.29) $ (.29) $ (.23) $ (.19) $ (.31)
Diluted
Loss Per Share
Basic and 26,380,351 31,443,208 32,083,957
Diluted
Weighted Average 22,724,913 29,251,846 32,095,776 34,210,987
Shares
Outstanding
19
Other Cash Flow
Data
Cash Used in
Operating $ (5,853) $ (6,990) $ (8,074) $ (7,281) $ (6,409) $ (4,927) $ (4,926)
Activities
Capital (151) (251) (171) -- -- -- --
Expenditures
Balance Sheet Data: December 31, September 30,
--------------------------------------------------------------- ----------------------
1998 1999 2000 2001 2002 2002 2003(2)(3)
------- ------- ------- ------- ------- ---------- ----------
(unaudited) (unaudited)
Working Capital $12,587 $ 9,507 $ 7,550 $ 7,534 $ 2,925 $ 3,484 $ 5,993
Total Assets 16,327 14,168 13,067 12,035 6,040 6,863 11,992
Shareholders' 15,185 12,657 11,572 10,763 3,630 4,983 7,360
Equity
(1) General and Administrative expenses include stock compensation expense
totaling $795, $4,618, $397, $673, $132, $132 and $0 for the years ended
December 31, 1998, 1999, 2000, 2001, and 2002 and for the nine months
ended September 30, 2002 and 2003, respectively.
(2) For information concerning recent acquisitions of certain assets of
Interferon Sciences, Inc. ("ISI") and related financing see notes 8 and 9
to our consolidated financial statements for the nine months ended
September 30, 2003 and notes 1 and 16 to our consolidated financial
statements for the year ended December 31, 2002, contained elsewhere in
this prospectus.
(3) In accounting for the March 12, 2003 and July 10, 2003 issuances
($5,426,000 each) of 6% Senior Convertible Debentures and related embedded
conversion features and warrant issuances, we recorded debt discounts of
approximately $9 million, which in effect reduced the carrying value of
the debt to zero. Excluding the application of related accounting
standards, our debt outstanding as of September 30, 2003 totaled
approximately $3.9 million. For additional information refer to note 9 to
our consolidated financial statements for the nine months ended September
30, 2003 and note 16 to our consolidated financial statements for the year
ended December 31, 2002, contained elsewhere in this prospectus.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and related notes included elsewhere in this prospectus. This discussion and
analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of a number of factors
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
20
Background
In the course of almost three decades, we have established a strong
foundation of laboratory, pre-clinical data with respect to the development of
nucleic acids to enhance the natural antiviral defense system of the human body
and the development of therapeutic products for the treatment of chronic
diseases. Our strategy is to obtain the required regulatory approvals which will
allow the progressive introduction of Ampligen(R) (our proprietary drug) for
treating Myalgic Encephalomyelitis/Chronic Fatigue Syndrome ("ME/CFS"), HIV,
Hepatitis C ("HCV") and Hepatitis B ("HBV") in the U.S., Canada, Europe and
Japan. Ampligen(R) is currently in phase III clinical trials in the U.S. for use
in treatment of ME/CFS and is in Phase IIb Clinical Trials in the U.S. for the
treatment of newly emerging multi-drug resistant HIV, and for the induction of
cell mediated immunity in HIV patients that are under control using potentially
toxic drug cocktails.
Our proprietary drug technology utilizes specifically configured
ribonucleic acid ("RNA") and is protected by more than 350 patents worldwide,
with over 60 additional patent applications pending to provide further
proprietary protection in various international markets. Certain patents apply
to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in combination with certain other drugs. Some compositions of matter
patents pertain to other new RNA compounds, which have a similar mechanism of
action.
We have obtained from Interferon Sciences, Inc. ("ISI") all of its raw
materials, work-in-progress and finished product ALFERON N Injection, together
with a limited license to sell ALFERON N Injection, a natural alpha interferon
that has been approved for commercial sale for the intralesional treatment of
refractory or recurring external condylomata acuminata ("genital warts") in
patients 18 years of age or older, in the United States. We are under contract
to purchase from ISI the balance of ISI's rights to its product as well as ISI's
production facility. We intend to market the ALFERON N Injection in the United
States through sales facilitated via third party marketing agreements.
Additionally, we intend to implement studies testing the efficacy of ALFERON N
Injection in multiple sclerosis and other chronic viral diseases.
Result of Operations
Nine months ended September 30, 2003 versus Nine Months ended September 30, 2002
During the nine months ended September 30, 2003, we have 1) acquired
certain assets and patent rights to ALFERON N Injection(R), 2) privately placed
the March Debentures and the July Debentures with an aggregate maturity value of
$10,852,000 (gross proceeds of $9,300,000), 3) continued our efforts to develop
Ampligen(R) for the treatment of patients afflicted with ME/CFS and HIV, 4)
activated the New Brunswick production facility to process doses of Alferon N
and 5) produced 21,000 doses of Alferon now in the final FDA approval process.
Net Loss
In the nine months ended September 30, 2003, we recorded $10,728,000 or
$.31 per share in net losses. In the same period in 2002, we had net losses of
$6,013,000 or $.19 per share. The losses in 2003 includes $5,795,000 in non-cash
interest charges relating to our March Debentures and July Debentures. These
non-cash interest charges account for 54% of our net losses in the nine months
ended September 30, 2003. In addition, our losses during this period include
$671,000 in expenses relating to our new Alferon division. Solely for comparison
purposes, excluding our 2003 losses for these two factors, our losses were
$4,262,000 in 2003 compared to $6,013,000 in 2002 or a reduction in the amount
of $1,751,000.
21
Revenues
Revenues were $354,000 in the first nine months of 2003 compared to
revenues of $826,000 in the first nine months of 2002. Revenues in 2002 included
$563,000 of license fee income which was not repeated during this period in
2003. Revenues in 2003 include $118,000 in ME/CFS Cost Recovery Income and
$236,000 in net sales of ALFERON N.
Cost and Expenses
Overall costs and expenses were lower in the nine months ended September
30, 2003 by approximately $836,000 compared to the first nine months of 2002.
Total costs and expenses in 2003 were $5,348,000 versus $6,179,000 in 2002. In
2003, our costs consisted of $895,000 for ALFERON N Injection(R) related
expenses, $2,574,000 for Ampligen(R) research and development costs and
$1,879,000 for general and administrative expenses, which includes a bonus of
$197,000 issued to Dr. Carter in the quarter ended September 30, 2003 for
services performed during 2001 and 2002.
Production costs were $224,000 in the first nine months of 2003. These
costs reflect approximately $117,000 for the cost of sales of ALFERON N
Injection(R) during the period of April 1, 2003 through September 30, 2003. In
addition, we recorded $107,000 of production costs at the New Brunswick
facility. We ramped up the facility in April, 2003 and started production on
three lots of work in process inventory.
Research and Development
Research and Development costs of $2,574,000 in the nine months ended
September 30, 2003 compared to research and development costs of $3,732,000 in
the first nine months of 2002. 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 conducting clinical trials involving patients with ME/CFS and
patients with HIV. Our research and development direct costs are $1,158,000
lower in 2003 due to reduced costs associated with the development of
Ampligen(R) to treat ME/CFS patients. In the first nine months of 2002, our
ME/CFS Phase III clinical trial was in full force and effect therefore
increasing our manufacturing and clinical support expenses during that period.
AMP 516
Over 230 patients have participated and/or participating in our ME/CFS
Phase III clinical trial. Approximately 16 patients are still in the randomized
phase of the clinical process. We expect to complete the randomized placebo
controlled phase of this study by the first quarter of 2004. At that time we
will complete data collection and start the data analysis process with the
expectation of filing an NDA (New Drug Application) with the FDA by the second
quarter 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
variable, we are unable to project when material net cash inflows are expected
to commence from the sale of Ampligen(R).
22
AMP 719/720
Our efforts in using Ampligen(R) to treat HIV patients currently consist
of conducting two clinical trials. 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 the Company's lead experimental
agent, Ampligen(R), a double stranded RNA drug acting potentially both as an
immunomodulator and antiviral. Patients, who have completed at least 9 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 that 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, the Company may obtain revenues from its HIV
treatment indications.
Alferon N Injection(R)
Since acquiring the right to manufacture and marketing of 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 54,000 vials (doses) at various stages
of the manufacturing process. On August 8, 2003, we released the first lot of
product to Abbott Laboratories for bottling and realized some 21,000 vials of
ALFERON N. Which are now in the final review process. Preliminary work has
started on completing the second lot of approximately 17,000 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 16,000 vials
now in very early stages of production.
Our marketing and sales plan for ALFERON N consists of engaging sales
force contract organizations and supporting 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 of
recurring external general warts in patients of age 18 or older and to assist
primary prescribers in expanding their practice.
23
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.
General and Administrative Expenses
General and Administrative expenses ("G&A") were $2,550,000 during the
nine months ended September 30, 2003, which includes $671,000 of expenses
relating to our new Alferon Division. Excluding the Alferon expenses, our G&A
costs were $1,879,000 compared to $2,447,000 of expenses in 2002. This decrease
of $568,000 is primarily due to lower legal expenses and lower public relation
costs. In the nine months ended September 30, 2002 we incurred significant legal
costs associated with the Asensio lawsuit and trial. See "Legal Proceeding" for
more details.
Years Ended December 31, 1996 v. 19952002 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 for the year ended ("ftye") 2001. Per share
losses ftye 2002 was 23 cents versus a per share loss of 29 cents ftye 2001.
This year to year decrease in losses of $1,659,000 is primarily due to higher
revenues and lower costs in 2002. Revenues were up $514,000 in 2002 and total
expenses were down by $2,231,000 offset by a write down in the carrying value of
our investments in the amount of $1,366,000 for a net cost decrease of $865,000.
Revenues
Our revenues have come from our ME/CFS cost recovery treatment programs
principally underway in the U.S., Canada and Europe. These clinical programs
allow us to provide Ampligen(R) therapy at our cost to severely debilitated
ME/CFS patients. Under this program the patients pay for the cost of Ampligen(R)
doses infused. These costs total approximately $7,200 for a 24 weeks treatment
program. Revenues from cost recovery treatment programs totaled some $341,000 in
2002. In 2001, these revenues were $390,000 or 14% higher than 2002 revenues. We
expected revenues in the U.S. to decline due to the focus of our clinical
resources on conducting and completing the AMP 516 ME/CFS Phase III clinical
trial as well as the start up of the AMP 719 and AMP 720 HIV clinical trials.
The Companyclinical 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 (approximately $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
were $904,000 compared to revenues of $390,000 in 2001.
Revenues for non-refundable license fees are recognized under the
performance method. This method recognizes revenue to the extent of performance
to date under a licensing agreement. In computing earned revenue, it considers
only the amount of non-refundable cash actually received to date.
24
This method considers future payments to be contingent and thus ignores the
possibility of future milestone payments when computing the amount of revenue
earned in a current period.
Research and Development costs
Our 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.
Ampligen is currently 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. 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.
AMP 516
In the first quarter of 2003, the AMP 516 clinical trial was fully
enrolled with more than the targeted 230 patients in order to potentially
compensate for "drop outs". 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 in the first or second quarter of 2004.
The date of potential commercial approval depends on whether we receive Fast
Track Status or not by 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.
Expenses related to the ME/CFS Phase III are expected to decrease in 2003
because of fewer patients to be treated as the trial nears completion. The
remaining patients are treated at only a few investigational sites, which makes
data collection and monitoring more cost effective. Accordingly, the estimated
cost for completion of the study and data analysis is estimated to be
approximately $500,000 to $600,000. In the event significant numbers of patients
were to prematurely leave the clinical trial, any potential FDA approval of an
NDA could be indefinitely delayed which would have a materially adverse effect
on our ability to receive potential revenues in the next 2-3 years from this
therapeutic indication.
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).
25
AMP 719 and AMP 720
As of December 2002, approximately 55 patients have been enrolled in both
studies combined and they are 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. Under optimal
conditions, the out of pocket cost of completing the studies could be
approximately $3 million. The rate of enrollment depends on patient availability
and on other products being in clinical trials for the treatment of HIV, because
there could be 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 by the FDA, which will decide when
completion of the ongoing Phase IIb is appropriate and whether a Phase III trial
will have to be conducted or not. In case of 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 HIV treatment indications.
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 were $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
non-cash charges 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 "Our Business" 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 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 their current proposed equity
offerings. Please see "Research And Development/Collaborative Agreements" in
"Our Business" for more details on these transactions.
26
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 "Our Business" for more
details on these transactions.
Other Income/Expense
Interest and other income totaled $103,000 ftye 2002 compared to $284,000
recorded ftye 2001. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities, which earned much lower interest income in 2002.
Years Ended December 31, 2001 vs. 2000
Net loss
We reported a net loss of $4,554,489 in 1996approximately $9,083,000 for the year ended
December 31, 2001 versus a net loss of $1,839,840approximately $8,552,000 for the year
2000. The increase in 1995. Several factors contributedlosses of $531,000 in 2001 was basically due to lower
ME/CFS cost recovery treatment revenues and interest income. In addition we
recorded a non-operating, non-cash charge of $485,000 with respect to our
investments in unconsolidated affiliates. This amount represents the unamortized
balance of Goodwill included in the investments. Overall operating expenses in
2001 were $639,000 lower than operating expenses experienced in 2000. Our loss
per share was $0.29 in 2001 and 2000.
Revenues
At this time, (prior to the increased lossacquisition of $2,714,649.ALFERON N Injection(R)) our
revenues come from our ME/CFS cost recovery treatment programs principally
underway in the U.S., Canada and Europe. These clinical programs allow us to
provide Ampligen(R) therapy at our cost to severely debilitated ME/CFS patients.
Under this program the patients pay for the cost of Ampligen(R) doses infused.
These costs total approximately $7,200 for a 24 weeks treatment program.
Revenues from cost recovery treatment programs totaled some $788,000 in 2000. In
2001, these revenues declined by $398,000 or 51%. We expected revenues in the
U.S. to decline due to the focus of our clinical resources on conducting and
completing the AMP516 ME/CFS Phase III clinical trial as well as the start up of
the AMP 719 and AMP 720 HIV clinical trials. Revenues from the European cost
recovery treatment programs were down $2,933,866lower than expected primarily due to our
European investigators spending a great deal of time in reviewing and analyzing
the clinical data collected in the treatment of some 150 patients in Belgium.
The clinical data collected from treating patients under the cost recovery
treatment programs will augment and supplement the data collected in the U.S.
Phase III ME/CFS trial.
27
Research and Development Costs
As previously noted, our research and development is primarily directed at
developing our lead product, Ampligen(R), as a therapy for 1996use in treating
various chronic illnesses as 1995 included $2,900,000well as cancer. In 2000 and 2001, most of licensing fees recordedthis
effort was directed toward conducting and supporting clinical trials involving
patients affected with ME/CFS. Our research and development direct costs were
$5,780,000 in connection with SAB/Bioclones agreement. Research2001 compared to $6,136,000 spent in 2000. The lower research and
development costs increased $873,665 in 1996 due primarily to increased efforts
on the Canadian and Belgium clinical programs. General and administrative
expenses of $3,023,590 in 1996basically reflect the benefitnet sum of less costs related to lower
cost recovery treatment revenues and lower expenses related to the ME/CFS
clinical trials offset by increased purchases of polymers and increased expenses
relating to the HIV trials initiated in 2001. As to be expected, costs related
to the cost recovery treatment programs were down approximately $275,000 due to
lower revenues recorded in 2001. Also expenses relating to the ME/CFS Phase III
clinical trial were down some $863,000 in 2001 versus 2000 due to fewer patients
being treated in the cost-intensive segment of the program as the clinical trial
nears completion. This clinical trial is a one time gainmulticenter, placebo-controlled,
randomized, double blind study to evaluate the efficacy and safety of treating
230 ME/CFS patients with Ampligen(R). These lower costs relating to our ME/CFS
programs were partially offset by an increase in polymer purchase in 2001 in the
amount of $318,757 resulting$317,000 and an increase due to spending on the new HIV clinical
trials now underway. The polymer purchase increase was needed to boost our on
hand inventory for the production of Ampligen(R). The HIV clinical trials were
initiated to evaluate the use of Ampligen(R) in concert with other antiviral
drugs in treating patients severely afflicted with AIDS. We expect levels of
these clinical trials to continue throughout 2003. (See "business" for more
information on our research and development for programs.)
General and Administrative Expenses
Excluding stock compensation expense, general and administrative expenses
were approximately $2,741,000 in 2001 versus $3,298,000 in 2000. The decrease in
expense is primary due to lower professional fees in 2001. All other general and
administrative expenses were slightly less than recorded in 2000. Stock
compensation expenses were $671,000 or some $274,000 higher than recorded in the
year 2000. The compensation reflects the imputed non-cash expense recorded to
reflect the cost of warrants granted to outside parties for services rendered to
us.
Equity Loss-Unconsolidated Affiliates
During the fourth quarter of 2001, we recorded a non-cash charge of
$485,000 with respect to our investment in CIMM. The amount represents the
unamortized balance of goodwill included as part of our investment. This was a
result of management's determination that CIMM's operations had not yet evolved
to the point where our full carrying value of its investment could be supported
based on their financial position and operating results.
Other Income/Expense
Interest and other income of $284,000 in 2001 was lower than the $572,000
recorded in 2000. Significantly lower interest rates on money market accounts
and lower cash available for investment basically account for the difference.
All funds in excess of our immediate need are invested in short term high
quality securities, which earned much lower interest income in 2001.
Liquidity and Capital Resources
Cash used in operating activities for the nine months ended September 30,
2003 was $4,926,000. Cash provided by financial activities for nine months ended
September 30, 2003 amounted to $7,568,000,
28
substantially from proceeds from debentures (see below). As of September 30,
2003, we had approximately $5,100,000 in cash and cash equivalents and short
term investments and $141,000 in accounts receivable. We believe that these
funds plus the net proceeds of approximately $3.2 million from the forgivenessrecently
placed October Debentures (inclusive of the $1.55 million of proceeds held back
pending the acquisition of the ISI facility), the projected revenue from the
acquisition of the ALFERON N Injection(R) business and additional financing of
$2.0 million will be sufficient to meet our operating requirements including
debt service during the twelve months subsequent to September 30, 2003. The need
for additional financing assumes that the debenture holders do not continue to
convert debt into common stock and that we will need cash to repay the debt as
scheduled. If the debenture holders continue to convert debt, we may not need
additional funds. Also, sales of ALFERON N Injection(R) could be greater than
expected which will reduce our need for additional financing during the twelve
months subsequent to September 30, 2003. 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 materially and 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").
All clinical trial drug supplies produced and acquired in 2003 have been
fully expensed although some costs are expected to be recovered under the
expanded access cost recovery programs authorized by FDA and regulatory bodies
in other countries. Our operating cash "burn rate" should decline as the AMP 516
ME/CFS clinical trial nears completion and the cost of European market
development activity is reduced.
On March 12, 2003, we issued an aggregate of $5,426,000 in principal
amount of 6% Senior Convertible Debentures due January 2005 (the "March
Debentures") and an aggregate of 743,288 warrants to two investors in a private
placement for aggregate gross proceeds of $4,650,000. 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 will be released to us if, and only
if, we acquired ISI's facility within a set timeframe. Although we have not
acquired ISI's facility yet, these funds were released to us in June 2003. The
March Debentures mature on January 31, 2005 and bear interest at 6% per annum,
payable quarterly in cash or, subject to satisfaction of certain lease obligationsconditions,
common stock. Any shares of common stock issued to the investors as payment of
interest shall be valued at 95% of the average closing price of the common stock
during the five consecutive business days ending on the third business day
immediately preceding the applicable interest payment date. Pursuant to the
terms and conditions of the March Debentures, we have pledged all of our assets,
other than our intellectual property, as collateral and are subject to comply
with certain financial and negative covenants, which include but are not limited
to the repayment of principal balances upon achieving certain revenue
milestones.
The March Debentures are convertible at the option of the investors at any
time through January 31, 2005 into shares of our common stock. The conversion
price under the 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 will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection. All of these warrants have been exercised.
29
We entered into a Registration Rights Agreement with the investors in
connection with the restructuringissuance of the Company'sMarch 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.
On July 10, 2003, we issued an aggregate of $5,426,000 in principal office lease.
Excluding this one time gain, generalamount
of 6% Senior Convertible Debentures due July 31, 2005 (the "July Debentures")
and administrative expenses in 1996
exceeded related expenses in 1995 by $461,904. This increase can mostly be
attributed to stock compensation expensean aggregate of $634,344 and certain consulting
fees.
Debt conversion costs of $149,384 and interest expense of $843,148 incurred
in 1995 did not recur in 1996 due the fact that all the associated debt was
converted or repaid in 1995. Interest income increased by $243,497 due507,102 Warrants (the "July 2008 Warrants") to the earningssame
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 with in a set timeframe. Although we have 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 remaining IPO fundsthird 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 are to acquire at any
time through July 31, 2008 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 funds fromJuly 9, 2004 (but in no event less than $1.722 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 preferredthe 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
30
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 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. Years EndedAny 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 received by the investors are to acquire at any
time through October 31, 2008 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 $1.624
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 December 10, 2003, the investors had converted $5,916,413 of debt
from the March and July Debentures into 3,504,363 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 $1.3 million ($951,000 paid through September 30,
2003) into the debenture cash collateral account as required by the terms of the
October Debentures. The amounts paid through December 31, 1995 vs. 19942003 have been
accounted for as advances receivable and are reflected as such on the
accompanying balance sheet as of September 30, 2003. The Company reported revenuescash collateral account
provides partial security for repayment of $2,965,910the March, July and October
Debentures in 1995 versus $175,758the event of default.
We entered into a Registration Rights Agreement with the investors in
1994. In 1995,connection with the Company receivedissuance of the October Debentures and recognized $2,900,000 in licensing fees
resulting from the SAB/Bioclones agreementsOctober 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 comparedinterest shares under the October Debentures and upon
exercise of the 2008 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 $100,000 in 1994.
Revenues from cost recovery clinical trials were $65,910 in 1995 versus $75,758
in 1994. Net lossescertain exceptions, sales of $1,839,840 were incurred in 1995 versus losses of
$5,133,051 in 1994. The yearall shares
required to year improvement of $3,293,211 consisted of: (1)
$2,790,152 in higher revenues primarily duebe registered thereon cannot be made pursuant thereto, then we will
be required to pay to the licensing feesinvestors their pro rata share of $3,635 for each day
any of the above conditions exist with respect to this Registration Statement.
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, 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
512,500 warrants to purchase
31
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 and
87,500 are exercisable at $2.42 per share. The $1.74 warrants expire on July 10,
2008, the $2.57 and $2.50 warrants expire on March 12, 2008 and the $2.42
warrants expire on October 30, 2008. By agreement with Cardinal, we have
registered all 542,500 shares for public sale.
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 SAB Agreement; (2) $609,107 or 37% in lower researchproduction,
manufacture, use, marketing and development
27
costssale 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. We also agreed to pay
ISI 6 % of the net sales of ALFERON N Injection(R).
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, ISI
requests that we honor the guarantee, we will be obligated to reacquire ISI's
remaining guaranteed shares and pay the ISI $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, 18 or 24 months after the winddowndates of issuance of the
guaranteed shares, our financial condition could be adversely affected" in "Risk
Factors," above.
On March 11, 2003, we also entered into an agreement to purchase from ISI
all of its rights to the product and completionother 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 certain clinical trials; (3)
higher generalISI. 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 administrative costsdelivery of $262,681 or 10% basicallythe
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 increased legal and professional fees associated with various legal matterspay 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 Company's IPO efforts; (4) $138,884American
National Red Cross. Pursuant to our agreements with ISI and these two creditors,
we have registered the foregoing shares for public sale.
In connection with the debenture agreements, we have outstanding letters
of credit of $1 million as additional collateral.
In addition, as of September 30, 2003, we have $200,000 in higher debtrestricted 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 expense
relatingor 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
debt restructuring that took placeoptions and warrants prior to approval of the increase in April, 1995; and (5)
lower net interest expenseour
32
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 $295,517 or 28%$456,839 from certain investors.
These tax liens were issued for property taxes and utilities due to the paydownfor 2000, 2001
and 2002.
Because of certain notes from the proceeds of the IPO.
Years ended December 31, 1994 versus 1993
In 1994, the Company's net loss was $5,133,051 as compared to a net loss of
$7,702,050 in 1993. The $2,568,999 improvement resulted from increased revenues
of $127,758, reduced research and development costs of $481,127, reduced general
and administrative costs of $729,714, reduced conversion expense of $1,204,000
and reduced net interest expense of $26,400.
The Company had revenues of $48,000 in 1993 compared to $175,758 in 1994.
In 1994 the Company received $100,000 in licensing fees in accordance with the
terms of the SAB Agreement. Additionally, cost recovery revenues from the
Belgium clinical trials increased by approximately $29,000. Operating expenses
declined 22% in 1994 as compared to 1993, primarily as a result of reduced
research costs and efforts to correspondingly downsize the general and
administrative costs. Research and development costs declined approximately
$481,000 or 23% primarily due to the completion of certain clinical trial
efforts. General and administrative expenses declined approximately $730,000 or
22% as a result of restructuring and downsizing the Company's overhead to
support the needs of the Company and reduced research and development activity.
This restructuring in the fall of 1993 produced lower wages and salaries,
telephone expense, travel and other expenses in 1994. In addition, in 1993 the
Company incurred debt conversion expenses of $1,214,500 as a result of the
conversion of certain debt to equity.
Liquidity and Capital Resources
As of December 31, 1996 the Company had $5,279,429 in cash and cash
equivalents. This cash plus anticipated interest income, licensing fees, and
revenues from product sales in Canada and Belgium in 1997 should be sufficient
to cover the Company's cash needs in 1997. However, because of the Company'sour long-term capital requirements, itwe may seek to access the
public equity market whenever conditions are favorable, even if it doeswe 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. The CompanyWe may also
need additional funding earlier than anticipated, and the Company'sour cash requirements, in
general, may vary materially from those now planned, for reasons including, but
not limited to, changes in the Company'sour research and development programs, clinical
trials, competitive and technological advances, the regulatory process, and
higher than anticipated expenses and lower than anticipated revenues from
certain of the Company'sour clinical trials as tofor which cost recovery from participants has
been approved.
28(dollars in thousands)
Contractual Obligations Obligations Expiring by Period
==========================================
Total 2003 2004-2005 2006-2007
==========================================
Operating leases $1,063 $ 279 $ 526 $ 258
====== ====== ====== ======
Total $1,063 $ 279 $ 526 $ 258
====== ====== ====== ======
Convertible Debentures
March 12, 2003 $5,426,000 6% Senior
Convertible Debenture $ 260 $ 260 $ -- $ 0
July 10, 2003 5,426,000 6% Senior
Convertible Debenture $4,568 $ 750 $3,818
====== ====== ====== ======
Total $4,828 $1,010 $3,818 $ 0
====== ====== ====== ======
For information concerning the issuances of March 12, 2003 and July 10,
2003 6% Senior Convertible Debenture see notes 9 and 16 to our financial
statements for the nine months ended September 30, 2003 contained elsewhere in
this prospectus.
In connection with the debenture agreements, we have outstanding letters
of credit of $1 million to be used as additional collateral.
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). This
Interpretation elaborates on the existing disclosure requirements for most
guarantees such as standby letters of credit. It also clarifies that at the time
a company issues a guarantee,
33
Atthe company must recognize a liability for the fair market value of the
obligations it assumes under that 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, 1996,2002. The adoption of
Interpretation No. 45 did not have an impact on our consolidated results of
operations, financial positions, or cash flows.
In April 2002, the Company had accounts payableFASB issued SFAS No. 145, "Rescission of FASB
statements No. 4, 44 and accrued current
liabilities64, Amendment of approximately $1,146,390.
Net cash used byFASB statement No. 13, and Technical
Corrections" ("SFAS 145"). FASB No. 4 required that gains and losses from
extinguishment of debt that were included in the Company for operating activities amounteddetermination of net income be
aggregated and, if material, be classified as an extraordinary item, net of
related income tax. Effective January 1, 2003, pursuant to approximately $1,952,145SFAS 145, the
treatment of debt is to be included in 1994, $1,939,219"Other Income" in 1995the Financial
Statements. Our adoption of SFAS 145 did not have an impact on our financial
position and $6,097,906results of operations.
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". ("Interpretation No. 46"), which clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in 1996.
In March, 1997,which equity investors do not have the
Company used the servicescharacteristics of an investment banking firm
to privately place $5 million of Series E Preferred. The proceeds from this
placement were used to retire the $5 million balance of Series D Convertible
Stock issued in July of 1996.
The Company has incurred and will continue to incur substantial research
and development costs and manufacturing costs. In addition, if the Company
receives regulatory clearancea controlling financial interest or do not have sufficient
equity at risk for the commercial sale of its products, the
Company will incur substantial expenditures to develop its manufacturing, sales,
marketing and distribution capabilities to the extent such functions are not
supplied by third parties. The Company will require substantial additional funds
for these purposes through additional equity and/or debt financings,
collaborative arrangements with corporate partners or from other sources. No
assurances can be given that such additional funds will be available for the
Companyentity to finance its developmentactivities 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 are applicable for fiscal periods ending
after December 15, 2003. We do not expect this Interpretation to have an effect
on acceptable terms, ifthe consolidated financial statements.
In May 2003, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liability and Equity". This Statement establishes
standards for how an issuer classifies and measures in statement of financial
position certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
with its scope as a liability (or assets in some circumstances) because that
financial instrument embodies an obligation. This statement shall be effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise shall be effective at all. If adequate
funds arethe beginning of the first interim period
beginning after June 15, 2003, except for mandatory redeemable financial
instruments of a nonpublic entity. We do not available fromexpect this Interpretation to have
a material effect on the consolidated financial statements.
Disclosure About Off-Balance Sheet Arrangements
In connection with the debenture agreements, we have outstanding letters
of credit of $1 million as additional sourcescollateral.
In addition, as of financing,September 30, 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 of outstanding convertible and exercisable
securities such as debentures, options and warrants. Prior to the Company's
business will be materially adversely affectedmeeting, to
permit consummation of the sale of the July 2005 Debentures and the Company mayrelated
warrants, Dr. Carter agreed that he would not be ableexercise 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 continue operations. "See Business -- Company Strategy"exercise certain
options and "Risk Factors."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.
34
Critical Accounting Policies
Financial Reporting Release No. 60., which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or method used in the preparation of
financial statements. Our significant accounting policies are described in Notes
to the Consolidated Financial Statements. The Company'ssignificant 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 capital requirements will dependmilestone payments are contingent on
many factors,
including scientific progressfuture events.
Upon receipt, the upfront non-refundable payment is deferred. The
non-refundable upfront payments plus non-refundable payments arising from the
achievement of defined milestones are recognized as revenue over the performance
period based on the lesser of (a) percentage of completion or (b) non-refundable
cash earned (including the upfront payment).
This method requires the computation of a ratio of cost incurred to date
to total expected costs and then apply that ratio to total expected revenue. The
amount of revenue recognized is limited to the total non-refundable cash
received to date.
Revenue from the sale of Ampligen(R) under cost recovery clinical
treatment protocols approved by the FDA is recognized when the treatment is
provided to the patient.
Revenues from the sale of product are recognized when the product is
shipped, as title is transferred to the customer. We have no other obligation
associated with our products once shipment has occurred.
Patents and Trademarks
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 its research, drug discoveryrespective capitalized cost. In addition,
management's review addresses whether each patent continues to fit into our
strategic business plans.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
development
programs,assumptions that affect the magnitudereported amounts of these programs,assets and liabilities and
disclosure of contingent assets and liabilities at the lengthdate of the financial
statements and expensethe
35
reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
Quantitative And Qualitative Disclosures About Market Risk
Excluding obligations to pay us for various licensing related fees, we had
approximately $5,061,000 in cash, cash equivalents and short-term investments at
September 30, 2003. To the extent that our cash and cash equivalents exceed our
near term funding needs, we invest the excess cash in three to six month high
quality interest bearing financial instruments. We employ established
conservative policies and procedures to manage any risks with respect to
investment exposure. We have not entered into, and do not expect to enter into,
financial instruments for trading or hedging purposes.
OUR BUSINESS
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 trials,data with respect
to the time and costs involved in seeking
regulatory approvals,development of nucleic acids to enhance the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, changes in the
existing collaborative research relationships, the abilitynatural antiviral defense
system of the Company to
establish producthuman body and the development arrangements, the cost of manufacturing scale-up
and effective commercialization activities and arrangements. The failure by the
Company to obtain regulatory approval for any product will preclude its
commercialization. There can be no assurance that necessary regulatory approvals
will be obtained. See "Risk Factors" and "Business -- Government Regulation."
Pursuant to the terms of the SAB Agreement, the Company has received an
aggregate of $3,000,000 through December 31, 1996.
New Accounting Pronouncements
The Company adopted the provisions of FASB No. 121, "Accounting for the
Impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying
29
amount or fair value less costs to sell. Adoption of this Statement did not have
a material impact on the Company's financial position, results of operations, or
liquidity.
On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for
Stock- Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock options grants made in 1995 and future
years as if the fair-value-based method defined in FASB No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123.
30
BUSINESS
General
Hemispherx BioPharma, Inc. ("HEMX" or the "Company") is a biopharmaceutical
company using nucleic acid technologies to develop therapeutic products for the
treatment of viral diseases and certain cancers. Nucleic acid compounds
represent a new class of pharmaceutical products that are designed to act at the
molecular level for the treatment of human disease. The Company's drug
technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the
Company's double stranded RNA drug products, trademarked Ampligen(R), a
parenteral drug product, is in advanced human clinical development for various
therapeutic indications. Based on the results of pre-clinical studies and
clinical trials, the Company believes that Ampligen may have broad-spectrum
anti-viral and anti-cancer activities. Over 300 patients have received Ampligen
in clinical trials authorized by the U.S. Food and Drug Administration ("FDA")
at over twenty clinical trial sites across the United States, representing the
administration of more than 40,000 doses of this drug. Sales on a pre-approval,
cost recovery basis have been initiated in Belgium and are expected to start in
Canada during the second quarter of 1997. HEMX is presently exploring additional
distributor relationships for Europe and the United States to set the stage for
wider market penetration. SAB/Bioclones, the Company's partner in certain
countries, is initiating trials of Ampligen in South Africa and Australia, and
is exploring clinical sites in the United Kingdom.
Ampligen is being developed clinically for use in treating three anti-viral
indications: chronic hepatitis B virus ("HBV") infection (Phase I/II), human
immunodeficiency virus ("HIV") associated disorders (Phase II), and myalgic
encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS") (Phase
II/III). The Company's businessdiseases. Our strategy is designed around seekingto 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 AmpligenAmpligen(R) for Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome ("ME/CFS"), HIV, Hepatitis C ("HCV") and ME/CFS followed by HBVHepatitis B ("HBV") in the
U.S., Canada, Europe and Japan. Ampligen has received Orphan Drug designation from the FDA for four indications
(AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive malignant
melanoma). The CompanyAmpligen(R) is also developing a second generation RNA drug
technology, termed Oragen compounds, which the Company believes offers the
potential for broad spectrum antiviral activity by oral administration.
The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. Incurrently in phase III clinical
trials in the U.S. alone, there are an estimated 1.25 million carriers. HBVfor use in treatment of ME/CFS and is one of several
viruses that cause human hepatitis, or inflammation of the liver. The Company
conducted ain Phase I/IIIIb clinical
trial of Ampligentrials in the U.S. for the treatment of chronic HBV infection at Stanford Universitynewly emerged multi-drug resistant HIV,
and for the Universityinduction of Pennsylvania. A significant reductioncell mediated immunity in viral componentsHIV patients that are under
control using potentially toxic drug cocktails.
In March, 2003, we acquired from Interferon Sciences Inc. ("ISI"), all of
ISI's raw materials, work-in-progress and improvement in
liver function was noted duringfinished product of Alferon N
Injection(R), together with a limited license for the courseproduction, manufacture,
use, marketing and sale of the Phase I/II clinical trial and
the drugproduct. Alferon N Injection(R) [interferon alfa-
n3 (human derived)] is a natural alpha interferon that has been generally well tolerated. At present, interferon-alpha isapproved by the
only approved productU.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 disease; however, 60% to 75% of
patients with chronic HBV ultimately fail to respond to interferon-alpha. The
global sales of interferon are presently estimated at more than $1 billion,
largely for its use in liver infections.
31
The Centers for Disease Control ("CDC") has estimated that approximately
one million peopleproduct in the
U.S. are infected with HIV, excluding patients who
have progressedUnited State through sales facilitated via third party marketing agreements. In
the future, we expect to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwideimplement studies, beyond those conducted by ISI, for
testing the year 2000. The Company
is currently conducting a Phase II clinical trial of Ampligen in the U.S. for
thepotential treatment of HIV, infection. The drug is designed to enhanceHepatitis C and other indications,
including multiple sclerosis. This acquisition not withstanding, our primary
focus remains the patient's
own immune system, thereby fighting the invasive viral agent more effectivelydevelopment of Ampligen(R) for treating ME/CFS and resulting in more durable long term benefits.
ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 500,000 cases. The Company hasHIV
diseases.
In March, 2003, we entered into an agreement with a Canadian pharmaceutical firm pursuantISI 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
Canadian company willentire process through our quality assurance group and our clinical monitoring
group.
36
AMPLIGEN(R)
Our proprietary drug technology includes Ampligen(R) and utilizes
specially configured ribonucleic acid ("RNA") and is protected by more than 350
patents worldwide with over 60 additional patent applications pending to provide
further proprietary protection in various servicesinternational markets. Certain patents
apply to the use of Ampligen(R) alone and certain patents apply to the use of
Ampligen(R) in connectioncombination with the distributioncertain other drugs. Some composition of Ampligen on a
cost recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligenmatter
patents pertain to
patients in an open label clinical trial being conducted in Belgium. The Company
is currently discussing open-label and placebo controlled trials with the FDA.
The Company is unaware of any other new drugsmedications which are under development forhave a similar mechanism of
action. The main U.S. ME/CFS treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people
entering chronic disability status in thepatent (#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.
Thus, this presently untreatable
illness constitutes a significant impactpatent #5593973 which expires on the overall cost of health care.
Accordingly, the estimateOctober 5, 2014. The U.S. marketAmpligen(R) Trademark
(#1,515,099) expires on December 6, 2008 and can be renewed thereafter for an
effective treatment ofadditional 10 years. The U.S. FDA has granted us "orphan drug status" for our
nucleic acid-derived therapeutics for ME/CFS, is in
excess of $1 billion annually.
The Company also has clinical experience with Ampligen in patients with
certain cancers, includingHIV, and renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company estimates that approximately 25,000 new casesOrphan drug status grants us protection against competition
for a period of renal cell
carcinoma were diagnosed in the U.S. in 1996. Based on estimates prepared by the
American Cancer Society, the Company believes that approximately 34,000 new
cases of malignant melanoma were diagnosed in the U.S. in 1996. Data from the
American Cancer Societyseven years following FDA approval, as well as certain federal
tax incentives, and the World Health Organization indicate that both the
incidence and mortality from malignant melanoma are rising steadily among white
populations throughout the world. In the past decade, the incidence of melanoma
has increased faster than that of any other cancer except lung cancer in women.
The Company was incorporated in Maryland in August 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support products.
The Company was redirected in the early eighties to the development of nucleic
acid pharmaceutical technology and the commercialization of RNA drugs. HEM was
reincorporated in Delaware and changed its name to HEM Pharmaceuticals Corp. in
January 1991. In June, 1995, the Company became Hemispherx BioPharma, Inc. The
Company's principal executive offices are located at One Penn Center, 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103. The Company's telephone number is
(215) 988-0080, and its WEB site is HTTP// WWW.HEMISPHERX.COM.
32
The Productsregulatory benefits.
Nucleic Acid Pharmaceuticals
The Company believes that nucleic acid compounds represent a potential new class of pharmaceutical
products that are designed to act at the molecular level for the treatment of human
disease.diseases. There are two forms of nucleic acid:
deoxyribonucleic acid ("DNA")acids, DNA and ribonucleic acid ("RNA").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 defensesdefense against virusesvirus and tumors.
To
date, the CompanyOur drug technology utilizes specially configured RNA. Our double-stranded RNA
drug product, trademarked Ampligen(R), which is administered intravenously, is
(or has focused its efforts on developing two classes of RNA
pharmaceuticals, Ampligen, a high molecular weight double-stranded intravenous
drug, and Oragen, low molecular weight single-stranded drugs intendedbeen) in human clinical development for oral
administration.
Although there are many competitive approaches to anti-viral and
anti-cancer therapies, the Company has taken an approach which it believes
appears to hold a great deal of promise. By activating the human body's immune
system through naturally occurring immune pathways, the Company's lead drug
compound Ampligen is designed to avoid many of the pitfalls of other anti-viral
drugs. Moreover, the Company believes that the broad-spectrum action of Ampligen
greatly increases the probability of success. HEM has chosen markets which are
not only sizeable and growing, but invarious disease areasindications,
including treatment for which there are
presently no known cures.
The Company's business strategy is designed around seeking the required
regulatory approvals which will allow the progressive introduction of Ampligen
for HIV and ME/CFS, followed by HBV in the U.S., Canada, Europe and Japan. There
can be no assurance of regulatory approvals for any of such disorders. Ampligen,
however, has received Orphan Drug designation (see "Business - Government
Regulations") from the FDA for four indications (AIDS, chronic fatigue syndrome,HIV, renal cell carcinoma and malignant
melanoma). The Company is also developing a
second generation RNA drug technology, termed Oragen compounds, which the
Company believes offers the potential for broad spectrum antiviral activity by
oral administration. In addition the Company has commenced development of
certain clinical laboratory diagnostic products known as Diagen products. In
December, 1996, the Company announced receipt of Diagen Patentsmelanoma. Further studies are planned in ten (10)
European countries.
Ampligen
Ampligen is a high molecular weight RNA drug which is administered
intravenously.cancer but initiation dates have not
been set.
Based on the results of published, peer reviewed pre-clinical studies and
clinical trials, to date, the Company
believeswe believe that AmpligenAmpligen(R) may have the potential to address significant medical
needs where current treatment methods are inadequate or non-existent.
33
The preliminary results of the Company's animal and human tests indicate
that Ampligen may have both broad-spectrum anti-viral
and anti-cancer activities. To date, Ampligen has been given to over 300properties. Over 500 patients have received Ampligen(R) in the
clinical trials authorized by the U.S. Food and Drug AdministrationFDA at over 20twenty 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 United States under effective Investigational New
Drug (IND) applications. In addition, clinical trials are currently ongoingmedical community. A further scientific publication by independent
academicians on the accurate laboratory diagnosis of ME/CFS appeared in Belgium and Houston, Texas.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 table summarizesan audit by the primary
indications and the current clinical trial regulatory statusU.S. Government Accounting Office ("GAO") which
was announced July 28, 1999.
37
Estimates of AmpligenME/CFS patient numbers in the U.S.
FDA-AUTHORIZED
INDICATION THERAPEUTIC TARGETS CLINICAL TRIALS*
- ---------- ------------------- ----------------
Antiviral Chronic HBV (hepatitis B virus) Phase I/II(1)
HIV Phase II(2)
ME/CFS (chronic fatigue
syndrome) Phase II/III(3)
Anti-Cancer Renal Cell Carcinoma Phase II/III(4)
Melanoma (skin cancer) Phase II(5)
* The foregoing chartUnites 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 qualified in its entirety by referencebelieved worldwide patient totals may be as high as ten
million.
In 1989, we received FDA authorization to more
detailed information included elsewhere in this document. See
"Business--Government Regulation" for a description of the FDA regulatory
approval process.
(1) A Phase I/II study was authorized by the FDA. This study has been partially
enrolled with patients, and is currently on hold pending ongoing
discussions with a potential corporate partner.
(2) A FDA-authorized Phase I and two Phase II clinical trials of Ampligen for
HIV infection have been completed; one Phase II trial studied Ampligen as
monotherapy and the second used Ampligen in combination with AZT. A Phase
II study utilizing Ampligen in a population of largely asymptomatic HIV
carriers was recently initiated in Houston, Texas.
(3) The Company has completed a Phase I/II study and a second Phase II clinical
trial of Ampligen in ME/CFS under FDA authorizations. Recently the Company
presented an open label expanded access Phase II study to the FDA for
review and approval as well as a new Phase II/III study in ME/CFS. The
Company is currently working with the FDA with respect to the design of
these studies. In addition,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 late 1998, we were authorized by the FDA to initiate a Phase III
multicenter, placebo-controlled, randomized, double blind clinical trial to
treat 230 patients with ME/CFS in the U.S. The objective of this Phase III,
clinical study, denoted as Amp 516, is ongoingto evaluate the safety and efficacy of
Ampligen(R) as a treatment for ME/CFS. As of December 10, 2003, we had engaged
the services of twelve (12) clinical investigators at Medical Centers in
Belgium.
(4)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 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 and then move into
the stage II or the open label treatment portion of the clinical trial. To date
there have been no reported serious adverse events definitely or probably
related to the study medication. The next stage in our program is final data
collection, quality assurance of data to insure its accuracy and analysis of the
data according to regulatory guidelines to facilitate filing for commercial
approval to sell.
Human Immunodeficiency Virus (HIV)
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,
38
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,
the problem of drug toxicities, the complex interactions between these drug
classes, and the likelihood of life-long therapy will remain a serious drawback
to their usage.
Failure of antiretroviral therapies over time and the demonstration of
resistance have stimulated intensive searches for appropriate combinations of
agents, or sequential use of different agents, that act upon the same or
different viral targets. This situation has created interest in our drug
technology, which operates by a different mechanism.
We believe that the concept of Strategic Therapeutic Interruption ("STI")
of HAART provides a unique opportunity to minimize the current deficiencies of
HAART while retaining the HIV suppression capacities of HAART. STI is the
cessation of HAART until HIV again becomes detectable (i.e., rebounds) followed
by resumption of HAART with subsequent suppression of HIV. By re-institution of
HAART, HIV is suppressed before it can inflict damage to the immune system of
the patient. Based on recent publications (AIDS 2001,15: E19-27 and AIDS 2001,
15:1359-1368) in peer reviewed medical literature, it is expected that in just
30 days after stopping HAART approximately 80% to 90%, of the patients will
suffer a relapse evidencing detectable levels of HIV. We believe that
Ampligen(R) combined with the STI approach may offer a unique opportunity to
retain HAART's superb ability to suppress HIV while potentially minimizing its
deficiencies. All present approved drugs block certain steps in the life cycles
of HIV. None of these drugs address the immune system, as Ampligen(R)
potentially does, although HIV is an immune-based disease.
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 International AIDS Conference 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 recently reported ex vivo studies in
peer-reviewed scientific journals. All patients are chronically HIV infected and
will have been receiving the indicated HAART regimen prior to starting the
39
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.
We expect enrollment in this clinical trial to accelerate as we recruit more
investigators. The length of this stage of the trial will be determined by an
analysis of the interim results.
Other Diseases
We currently have an informal arrangement with the California Institute of
Molecular Medicine ("CIMM") to collaborate and assist their efforts to replicate
human Kupffer's cells obtained from HCV infected patients. This proprietary CIMM
approach involves the in vitro growth of hepatic macrophages (called Kupffer's
cells) from the failing liver of a patient and reinfusion of the in vitro grown
Kupffer's liver cells into the same patient. The ability to grow HCV in long
term culture that would allow the testing of, potential anti-HCV drugs in vitro
would permit us to conduct and obtain valuable research data in using
Ampligen(R) to treat HCV prior to engaging clinical trials. This would not raise
the question of immunological incompatibility. Testing by CIMM indicates that
their process of Kupffers's cell application in vitro is reproducible (>95%
efficacy) from individual patients. CIMM is also developing a process for
maintaining and propagating Kupffer's cells reproducibly in defined cell
cultures from fine needle liver aspirates from living humans.
In January 2001 CIMM filed a Notice of Invention with the U.S. Patent
Office. As a result, a patent application entitled "Replication of Human
Kupffer's cells obtained from HCV Infected Patients By Fine Needle Biopsy
Technique", was submitted. This method can potentially salvage critically needed
liver function without major surgery or aggressive medical intervention.
We are also evaluating potential novel clinical programs which would
involve using Ampligen(R) to treat both HCV and HIV when they coexist on the
same patient. We expect to commence these studies in collaboration with one or
more prospective corporate partners. A FDA-authorizedcollaborative Clinical study in Europe,
in conjunction with Laboratorios Del Dr. Esteve S.A., is expected to commence in
early 2004.
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 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
currently pay minimum royalties of $30,000 per year to Temple. These compounds
have been evaluated in various academic and government laboratories for
application to chronic viral and immunological disorders. Research and
development of Oragen(TM) is on hold at this time.
An FDA authorized Phase I/II study of AmpligenAmpligen(R) in cancer, including
patients with renal cell carcinoma has been completed.was completed in 1994. The Company hasresults 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/IIIII
40
study of
Ampligen inusing Ampligen(R) to treat patients with metastatic renal cell carcinoma.
At present, the
Company does not anticipate devoting significant Company resources to the
funding of this study, and, accordingly, a date for initiating this study
has not been determined.
34
(5) Patients with metastatic melanoma have been treated with Ampligen as
monotherapy under a FDA-authorizedwere included in the Phase I/II open-label study of
AmpligenAmpligen(R) in cancer. The FDA has authorized the Companyus to conduct a Phase II clinical
trial of Ampligenusing Ampligen(R) in melanoma. We do not expect to devote any significant
resources to funding these studies in the near future.
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 CompanyALFERON 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 seekingproduced from human white blood cells.
The potential advantages of natural alpha interferon over recombinant
interferon may be based upon their respective molecular compositions. natural
interferon is composed of a corporate partnerfamily 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 efficacy in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently marketed recombinant alpha
interferons. 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 assistother
treatment) or recurring external genital warts in conductingpatients 18 years of age or
older. Certain types of human papillomaviruses ("HPV") cause genital warts, a
sexually transmitted disease ("STD"). A published report estimates that
approximately eight million new and recurrent causes of genital warts occur
annually in the United States alone.
Basically, our interest in acquiring Alferon N Injection(R) was driven by
two factors;
(1) Our belief that its use in combination with Ampligen(R) has the
potential to increase the positive therapeutic responses in chronic
life threatening viral diseases. Combinational therapy is evolving
to the standard of acceptable medical care based on a detailed
examination of the Biochemistry of the body's natural antiviral
immune response,
(2) New knowledge about the competitive products in the interferon arena
that we believe imply a large untapped market and potential new
therapeutic indication for Alferon N Injection(R) which could
accelerate its revenues in the near term. Specifically, the
recombinant DNA derived alpha interferon are now reported to have
dramatically decreased effectiveness after one year, probably due to
antibody formation and other severe toxicities. These detrimental
effects have not been reported with Alferon N Injection(R) which
could allow this trial.product to assume a much larger market share. These
41
revenues would provide operational capital to complete the Phase III
clinical trials of our experimental drug, Ampligen(R) in a more cost
effective, non-dilutive manner on a shareholder's equity.
Alferon N Injection(R) [Interferon alfa-n3 (human leukocyte derived)] is a
highly purified, natural-source, glycosylated, multispecies alpha interferon
product. There are essentially no antibodies observed against natural interferon
to date and the product has a relatively low side-effect profile. Alferon is the
only natural-source, multispecies alpha interferon currently sold in the U.S.
The Company believes that AmpligenAlferon 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. This will be done in existing partnership with our strategic partners
including Gentiva Health Services, Biovail Corporation and Esteve Laboratories,
all of which have proven marketing expertise.
According to the NIH, there are one million new cases of venereal warts
every year.
Pipeline Products (Alpha Interferon)
The following products, together with other assets are to be acquired upon
the closing of the second ISI agreement, which is anticipated to occur at the
end of December 2003 or in January 2004.
ALFERON N Injection(R) -Other Applications
ALFERON N Injection(R) has been generally well toleratedapproved by the U.S. FDA for the
intralesional treatment of refractory or recurring external genital warts in
more than 15,000 patientpatients 18 years of age or older and has been studied for the potential
treatment weeksof 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,
the FDA determined that additional trials were necessary.
ALFERON N Gel
ALFERON N GEL is a low incidencetopical (dermatological) Natural Alpha Interferon
preparation in a hydrophilic gel base. This product is still in research and
development.
ALFERON LDO
ALFERON LDO is the low-dose, oral liquid formulation of Natural Alpha
Interferon. Two Phase 2 clinical toxicity, particularly giventrials using ALFERON LDO for the life threatening diseases being treated.
Clinical experience with Ampligen now totals 311 patients,treatment of
whom 171HIV-infected patients have received Ampligen for six months or more. Of these patients, 117 have
received Ampligen for one year or more; 63 patients have received Ampligen for
two years or more; and 22 patients have received Ampligen for periods in excess
of three years. A mild flushing reaction has been observed in approximately 15%
of patients treated in the Company's various studies. This reaction is
occasionally accompanied by erythema, a tightness of the chest, tachycardia,
anxiety, shortness of breath, subjective reports of "feeling hot," sweating and
nausea. The reaction is usually infusion-rate related and may generally be
controlled by slowing the infusion rate. Other adverse side effects include
liver enzyme level elevations, diarrhea, itching, urticaria (swelling of the
skin), bronchospasm, transient hypotension, photophobia, rash, bradycardia,
transient visual disturbances, arrhythmias, decreases in platelets and white
blood cells 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.
Oragen Drugs
Oragen drugs are low molecular weight RNA compounds which the Company
believes, by virtue of their small size and molecular stability, have the
potential for becoming the first oral, broad-spectrum nucleic acid treatments
for various viral diseases such as HIV infection and chronic HBV infection. The
technology for these nucleicacid products is licensed to the Company for
commercial use on an exclusive basis from Temple University, subject to certain
limited exceptions. To date, a number of compounds have been developed.
Initial studies indicated that these drugs may withstand enzymatic
destruction, an important factor in order for compounds to enter the blood
stream in an intact form. Results from in vitro studies conducted in
collaboration with the National Institute of Allergy and Infectious Diseases
indicate that Oragen products may inhibit HBV infection, and in vitro studies
conducted in collaboration with the National Cancer Institute and the University
of Mainz, Germany, indicate that Oragen products may inhibit HIV infections. One
compound, Oragen 0004, has shown inhibition of HBV multiplication in vitro and
another, Oragen 0044, has demonstrated activity against HIV in vitro studies
performed by Temple University. These two Oragen compounds have been produced in
quantities which the Company believes are sufficient to perform animal
toxicology testing. Experiments with mice at the University of Toronto indicate
that Oragen drugs may protect against mouse hepatitis virus. There has been no
human clinical testing of
35
Oragen products to date.completed.
There can be no assurance that human clinical testing,
if initiated, will yield results consistent with those achieved in vitro or
animal testing.
The Company believes that Oragen drugs may exert anti-viral activity
through two intracellular mechanisms. First, they may activate the intracellular
"latent" RNase-L to degrade viral RNA. Second, they inhibit the HIV replication
enzyme, reverse transcriptase, by binding to a different site on the enzyme from
that bound by conventional anti-HIV compounds such as AZT. The Company's belief
in the potential effectsany of these compounds is based, in part, on the
collaborative in vitro experiments performed with the National Cancer Institute
referred to above. Certain in vitro experiments performed at Vanderbilt
University indicate that certain human immune cells can be protected from cell
death caused by HIV infection by treatment with Oragen drugs. Under sponsorship
of the National Institutes for Allergy and Infectious Diseases, in vitro studies
at Georgetown University also demonstrated that Oragen drugs may inhibit the
replication of human HBV. In each of the in vitro studies, no substantial cell
toxicity was observed at concentrations which inhibit the applicable virus.
The Company believes Oragen drugs work at a different stage of the
anti-viral and anti-cancer response chain than Ampligen and therefore may be
effective in disorders where the activity of Ampligen is limited. The Company
also believes that Oragen drugs can potentially be engineered to trigger
specific responses in immune cells based on in vitro tests. Significant
additional testingproposed products will be
required in order to determine whether the Company's
beliefs regarding Oragen drugs can be transformed into viable human therapeutic
products.
The following table shows the Company's pastcost-effective, safe, and present pre-clinical
studies of Oragen compounds. Except as otherwise noted, the studies have been
conducted under collaborative arrangements pursuant to which the Company
supplies quantities of the drug to the third party institution for testing, andeffective or that institution assigns all of the commercial rights to the studies to the
Company and funds the research costs.
Target Programs Potential Market Applications Collaborators
Human Immunodeficiency Treatment of HIV National Cancer Institute
Temple University(1)(2)
Vanderbilt University(1)
University of Mainz,
Germany(1)
Hepatitis B Virus (HBV) Treatment of HBV National Institute of
Allergy
and Infectious Diseases
Georgetown University
Mouse Hepatitis Virus Treatment of Hepatitis C University of Toronto(1)
Herpes Simplex Virus Treatment of Herpes Infectious Medical College of
Type 1 and 2 Pennsylvania(1)
Juntendo University
36
Tokyo, Japan
Poliovirus/Respiratory Childhood Viral Diseases Howard University
Syncytial virus Solid tumors Treatment of various types Temple University(1)(2)
of cancer and Allegheny/
Hahnemann University
(1) Funding provided by the Company. In all other cases, funding provided by
the institution.
(2) The Company was notified in July 1994 that Temple believed the Company was
in breach of its licensing agreement and therefore the agreement was being
terminated. The Company and Temple University settled this dispute in
December 1996 and the licensing agreement was re-instated.
Diagnostic Diagen Products
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's products, if and when such products are available for commercial
sale. While these tests are at an early stage of commercial development, the
Company believes that they may ultimately provide an opportunity for
diversification of the Company's products and revenues and may help to identify
patients who could benefit from the Company's drug treatment. The Diagen
products would have to go through a regulatory process for diagnostic product
clearance prior to commercial sale.
Patents and Proprietary Rights
The Company has filed more than 380 patent applications involving
chemistry, processes, biological insights and specific target-oriented
compositions of matter worldwide covering its RNA technology, including 30
filings with the U.S. Patent Trademark Office and more than 350 corresponding
foreign patent applications in other countries, such as members of the European
Patent Convention, Japan, South Korea, Australia. There can be no assurance that
the Company's patent applications will result in the issuance of patents. The
Company's policy is to file patent applications on a worldwide basis to protect
technology, inventions, and improvements that are considered important to the
development of its business. The Company has, as a matter of policy, sought
patent protection in each of the three major geographic markets: the United
States, Europe, and the Pacific Rim. The Company also relies upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain its competitive position. Of the patent applications filed
worldwide, over 230 have been issued (including 13 in the United States).
Within the 13 patents issued or accepted for issuance in the United States,
seven include claims which afford patent protection for RNA treatment in HIV
disease; one affords patent
37
protection for RNA treatment of Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome, two affords patent protection for RNA treatment/diagnosis of hepatitis
infection, and three affords patent protection in other areas.
In addition, the Company has filed patent applications for diagnostic
applications resulting from insights and discoveries made by its employees and
consultants relating to RNA nucleic acid structure and 2-5A biochemistry, which
the Company believes may be applicable to the development and commercialization
of various drugs that may operate by augmentation of cellular antiviral
defenses.
The license agreement with Temple University covering the Oragen Compounds
presently includes 8 issued U.S. patents and 29 issued foreign patents as well
as 24 patent applications in process.
The patent positions of biopharmaceutical and biotechnology firms,
including the Company, are generally uncertain and involve complex legal and
factual questions. Consequently, even though the Company is currently
prosecuting many patent applications with the U.S. and foreign patent offices,
the Company does not know how many of its applications will result in the
issuance of any patents or, of patents which are issued, whether they will
provide significant proprietary protection orwe will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature tendable to lag behind actual discoveries by several
months, The Company cannot be certain that it was the first creator of all
inventions covered by pending patent applications or that it was the first to
file patent applicationsobtain FDA
approval for all such inventions. Competitors or potential
competitors may have filed applications for, and may obtain, additional patents
and proprietary rights relating to, compounds or processes competitive with
those of the Company. Accordingly,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 Company's
patent applicationsintroduction of
Hemispherx products and to accelerate market penetration into the European
market once full approval is obtained from the European
42
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 resultbe 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 ten members in patents being issued or that if issued the patents will afford protection against competitorsyear 2000 to 800 currently. Every
major country now has an active educational association with similar technology; nor
can there be any assurance that others will not obtain patents thatsubstantial numbers
of members who regularly meet and "network". These programs have been modeled on
the Company
would need to license or circumvent. The Company issuccessful 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 a claim by
Vanderbilt University regardingour
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 RNA combinedAmpligen(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. In addition, we are
exploring various ways to accelerate the commercial availability of our products
in the various nations of the EEU, including potential appreciation of the
"foreign import" rule for accepting products already approved in the U.S.
Limited number ME/CFS patients were treated during 2002 with azidothymidine
(AZT)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 has started to produce results. In March
2002, our European subsidiary Hemispherx Biopharma Europe, S.A. ("Hemispherx,
S.A.") entered into a Sales and Distribution Agreement with Laboratorios Del Dr.
Esteve S.A. ("Esteve"). Pursuant to the terms of the Agreement, Esteve was
granted the exclusive right to market Ampligen(R) in Spain, Portugal and Andorra
("Territory") for the treatment of ME/CFS. In addition to other terms and other
projected payments, Esteve paid an initial and non-refundable fee of 625,000
Euros (approximately $563,000) to Hemispherx, S.A. on April 24, 2002. Esteve is
to pay a fee of 1,000,000 Euros after U.S. 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 human disease (HIV infection)minimum annual amounts of Ampligen(R).
The Company
does not believe this claimagreement is terminable by either party if Ampligen(R) is withdrawn from the
territory for a specified period due to have merit. The Company has used RNA with AZT in
someserious adverse health or safety
reasons, bankruptcy, insolvency or related issues of its clinical programs.
There can be no assurance that the Company's patents or those of its
competitors, if issued, would be upheld by a court of competent jurisdiction.
The Company also relies upon unpatented trade secrets, and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology, or that the Company can meaningfully
protect its right to unpatented trade secrets.
38
The Company requires it employees, consultants, membersone of the Scientific
Advisory Board, outside scientific collaborators and sponsored researchers and
other advisors to execute confidentiality agreements upon the commencement of
employmentparties; or
consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the coursematerial breach of the individual's relationship withagreement. Hemispherx may transform the Company
be kept confidential and not disclosed to third parties except in specific
circumstances. Inagreement into a
non-exclusive agreement or terminate the case of employees, the agreements provide that all
inventions conceived by the individual shall be the exclusive property of the
Company. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for the Company's trade secretsagreement in the event that Esteve does
not meet specified percentages of unauthorized useits
43
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 disclosurecertain clinical trials being
conducted by Hemispherx are not successful.
We continue negotiations with other prospective partners for the marketing
and distribution of such information.
Manufacturing
Drug intermediatesAmpligen(R) in other European territories on terms similar
to the Esteve agreement.
MANUFACTURING
We outsource the manufacturing of Ampligen(R) to certain contractor
facilities in the United States and South Africa while maintaining full quality
control and supervision of the process. Nucleic Acid polymers constitute the raw
material used in the production of Ampligen are currently
manufactured fromAmpligen(R). We acquire our raw materials
from Ribotech, Ltd. ("Ribotech") located in South Africa. Ribotech, is jointly
owned by Pharmacia Biotech,us (24.9%) and Bioclones (Proprietary), Ltd. (75.1%). Bioclones manages
and operates Ribotech. Two manufacturers in the United States are available to
provide the polymers if Ribotech is unable to supply our needs. Sourcing our
needs from other suppliers could result in a divisioncost increase for our raw
materials.
Until 1999, we distributed Ampligen(R) in the form of
Pharmacia-Upjohn, a major multinational pharmaceutical company. The
intermediates are analyzed by the Company for compliance with specifications and
then transferred to another contractor where the Ampligen drug intermediates are
mixed under defined conditions to prepare 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. HEM
provides a representativeAmpligen(R). At the
present time, we have engaged the services of Schering-Plough Products to supervise and monitor proceduresmass
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 all proprietary informationthe polymers used
in manufacturing Ampligen(R). The licensing agreement with Bioclones presently
includes South Africa, South America, Ireland, New Zealand and the United
Kingdom.
We currently occupy and use the New Brunswick, New Jersey laboratory and
production facility owned by ISI. We are in the process of acquiring title to
generate its Ampligen intermediates. The
Company also plansthese facilities pursuant to phase inour second asset acquisition agreement with ISI
(see "Management's Discussion and Analysis of Financial Condition and Results of
Operations; Liquidity And Capital Resources" for more details). This facility is
approved by the FDA for the manufacture of raw materials for Ampligen by
its corporate partner Bioclones Proprietary Limited ("Bioclones")Alferon N Injection(R).
Good Manufacturing Practices (GMP) require that a biopharmaceutical company associatedproduct be consistently
manufactured to an identical potency (strength) and purity with The South African Breweries Ltd.
("SAB"each lot, and
together with Bioclones, "SAB/Bioclones"), fromthat the manufacturing facility itself and all the equipment therein, be
certified to operate within a facility in South
Africa. Critical contract relationships are covered by long term non-compete
provisions as well as customary non-public disclosure terms. In each case the
final product is tested by the Company to determine drug product compliance with
astrict set of technical specifications. Upon meeting these specifications, the
product is transferred to HEM and dosage units are then prepared at HEM's
Rockville, Maryland, manufacturing facility. Pharmacia has a minor equity
interest in the Company. The Company's plan is to source raw materials for its
lead products on a worldwide basis. At present, Oragen compounds used for the
Company's pre-clinical testing are produced at the University of Konstanz,
Germany.
Marketing
The Company intends to design itsperformance standards.
MARKETING/DISTRIBUTION
Our marketing strategy to reflectfor 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 United States, the Company expectsU.S.,
we expect that, subject to receipt of regulatory approval, AmpligenAmpligen(R) will be
usedutilized in threefour medical arenas: physicians' offices, or clinics, the hospitalhospitals and the
home treatment setting. The CompanyWe currently plansplan to use a service providerprovided 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 billingsbilling and
collections. Accordingly, the
Company iswe are developing marketing plans to facilitate the
product distribution and medical support for indications,indication, if and when they are
approved, in each 39
arena. The Company believesWe believe that this approach will facilitate the
generation of revenuesrevenue without incurring the substantial costs associated with a
sales force. Furthermore, management believes that the approach will enable the Companyus
to retain many options for future
44
marketing strategies. In February 1996, the Company1998, we and Gentiva Health Services (formerly
Olstein Health Services) entered into an agreement with Rivex Pharma
Inc. (a Canadian-based pharmaceutical company "Rivex"), pursuant to which Rivex
will provide various services in connection witha Distribution/Specialty Agreement for the marketing and exclusive
distribution of Ampligen in Canada on an emergency drug release basis. UnderAmpligen(R) for the termstreatment of this agreement,ME/CFS patients under the Company will supply and Rivex will purchase as much
Ampligen as necessary to satisfy Rivex's customers at a mutually agreed upon
cost. In return, Rivex will retain the exclusive right to market and distribute
Ampligen in Canada. The Company expects Rivex to have patients in this program
beginning in the second quarter of 1997.U.S.
treatment protocols.
In Europe, the Company planswe plan to adopt a country-by-country and, in certain cases, an
indication-by-indication marketing strategy due to the heterogeneity of governmental regulationsregulation
and alternative distribution systems in these areas.
The Companyarea. We also plansplan to adopt an
indication-by-indication strategy in Japan. Subject to receipt of regulatory
approval, the Company planswe plan to seek strategic partnering arrangements with pharmaceutical
companies to facilitate product
introductions in these areas. No assurances can be given that any such
arrangement will be entered into on terms acceptable to the Company. The relative prevalence of
people suffering from target indications for AmpligenAmpligen(R) varies significantly by
geographic region, and the Company intendswe intend to adjust itsour clinical and marketing planning
to reflect the special needsspecialty of each area. The
Company does not currently anticipate devoting significant resources to the
establishment of an in-house sales force in the near term. In countries in South America, the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories, the Company contemplateswe contemplate marketing its productsour product through itsour relationship
with SAB/Bioclones pursuant to the SABBioclones Agreement.
The CompanyOur marketing and distribution plan for Alferon N Injection(R) is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's therapeutic products, if and when such products are available for
commercial sale, although the Company does not anticipate deriving significant
revenues directly from the commercial sale of Diagen products. These tests are
at an early stage of development and the Company has received limited royalties
in 1994 from its licensed reference laboratory in Texas. The Diagen products
would have to go through a regulatory process for diagnostic product clearance
applicable to medical devices prior to commercial sale. In some cases, use in
clinical trials may require FDA clearances. See "Business" Government
Regulation" below. The Company's objective is to license these potential
products to a diagnostic company. The Company has granted rights to certain of
the patents related to the Diagen products to one of its subsidiaries. See
"Business--Subsidiary Companies."
40
Research and Development/Collaborative Agreements
The development of the Company's products has required and will continue to
require the commitment of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials that are necessary to
bring pharmaceutical products to market and to establish commercial-sale
production and marketing capabilities. During the Company's last three fiscal
years, the Company has spent approximately $4.5 million for research and
development, of which $1.9 million was expended in the year ended December 31,
1996.
Basedfocused on
its current operating plan, the Company anticipates that the net
cash and cash equivalents on hand of $5.3 million, together with the anticipated
receipt of limited revenues fromincreasing the sales of Ampligen,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/GYNSs, Urologists,
Proctologists and Dermatologists and simultaneously create product awareness in
the patient population through several media and health organizations. Different
regional meetings and seminars are scheduled during which guest speakers will
explain the therapeutic benefits and safety profile of Alferon. Additional
exposure will be sufficientcreated by exhibiting at several STD related conferences,
expanded web presence, mailings and publications. We also plan to meet the Company's capital requirements through 1997. It is not expected that
this will be sufficient to enable the Company to complete the necessary clinical
trials or regulatory approval process for Ampligen for any indication or, if any
such approval were obtained, to begin manufacturing or marketing Ampligen onengage a
commercial basis. Accordingly, the Company will need to raise substantial
additional funds through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing or from other
sourcescontract sales organization in order to completebuild up a nationwide network of
dedicated representatives in the necessary clinical trialsU.S. and the regulatory
approval processes and begin commercializing its products. If adequate funds are
not available from operations, as is anticipated, and if the Company is not able
to secure additional sources of financing on acceptable terms, the Company's
businessEurope. This will be materially adversely affected.
As part of its researchdone while
working with our strategic partners including Gentiva Health Services, Biovail
Corporation and development activities, the Company hasEsteve Laboratories.
For more information about our arrangements with Gentiva Health Services,
Bioclones, Esteve and Biovail. See "Research And Development/Collaborative
Agreements" below.
On August 18, 2003, we entered into various collaborativea sales and sponsored research agreements with researchers,
universities and government agencies. The Company believes that these agreements
provide the Company with access to physicians and scientists with expertise in
the fields of clinical medicine, virology, molecular biology, biochemistry,
immunology and cellular biology.
The Company has entered into the following collaborative agreements
regarding its products:
In October, 1994, the Company entered into anmarketing agreement with
Bioclones/SAB
(the "SAB Agreement") with respectEngitech, Inc. to co-development of various RNA drugs,
including Ampligen, for which the Company has previously obtained international
patent protection. The SAB Agreement provides that the Company will provide
SAB/Bioclones with an exclusive manufacturing and marketing license for certain
Southern hemisphere countries (including all countries in South America) as well
as the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and
certain other countries and territories. In exchange for these marketing and
distribution rights, the SAB Agreement provides for: (a)distribute Alferon N Injection(R) on a $3 million cash
payment to the Company; (b) the formation and issuance to the Company of 24.9 %
of the capital stock of a companynationwide basis.
Engitech, Inc. is to develop and operate a new manufacturing
facilityimplement marketing plans including extensive
scientific and educational programs for RNA drugs to be constructed by SAB/Bioclones, and (c) royalties on
all sales ofuse in marketing Alferon N Injection(R).
COMPETITION
Our potential competitors are among the Company's productslargest pharmaceutical companies
in the licensed territories. In addition,
SAB/Bioclones agreedworld, are well known to use its best efforts to pursue the marketing approval of
Ampligen for HBV in Australia, South Africa, Brazil,public and the United Kingdom, as
well as to perform (at its
41
own expense) a phase III study of Ampligen in chronic HBV infection in South
Africa, which clinical study is to be performed pursuant to U.S. FDA good
clinical practicemedical community, and good laboratory practice guidelines and standards.
SAB/Bioclones will be granted a right of first refusal to manufacture and supply
to the Company the drug product required for not less than one-third of its
world-wide sales of Ampligen (after deducting SAB/Bioclones-related sales) and
will also be granted a right of first refusal for the manufacture and marketing
of any of the Company's other RNA drugs in the licensed territories. According
to its most recent annual report, SAB is a multinational holding company
investing in and taking management responsibility for a portfolio of business in
beer and beverages retailing, hotels and the manufacture of certain mass market
consumer goods, together with strategic investments in businesses which support
its mainstream interests. By September 30, 1995, the Company had received
$3,000,000 in proceeds from SAB, in accordance with the terms of the SAB
Agreement. SAB notified the Company that it had initiated manufacturing of test
amounts of the licensed product as a significant step towards the new
manufacturing facility and design thereof. SAB is traded on the NYSE as American
Depository Receipts (ADRs).
In February, 1996, the Company entered into an agreement with Rivex Pharma,
Inc., a Canadian-based pharmaceutical company which grants Rivex an exclusive
marketing and distribution rights for Ampligen in Canada. In exchange, Rivex is
committed to purchase Ampligen from the Company. Rivex is also committed to
perform regulatory compliance functions necessary for marketing approvals in
Canada.
The Company has a clinical pharmacology unit at Hahnemann University
Hospital (now part of the Allegheny Health Education and Research Foundation and
known as Allegheny University Hospitals - Hahnemann Division) in Philadelphia.
This clinical pharmacology unit has performed studies on Ampligen metabolism in
the body, and initiates clinical trials at the Phase I/II level. The Company
also plans to use this unit for its initial clinical studies of Oragen drugs,
subject to receipt of necessary clinical approvals.
The Company does not own its own research and development or drug discovery
laboratories. Instead, employees of the Company's collaborators conduct those
functions at the laboratories of their employers. The Company has a
long-standing relationship with the Hahneman Division of Allegheny University
Hospitals (Allegheny/Hahnemann), to provide laboratory support in conjunction
with licensing arrangements and financial support from the Company. No
assurances can be given that such relationship will continue on terms
advantageous to the Company or at all.
In June 1989, the Company entered into an assignment and research support
agreement with Allegheny/Hahnemann and Dr. David Strayer, Dr. Isadore Brodsky
and Dr. David Gillespie who is now deceased (the "Scientist Group"). Dr. Strayer
is the Company's Medical Director. Prior to the execution of the
Allegheny/Hahnemann Agreement, Allegheny/Hahnemann and the Scientist Group had
participated in the clinical testing of Ampligen. In an effort to obtain the
benefits of the Scientist Group's future contributions to the development of
Ampligen and obtain exclusive rights to certain proprietary and regulatory
rights relating to Ampligen, the Company,
42
Allegheny/Hahnemann and the Scientist Group entered into the Allegheny/Hahnemann
Agreement, which provides (i) for the assignment by Allegheny/Hahnemann and the
Scientist Group to the Company of all of their respective rights in certain
proprietary information which was then owned or subsequently developed and the
exclusive and perpetual right to apply for any patents, trademarks or copyrights
relating to the proprietary information; (ii) for the payment by the Company to
Allegheny/Hahnemann (and the sharing by Allegheny/Hahnemann and the Scientist
Group on such terms as they determine) of a royalty of 2% of net sales proceeds
(up to a maximum royalty of $6 million per year) on all Ampligen sold by the
Company or any entity licensed by the Company after the date of the grant by the
FDA of the first NDA for Ampligen through January 1, 2005; (iii) for the payment
by the Company to Allegheny/Hahnemann of $ 162,000 for certain scientific
consultative support services to be performed by the Scientist Group during the
first year of the Allegheny/Hahnemann Agreement; (iv) for the payment by the
Company to Allegheny/Hahnemann of certain incremental amounts for scientific
consultative support services to be rendered by the Scientist Group subsequent
to the first year of the Allegheny/Hahnemann Agreement; (v) that either party
may terminate the scientific consultative support services of the Scientist
Group (and the Company's obligations to pay for those services) on 90 days'
notice; and (vi) that all rights to discovery and inventions resulting from the
Allegheny/Hahnemann Agreement are to be the exclusive property of the Company.
The Company has not made any incremental payments to Allegheny/Hahnemann on
account of scientific consultative support services rendered by any member of
the Scientist Group pursuant to the Allegheny/Hahnemann Agreement for any period
subsequent to September 30,1992.
The Company has entered into an at-will arrangement with
Allegheny/Hahnemann University, and Dr. Strayer, among others, pursuant to which
the services of Dr. Strayer, among others, are made available to the Company in
return for monthly salary subsidization payments made by the Company to the
University. The aggregate amount of these monthly payments is presently $14,896.
In August 1988, the Company entered into a pharmaceutical use license
agreement with Temple University (the "Temple Agreement"). Under the terms of
the Temple Agreement, Temple granted the Company an exclusive world-wide license
for the term of the agreement for the commercial sale of Oragen products using
patents and related technology held by Temple, which license is exclusive except
to the extent Temple is required to grant a license to any governmental agency
or non-profit organization as a condition of funding for research and
development of the patents and technology licensed to the Company. The rights to
such patents and related technology had previously been assigned to Temple by
various parties, including Dr. Robert J. Suhadolnik, an employee of Temple. The
Temple Agreement provides (i) for the payment by the Company to Temple of 4% of
net sales of Oragen products the active ingredients of which consist entirely of
products, processes or uses claimed by Temple's patents and 2% of net sales of
Oragen products some, but not all, of the active ingredients of which consist of
products, processes or uses claimed by Temple's patents; (ii) that the Company
must seek all necessary approvals for the commercial sale of Oragen products;
(iii) that the Company must file an application for
43
marketing approval for at least one licensed product with the FDA or a foreign
counterpart on or before August 3, 1996; (iv) for the funding of specified
research payments by the Company; and (v) that the Company shall have an
exclusive option to negotiate for a period of six months the terms of an
exclusive license for the commercial sale of any future related technology with
respect to which Temple shall hold a patent. The Temple Agreement expires upon
the expiration of the last licensed patent, unless sooner. terminated by mutual
consent, upon the failure by the Company to pay any required royalties or upon
any material breach of the agreement. Dr. Suhadolnik, as well as his laboratory,
will derive income and financial support from any royalties paid by the Company.
The Company was notified by Temple in July 1994 that it believed the Company was
in breach of the Temple Agreement and that Temple believed that the Temple
Agreement was terminated. The Company filed a lawsuit seeking a declaratory
judgement that the Temple Agreement remains in full force and effect and seeking
monetary damages. Temple has filed a motion to dismiss this lawsuit and in
January 1995, Temple filed a separate litigation against the Company seeking
declaratory judgment that the Temple Agreement has been lawfully terminated,
together with an award of costs, including attorney fees. The Company and the
University entered a settlement agreement in December, 1996 which resolves all
issues and reinstates the licensing rights.
In May 1992, the Company entered into a letter agreement to provide
research payments to Dr. Werner E. Muller at the University of Mainz for various
exclusive 20-year licensing arrangements including certain technologies for
genetic manipulation of the 2-5A pathway. The Company believes that the research
billing conducted by Dr. Muller will provide general knowledge with respect to
the manipulation of the cellular mechanism by which Ampligen works.
In addition to the arrangements with Temple University and Hahnemann
University described above, the Company has two types of collaborative research
arrangements. First, the Company has entered into "sponsored research
arrangements" with various institutions which provide for the payment by the
Company of specified financial support to the institutions which conduct the
research . Second, the Company has entered into "collaborative arrangements"
pursuant to which the institution conducts studies of the Company's products at
the institution's expense and gives the Company exclusive commercial rights to
research results. The Company provides its drugs to these institutions free of
charge. Collaborative research arrangements provide that the proprietary
knowledge is the sole property of the Company but permit the collaborator, after
a specified time period, to publish the results of its research in scientific
medical journals. The Company has research agreements with the National
Institute for Allergy and Infectious Diseases on the use of Ampligen and Oragen
products in the treatment of HBV infection and various herpes and respiratory
viruses and Hahnemann University on the biochemical and molecular activities of
RNA. Other collaborators include the following entities or scientists therefrom:
the National Cancer Institute, Harvard University Medical School, Yale
University Medical School, Vanderbilt University, University of Pittsburgh,
Howard University, Cornell University, Georgetown University, Stanford
University, University of Pennsylvania, Medical College of Pennsylvania,
University of California at Davis and the Uniformed Services University for the
Health Sciences. International collaborations include scientists from Konstanz
University
44
(Germany), University of Mainz (Germany), University of Toronto (Canada) and
Juntendo University (Japan).
The Company intends to continue to engage in such collaborative and
sponsored research with selected institutions. There can be no assurance,
however, that the Company will be able to maintain its existing collaborative
arrangements or enter into new collaborative arrangements.
Competition
Competition in the development and marketing of therapeutic drugs for human
diseases is intensely competitive. Many different approaches are being developed
for management of the diseases targeted by the Company. In addition to drug
therapy, companies are promoting biological and hormonal therapies, prophylactic
and therapeutic vaccines and surgery. These approaches, however, may have
limited utility and some are often associated with toxicity, including
life-threatening side-effects.
Most FDA-approved anti-viral drugs appear to directly inhibit the viruses
by interfering with their replication (so-called reverse transcriptase or
protease inhibitors). Their mechanisms of action do not seem to stimulate the
production of immune cells to attack or scavenge the disease-causing agents.
Interferon therapy does act by an immune mechanism and has been approved by the
FDA for the treatment of chronic HBV; durable effects, however, are seen in only
a minority of treated subjects and the side-effects are substantial. Interferon
has thus far not been demonstrated to be efficacious in HIV, ME/CFS and the
primary tumors (other than melanoma) and indications targeted by the Company.
The newer anti-HIV drugs may reduce the level of HIV in the plasma by
approximately 99%; however, the dramatic effects are often transitory.
Below is a list of certain compounds which appear directly competitive with
the Company's products:
HIV Infection. The principal treatments for HIV are AZT, DDI, DDC, D4T and
3TC. A group of newer compounds, termed protease inhibitors, share the problems
of rapid viral mutation, multi-drug resistance, etc., but may cause a more
dramatic transient drop in amount of HIV present in the blood stream. No immune
based drugs have been approved to date, and there is a paucity of clinical
developmental research on vaccines due to the problem of rapid viral mutations.
HBV. Treatments include interferon-alpha, thymosin and 3TC. Only interferon
alpha has proven effective in rigorous clinical tests, and less than 20% of
patients have a durable response. Also, interferon's side effects are
substantial and may curtail patient use and physician acceptability,
particularly in the major Asian markets.
ME/CFS. The FDA has not approved any drugs specifically for this disorder.
Physicians typically prescribe analgesics psychotropic and anti-inflammatory
drugs to combat and palliate
45
the symptoms without addressing the underlying immunologic damage or the herpes
virus proliferation.
Renal Cell Carcinoma. Interleukin 2 may be an extremely toxic product often
requiring immediate access to a critical care unit if used according to
manufacturer's recommendations (Chiron/Cetus).
Malignant Melanoma. Interferon alpha was recently approved by the FDA;
however, the percentage of responses is small, and a significant percentage of
relapses are expected. Treatment costs with Interferon often exceed $10,000 per
year.
There are several publicly held companies that place emphasis on nucleic
acid technology. Each is outlined below from publicly available documents filed
with the SEC.
Gilead Sciences, Inc. (Foster City, California; GILD/Nasdaq). Gilead is
developing nucleotide technologies and is pursuing pre-clinical and clinical
development of a number of product candidates.
ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIP/Nasdaq). This
company, founded in 1989, has devoted substantially all of its resources to
research, drug discovery and development programs. In July, 1995, ISIS 2922 was
in Phase III clinical trials to treat CMV-induces retinitis in AIDS patients,
ISIS 2105 was in Phase II trials to treat genital warts, and Phase II trials
were planned for ISIS 2302 for treatment of a variety of inflammatory diseases.
The Company anticipates that it will face increased competition in the
future as new products enter the market and advanced technologies become
available. There can be no assurance that existing products or new products
developed by the Company's competitors will not be more effective than any that
may be developed by the Company. Competitive products may render the Company's
technology and products obsolete or noncompetitive prior to the Company's
recovering research, development or commercialization expenses incurred with
respect to any such products.
Most of the Company's existing or potential competitors have
substantially greater financial technicalresources, product development, and
human resourcesmanufacturing and marketing capabilities than the Company.we have.
These companies and their competing products may be more effective and
less costly than our products. In addition, many of theseconventional drug therapy, surgery
and other more familiar treatments will offer competition to our products.
Furthermore, our competitors have significantly greater experience than the Companywe do in
undertaking research, preclinical studiespre-clinical testing and human clinical trials of new
pharmaceutical products and in
obtaining FDA, EMEA Health Protection Branch ("HPB") and other regulatory
approvals and
manufacturing and marketing suchof products. Accordingly, the Company'sour competitors may succeed in commercializing the productsobtaining FDA
EMEA and HPB product approvals more rapidly or more
effectively than the Company.
The Company's competitive positionus. If any of our products
receive regulatory approvals and we commence commercial sales of our products,
we will also depends upon its abilitybe competing with respect to attractmanufacturing efficiency and retain qualified personnel,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 proprietary products or processes,exploit our
products.
45
The major competitors with drugs to treat HIV diseases include Gilead
Pharmaceutical, Pfizer, Bristol-Myers, Abbott Labs, Glaxo Smithkline and
secure sufficient capital resourcesSchering-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 often substantial period between technological conceptiontreatment of genital and commercial
sales.
46
Subsidiary Companies
In September 1994, the Company incorporated three wholly-owned
subsidiaries--BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"), and
BioAegean Corp. ("BioAegean")--in the State of Delaware.
The purpose of BioPro is to commercialize tobacco-related products. BioPro
intends to develop methods to utilize RNA technology in conjunction with certain
tobacco and cigarette filter products to provide cleaner tobacco products. The
technology is based in part on recent unpublished experiments in laboratory
animals conducted at the University of California, Davis, which suggest that the
Company's RNA drugs may prevent certain aspects of lung fibrosis under certain
experimental conditions. In September, 1994, the Company granted an exclusive
worldwide license and/or sub-license to certain of its patents and assigned
certain other patents to BioPro (the "BioPro License ") for a term of three
years, which term will automatically be extended for a term of 15 years in the
event that BioPro provides evidence that it has commercialized one or more of
the patents. BioPro has agreed that it will not develop any product or
technology which may be deemed therapeutic and has granted a right of first
refusal to the Company with respect to any technology which it may develop or
acquire. BioPro has the right to grant sublicenses subject to the requirement
that its sublicensees agree to non-competition arrangements with the Company.
The Company has agreed that it will not develop any technology related to the
business of BioPro and has granted BioPro a right of first refusal with respect
to any technology it may develop with respect to the business of BioPro. The
Company is developing a business plan and will continue to seek corporate
partners in 1997.
The purpose of Core BioTech is to commercialize the Company's diagnostic
oriented patents which provide RNA technology to detect certain difficult to
diagnose viral diseases such as ME/CFS and other immuno-dysfunctional conditions
through strategically located central reference laboratories. In September,
1994, the Company granted an exclusive worldwide license and/or sub-license to
certain of its patents and assigned certain other patents to Core BioTech (the
"Core BioTech License") for a term of three years, which term will automatically
be extended for a term of 15 years in the event that Core BioTech provides
evidence that it has commercialized one or more of the patents. Core BioTech has
agreed that it will not develop any product or technology which may be deemed
therapeutic and has granted a right of first refusal to the Company with respect
to any technology which it may develop or acquire. Core BioTech has the right to
grant sublicenses subject to the requirement that its sublicensees agree to
non-competition arrangements with the Company. The Company has agreed that it
will not develop any technology related to the business of Core BioTech and has
granted Core BioTech a right of first refusal with respect to any technology it
may develop with respect to the business of Core BioTech.
In June 1995, the directors of BioAegean approved the private placement of
1,000,000 shares of common stock at $1.00 per share which is expected to occur
in 1997. In addition, the directors of BioAegean issued 10-year options to
purchase an aggregate of 1,200,000 shares of
47
common stock of BioAegean at an exercise price of $1.00 per share (the
"BioAegean Options") to its officers and directors. The BioAegean Options are
conditional upon the recipient's agreement to serve BioAegean as needed for at
least 24 months unless fully incapacitated. William A. Carter, M.D., Chairman,
President and Chief Executive Officer of the Company, serves as Chairman, Chief
Executive Officer and a Director of BioAegean and received 300,000 BioAegean
Options. R. Douglas Hulse, Chief Operating Officer of the Company, serves as
Chief Operating Officer of BioAegean and received 50,000 BioAegean Options.
Peter Rodino, III, a director and Secretary of the Company, serves as
Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and
received 150,000 BioAegean Options. Robert Peterson serves as Chief Financial
Officer of both the Company and BioAegean and received 50,000 BioAegean Options.
Sharon Will, Vice President of Investor Relations and Corporate Communications
for the Company, serves as Vice President of Marketing for BioAegean and
received 150,000 BioAegean Options. Harris Freedman serves as Vice President for
Strategic Alliances for both the Company and BioAegean and received 150,000
BioAegean Options. Richard Piani, a director of the Company, serves as a
director and the Advisor for European Affairs of BioAegean and received 50,000
BioAegean Options. Gerald Kay serves as a director for both the Company and
BioAegean and received 50,000 BioAegean Options. BioAegean's remaining director,
Jerome Belson, a principal shareholder of the Company, received 50,000 BioAegean
Options. The Company is presently exploring strategic alliances with recognized
skin care companies which currently market certain products to diminish the
effects of photoaging and UV-light on the skin.
Government Regulation
Overview.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 the Company's proposedALFERON
N products and in itsour ongoing research and product development activities.
All ofAmpligen(R) and the Company's proposed products and products of
itsdeveloped from the ongoing research and product
development activities will require regulatory clearances prior to
commercialization. In particular, new human new drug products for humans are subject
to rigorous preclinical and clinical testing as a condition of
clearancesfor 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 the
Companyus or itsour collaborators or
licensees to obtain, or any delay in obtaining, regulatory approvals could
materially adversely affect the marketing of any products developed by the Companyus and
itsour ability to receive product or royalty revenue. The CompanyWe 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 alsoonly 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 December 10, 2003, we have not received a Fast-Track designation for any of
our potential therapeutic indications although we have received "Orphan Drug
Designation" for both ME/CFS and HIV/AIDS in the 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. 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 the Company'sour research
work. The Company believesWe believe that itsour Rockville, Maryland manufacturing and quality
assurance/control facility is in substantial compliance with all material
regulations applicable to these activities.
48activities as advanced by the European Union
Inspections team
46
U.S. Regulatory Process. Beforewhich 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, 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
(Proprietory) limited ("Bioclones") for manufacturing and international market
development in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen(R) and Oragen(TM).
Bioclones is to pursue regulatory approval in the areas of its franchise and is
required to conduct Hepatitis clinical trials, based on international GMP and
GLP standards. Thus far, these Hepatitis studies have not yet commenced to a
meaningful level. Bioclones has been given the first right of refusal, subject
to pricing, to manufacture that amount of polymers utilized in the production of
Ampligen(R) sufficient to satisfy at least one-third of the worldwide sales
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 Gentiva to
develop certain marketing and distribution capacity for Ampligen(R) in the
United States. Gentiva is one of the nation's largest home health care companies
with over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Gentiva assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, Hemispherx
may mitigate the necessity of incurring certain up-front costs. Gentiva 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 Gentiva or
another major drug product may be sold commerciallydistributor. There were no initial fees and subsequent fees
paid under this agreement total $59,000 for services performed.
We have acquired a series of patents on Oragen(TM), potentially an oral
broad spectrum antiviral, immunological enhancer through a licensing agreement
with Temple University. We were granted an exclusive worldwide license from
Temple for the Oragen(TM) products. Pursuant to the arrangement, we are
obligated to pay royalties of 2% to 4% on sales of Oragen(TM), depending on how
much technological assistance is required of Temple. There were no initial fees
and we currently pay minimum royalties of $30,000 per year to Temple. These
compounds have been evaluated in various academic and government
47
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 U.S.formulation, clinical testing,
registration and other countries,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 trialsstudies and market development programs,
including without limitation, expansion of the product must be
conductedEmergency Drug Release Program in
Canada with respect to our products. In addition, Biovail agrees to work with us
in preparing and results submitted to the appropriate regulatory agencies as part
of the approval process. The Company's therapeutic and diagnostic products are
subject to regulation in the U.S. under the Food, Drug and Cosmetic Act (the
"FDC Act"). Ampligen and other RNA drugs will be reviewed as new drugs by the
FDA's Center for Drug Evaluation and Research ("CDER"). The process includes:
(1) Drug Products. The steps required before a non-biological drug product
may be marketed in the U.S. include (a) conducting appropriate pre-clinical
laboratory and animal tests, (b) submitting to the FDA an application for an
Investigational New Drug ("IND"), which must become effective before human
clinical trials may commence, (c) conducting well-controlled human clinical
trials which establish the safety and efficacy of the drug product, (d) filing a New Drug ApplicationSubmission with Canadian Regulatory
Authorities. 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 ("NDA"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
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 FDA,right of first refusal to acquire
an exclusive worldwide license for any and (e) obtaining FDA approvalall 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 their
current proposed equity offerings.
48
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 out 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 NDA priordisorder.
In March 2002, our European subsidiary Hemispherx S.A. entered into a
Sales and Distribution agreement with Esteve. Pursuant to any commercial sale or shipmentthe terms of the
drug.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 obtaining FDA approvalother
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 each indication to be treated with each product, each
domestic drug manufacturing establishment must register with the FDA, list its
drug products withlonger of ten years from the FDA, comply with current Good Manufacturing Practices
("GMP") requirements and be subject to inspections bydate of
first arms-length sale in the FDA. Foreign
manufacturing establishments also must comply with GMP requirements, and are
subject to periodic inspection byTerritory, the FDA or by local authorities under
agreement with the FDA.
Pre-clinical tests include formulation development, laboratory evaluation
of product chemistry and animal studies to assess the potential safety and
efficacyexpiration of the product formulation. Drug products must be manufacturedlast Hemispherx
patent exploited by Esteve or the period of regulatory data protection for
Ampligen(R) in accordance with GMP requirements and pre-clinical tests must be conducted in
accordance with the FDA regulations regarding Good Laboratory Practices. The
resultsapplicable territory. Pursuant to the terms of the pre-clinical tests are submitted to the FDA as part of the IND
and are reviewed by the FDA prior to authorizing the sponsoragreement
Esteve is to conduct clinical trials using Ampligen(R) to treat patients with
both HCV and HIV and is required to purchase certain minimum annual amounts of
Ampligen(R). The agreement is terminable by either party if Ampligen(R) is
withdrawn form the territory for a specified period due to serious adverse
health or safety reasons; bankruptcy, insolvency or related issues of one of the
parties; or material breach of the agreement. Hemispherx may transform the
agreement into a non-exclusive agreement or terminate the agreement in human subjects. Unless the FDA objectsevent
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 an IND,supply Ampligen(R) to the IND will become
effective 30 days following its receipt by the FDA. There is no certainty that
submissionterritory for a
specified period of an IND will result in FDA authorization to commencetime or certain clinical trials or that authorization of one phase of a clinical trial will result in
authorization of other phases or that clinical trials will result in FDA
approval. Clinical trials may be placed on holdbeing conducted by
the FDA at any time for a
variety of reasons, particularly if safety or design concerns exist.
(2) Clinical Testing Requirements. Clinical trials involve the
administration of the investigational drug product to human subjects. Clinical
trials typicallyHemispherx are conducted in three phases and are subject to detailed
protocols. Each protocol indicating how the clinical trial will be conducted
must usually be submitted for review to the FDA as part of the IND.not successful. The FDA's
review of a study protocol does not necessarily mean that, if the study is
successful, it will constitute proof of efficacy or safety. Further, each
clinical study must usually be conducted under the auspices of an independent
Institutional Review Board ("IRB") established pursuant to FDA regulations. The
IRB considers, among other factors, ethical concerns, informed consent
requirements, and the possible liability of the hospital conducting the trials.
The FDA or IRB may require changes in a protocol both prior to and after the
commencement of a trial. There is no assurance that the IRB or FDA will permit a
study to go forward or, once started, to be completed.
49
The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a larger but still limited patient population to determine the efficacy
of the drug for specific indications, to determine optimal dosage and to
identify possible side effects and safety risks. Phase II testing for an
indication typically takes at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase II evaluations, expanded Phase III trials are undertaken
to gather the additional information about effectiveness and safety that is
needed to evaluate the overall benefit-risk relationship of the drug and to
provide an adequate basis for physician labeling. Phase III studies for an
indication generally take at least from two and one-half to five years to
complete. There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all,last patent with respect to anythis agreement
expires on June 5, 2012.
The development of our nucleic acid based products requires the Company's products that have not yet completed any such
testing. Nor can there be any assurance that completioncommitment
of clinical testing will
result in FDA approval. Furthermore,substantial resources to conduct the FDA may suspendtime-consuming research, preclinical
development, and clinical trials at any
time ifthat are necessary to bring pharmaceutical
products to market and to establish commercial-scale production and marketing
capabilities. During our last three fiscal years, we have directly spent
approximately $16,862,000 in research and development, of which approximately
$4,946,000 was expended in the patients are believedyear ended December 31, 2002. These direct costs
do not include the overhead and administrative costs necessary to be exposed to a significant health risk.
Phase III or other clinical studies may be conducted after rather than before
approval under certain circumstances. For example,support the
FDA may determine under
its accelerated approval regulations that earlier studies, involvingresearch 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 surrogate markers rather than clinical outcomes, may establish an adequate basisME/CFS and other applications for drug product approval, providing that the sponsor agrees to conduct an
additional study after approval to verify and describe the clinical benefitall countries of the drug. TheseEuropean Union
(excluding the UK where Bioclones has a marketing license) and other similar regulations, however, are often limited to
drug products that are intended to treat serious or life-threatening diseases,
especially those diseases for which there are no alternative therapies, or that
provide meaningful therapeutic benefit to patients over existing treatments. The
Company believes that Ampligen may be eligible for review underNorway,
Switzerland, Hungary, Poland, the FDA's
"accelerated approval" or other similar regulations for certain indications;
however, the Company has not decided whether to seek such accelerated or other
similar approvalBalkans, Russia, Ukraine, Romania, Bulgaria,
Slovakia, Turkey, Iceland and no assurances can be given that such accelerated or other
similar approval, if sought, will be granted for any indication pursuant to such
regulations.
In the case of drugs for life-threatening diseases, the initial human
testing is generally done on patients rather than on healthy volunteers. Because
these patients are already afflictedLiechtenstein. As mentioned above, Hemispherx S.A.
entered into a Sales and Distribution Agreement with the target disease, it is possible
that such studies may provide results traditionally obtained in Phase II trials.
These trials are referred to as Phase I/II trials.
Reports of results of the pre-clinical studies and clinical trials for
non-biological drugs are submittedEsteve. Pursuant to the
FDAterms of this agreement, Esteve has been granted the exclusive right in Spain,
Portugal and Andorra to market Ampligen(R) for the formtreatment of an NDAME/CFS. See
"European Operations", above for approvalmore detailed information.
49
HUMAN RESOURCES
As of the marketing and commercial shipment. The NDA also includes information
pertaining to the preparation of drug substances, analytical methods, drug
product formulation, detailsDecember 10, 2003, we had 32 personnel working on the manufacturedevelopment of
finished product as well as
proposed product packaging and labeling. SubmissionAmpligen(R) consisting of an NDA does not assure
FDA approval for marketing. The application review process generally takes two
to three years to complete, although reviews of treatments for cancer and other
life-threatening diseases may be accelerated or expedited. However, the process
may take substantially longer if, among other
50
things, the FDA has questions or concerns about the safety and/or efficacy of a
product. In general, the FDA requires at least two properly conducted, adequate
and well-controlled clinical studies demonstrating efficacy with sufficient
levels of statistical assurance. However, additional information may be
required. For example, the FDA also may request long-term toxicity studies or
other studies relating to product safety or efficacy. Notwithstanding the
submission of such data, the FDA ultimately may decide that the application does
not satisfy its regulatory criteria for approval. Finally, the FDA may require
additional clinical tests following NDA approval to confirm product safety and
efficacy (Phase IV clinical tests).
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's GMP standards. In complying with
GMP standards, manufacturers must continue to expend16 full time money and effort in
production, recordkeeping and quality control to ensure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
drug manufacturing facilities in order to ensure compliance with applicable GMP
requirements. Failure to so comply subjects the manufacturer to possible FDA
action, such as the suspension of manufacturing, seizure of the product, or
voluntary recall of a product.
The product testing and approval process is likely to take a substantial
number of years and involves the expenditure of substantial resources. There can
be no assurance that any approval will be grantedemployees, five regulatory/research
medical personnel on a timelypart-time basis, or at all.
The FDA also may require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory requirements.
Upon approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved dosages. Adverse experiences with the
product must be reported to the FDA. The FDA also may require the submission of
any lot of the product for inspection and may restrict the release of any lot
that does not comply with FDA standards, or may otherwise order the suspension
of manufacture, recall or seizure. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems concerning
safety or efficacy of the product occur following approval.
In addition to applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing11 clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The approval
process varies from country to country and theinvestigator's. Part
time required may be longer or
shorter than that required for FDA approval.
(3) Orphan Drug Status. Under the Orphan Drug Act, the FDA may designate
drug products as orphan drugs if they are intended to treat a rare disease or
condition, which is defined as a disease or condition that affects less than
200,000 persons in the U.S., or if there is no reasonable expectation of
recovery of the costs of research and development from sales in the U.S.
Provided certain conditions are met, orphan drug status confers upon the sponsor
certain tax credits for amounts expended on clinical trials prior to May 31,
1997, as well as marketing exclusivity for seven years following FDA approval of
the product. Marketing
51
exclusivity means that the FDA cannot approve another version of the same
product for the same use for seven years after approval of the first product.
However, the FDA can still approve a different drug for the same use or the same
drug for a different use. The FDA regulations implementing the Orphan Drug Act
define what drugs are the "same" for purposes of the seven year market
exclusivity provisions. The Company has been advised that nucleic acids and
other complex drugs may present potentially difficult orphan drug issues under
these regulations. The Company cannot predict how these provisions will be
implemented with respect to its RNA products and competitive drugs. Certain
benefits of orphan drug status are only available upon obtaining FDA approval
for marketing. For example, orphan drug exclusivity only vests in the same
designated product that is first to receive FDA marketing approval. In 1993,
Ampligen was designated as an orphan drug by the FDA for the clinical
indications of AIDS and renal cell carcinoma. The Company does not believe that
the former designation extends to HIV disease which has not progressed to AIDS.
In December 1993, the FDA designated Ampligen as an orphan drug for the clinical
indications of invasive malignant melanoma and chronic fatigue syndrome. The FDA
denied a request by the Company to designate Ampligen as an orphan drug for
chronic active HBV infection. There is no assurance that any future products
will receive orphan drug designation, or that the benefits currently available
from such designations for Ampligen will not hereafter be amended or eliminated.
Various legislative proposals have from time to time been introduced in Congress
to modify various provisions of the Orphan Drug Act. Currently, Congress has
considered legislation that would amend the Orphan Drug Act and may limit the
scope of marketing exclusivity. The tax credit provisions expired on December
31, 1994 and were renewed by Congress in 1996.
(4) Diagnostic Products. The Company's potential Diagen diagnostic products
also must receive FDA clearance prior to any commercial marketing. The FDC Act
regulates most in vitro diagnostic products as medical devices, and provides for
two clearance mechanisms. Certain products may qualify for a Section 510(k)
procedure, under which the manufacturer gives the FDA a premarket notification
("510(k) Notice") of the manufacturer's intent to commence marketing the
product. The manufacturer must establish that the product to be marketed is
"substantially equivalent" to another legally marketed product which is subject
to a 510(k) Notice or was commercially marketed prior to May 28, 1976 and is not
subject to premarket application ("PMA") requirements. In some cases, a 510(k)
Notice must include data from human clinical studies. Normally, marketing may
commence when the FDA issues an order to the manufacturer finding the product to
be "substantially equivalent." If the product does not qualify for the 510(k)
procedure, the manufacturer must file a PMA which includes results of extensive
clinical and nonclinical tests demonstrating that the product is both safe and
effective. The PMA process requires more intensive testing than the 510(k)
procedure, involves a significantly longer FDA review process, and usually
requires review by an FDA scientific advisory committee. Approval of a PMA
allowing commercial sale of a product requires that its safety and effectiveness
be demonstrated through human clinical studies, usually conducted under an
Investigational Device Exemption ("IDE"). Some diagnostic products may be
clinically tested without an FDA approved IDE. It is unknown at this time
whether an IDE will be required in order to clinically test Diagen products. In
responding to a PMA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not
52
satisfy its regulatory approval criteria. There can be no assurance that
investigational or marketing approvals or clearances for Diagen products will be
granted to the Company.
Canadian Regulatory Process. The regulatory approval process in Canada of
pre-clinical and clinical trials, manufacturing and sales of drugs, registration
of establishments which manufacture biologics, compliance with GMP requirements
and periodic inspection by the Health Protection Bureau ("HPB") of the Canadian
Department of Health and Welfare, which serves as the federal drug agency in
Canada, is in general similar to that in the United States.
(a) Investigational New Drug Application. Before conducting clinical
trials of a new drug in Canada, a company must submit an IND application to
the HPB containing various information about the drug. In November 1992,
the HPB approved the Company's INDs to conduct open-label and controlled
clinical trials of Ampligen for ME/CFS. There is no assurance that the HPB
will accept data obtained from those clinical trials in any submission of
the Company to the HPB to market Ampligen in Canada or that such data, if
accepted, will result in the approval of Ampligen for sale in Canada. The
HPB may place clinical trials on hold at any time if safety concerns exist.
(b) New Drug Submission. Before marketing or selling a new drug in
Canada, the Company must submit a New Drug Submission ("NDS") to the HPB
and receive a notice of compliance from the HPB to sell the drug. The NDS
includes information describing the new drug, including its proper name,
the proposed name under which the new drug will be sold, the specifications
of the new drug, the methods of manufacturing, processing and packaging the
new drug, the controls applicable to these operations, the tests conducted
to establish the safety of the new drug, the tests to be applied to control
the potency, purity, stability and safety of the new drug, the results of
clinical trials and the effectiveness of the new drug when used as
intended. Submission of an NDS does not assure HPB approval of a new drug
for sale. If it determines the NDS meets the requirements of Canada's Food
and Drugs Act and Regulations, the HPB will issue a notice of compliance
for the new drug.
The HPB may deny approval of an NDS if applicable regulatory criteria are
not satisfied or may require additional testing. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the drug reaches the market. The HPB may require testing
and surveillance programs to monitor the new drug once commercialized.
Non-compliance with applicable requirements can result in fines and other
penalties, including product seizures and criminal prosecutions.
Among the requirements for product approval in Canada is the requirement
that a prospective manufacturer conform to the HPB's GMP and good laboratory
practices ("GLP") standards. Before manufacturing a biologic, a manufacturer
must have a license from the HPB that is specific to the site of manufacture.
The HPB periodically inspects the drug manufacturing site in order to ensure
compliance with Canada's Food and Drugs Act and Regulations and GMP and GLP
requirements. If there is a safety concern, the HPB, apart from other sanctions,
can suspend the manufacture of the product.
53
Certain provinces in Canada have the ability to determine whether the costs
of a drug sold within such province will be reimbursed by a provincial
government health plan by listing drugs on formularies. These provincial
formularies may affect the prices of drugs and the volume of drugs sold within
provinces. The Patented Medicines Prices Review Board has the ability to assess
whether the price of a patented medicine is excessive and, if determined to do
so, the Board has the ability to require the patent owner to reduce the price of
the patented medicine, to reduce the price of another patented medicine or to
remit money to the government.
Proposals have recently been made that, if implemented, would significantly
change Canada's drug approval system. Proposals include establishing a separate
agency for drug regulation and modeled on European Community agencies. It is
uncertain whether drugs such as the Company's would be evaluated by this
separate agency, and the Company is unable to predict the impact, if any, on the
transfer of regulatory responsibility from the HPB to the separate agency. The
Company is unable to predict whether these proposals will be implemented or, if
implemented, the effect thereof on the Company.
Employees
As of January 31, 1997 the Company had 14 full-time employees. Of these
employees 9 were engaged in the Company's research, development, manufacturing,
regulatory affairs or pre- clinical testing, and 5 employees performed general
administrative functions including financial matters and investor relations. In
addition, on an as needed basis 8 individuals employed at academic institutions
serve as consultants or independent contractors to the Company. Such personsparties are paid pursuant to licensing agreements with 2 universities. There are 29
additional individuals who serve or have served as part-time consultants or
independent contractors to the Company. In addition, to the individuals
throughout the United States from time to time are retained by the Company as
independent contractors, either on a per diem or monthly basis. The Company
believes22 personnel are engaged
in our research, development, clinical, and manufacturing effort. 10 of our
personnel perform regulatory, general administration, data processing, including
bio-statistics, financial and investor relations functions.
In addition to the foregoing personnel, on March 11, 2003, pursuant to our
agreement with ISI, we added personnel from ISI to our payroll consisting of
five part-time and 12 full-time employees.
We believe that itthe 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; however, competition for such personnel, is intense and there can be no assurance that the Companywe will be able to attract
andor retain the necessary qualified employees and/or consultants in the future.
NoneSCIENTIFIC ADVISORY BOARD
We recently reestablished a Scientific Advisory Board. 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 with, and
meet informally with our employees. All members of the Company's employeesScientific Advisory are
coveredemployed by collective bargaining agreements.
Recent Developments
In March, 1997, The Company sold 5,000 sharesothers and may have commitments to and/or consulting agreements with
other entities, including our potential competitors. Members of Series E Comvertible
Preferred Stockthe Scientific
Advisory Board are compensated at the rate of $1,000 per share in a private offering pursuantmeeting attended or per
day devoted to Regulation
D of the Securities Actour affairs.
FACILITIES
We currently lease and Rule 506 promulgated thereunder. The proceeds of
this placement were used to retire the convertible preferred stock (Series D),
which was placed under Regulation D filing with the SEC during 1996. As a result
of this transaction in 1997, the Company will incur a $1.2 million stock
compensation expense, however, this will have no effect on the net equity of the
company as it will be offset by an increase in additional paid-in capital.
54
In January 1997, the Company began a Phase II clinical trial in Texas
treating HIV infected patients with Ampligen. The trial, approved by the FDA,
will study the effect of Ampligen on viral load, or burden, in HIV patients with
CD4 levels over 400 cells/mm who are not being treated with any other HIV
medications. The principal investigator in the trial, Dr. Patricia Salvato,
specializes in the treatment of individuals with HIV infection. Dr. Salvato is a
Clinical Associate Professor at the University of Texas Health Science Center,
and has participated in prior clinical trials of Ampligen for various chronic
viral diseases including HIV and CFS.
In December, 1996 the Company and Temple University settled their legal
disputes regarding the license agreement between the parties covering the Oragen
drugs. The parties signed the documents required to consummate their settlement,
which includes a worldwide license for the commercial sale of Oragen products
based on patents and related technology held by Temple. This agreement was
originally executed in 1988. In 1994, Temple terminated the agreement, which
caused the company to file legal action to re-instate the 1988 agreement.
In November, 1996, the Company announced that it will significantly expand
the enrollment of patients in Ampligen treatment programs in Belgium. This
expansion was at the request of the Belgium Investigator.
On October 15, 1996, results of a Belgium clinical study were presented at
the annual scientific meeting of the American Association for Chronic Fatigue
Syndrome (AACFS) evidencing that Ampligen produced significant physical and
cognitive improvements among patients suffering from Chronic Fatigue Syndrome.
The study was presented by Kenny De Meirleir, M.D., Ph.D. from the University of
Brussels, and by David S. Strayer, M.D., Professor of Medicine at Allegheny
University, PA, and Medical Director for the Company.
In September, 1996, Helix BioPharma Corp. (Helix) informed the Company that
it had confirmed the elegibility of Ampligen under Canada's Emergency Drug
Release Program to be made available in Canada to sufferers of HIV, Renal
Cancer, and Chronic Fatigue Syndrome. The Company thereupon shipped an initial
inventory of Ampligen to Helix and is in the process of producing further
supplies of Ampligen for Helix.
In July 1996, the Company unbundled its public stock unit (consisting of
one share of Common Stock and one Warrant to purchase Common stock). The Common
shares (HEMX), Warrants (HEMXW) as well as Units (HEMXU) are now separately
traded on NASDQ. The unit (HEMXU) ceased trading in August, 1996.
On July 3, 1996, the Company issued and sold 6,000 shares of Series D
Convertible Preferred Stock ('the Preferred Stock") at $1,000 per share for an
aggregate total of $6,000,000. The proceeds, net of issuance costs, realized by
the Company were $5,395,885. In addition to the issuance of the Preferred Stock,
the Company issued to the buyer Warrants to purchase 100,000 shares of Common
Stock at the strike price of $4.00 per share.
55
In June, 1996, R. Douglas Hulse joined the Company as Chief Operating
Officer (COO). Mr. Hulse serves as Executive Director of The Sage Group, a
healthcare consulting firm specializing in pharmaceutical and biotechnology
business development and strategic planning. In his role as COO, Mr. Hulse
serves as global coordinator interacting with various distributors and corporate
partners while insuring an adequate supply of drug for the Company's expected
commercial sales and expanded clinical programs.
In April, 1996, SAB/Bioclones reported significant accomplishments in South
Africa in fulfillment of their licensing agreement. Pilot production runs of raw
materials for use in manufacturing Ampligen were completed and are being tested
for conformity to Company specifications. SAB/Bioclones are negotiating with two
manufacturers to formulate the drug and to produce 200ml infusion bottles (400mg
Ampligen) for use in clinical trials. Discussions also are underway with
clinical investigators to identify suitable participants for a controlled study
of Ampligen in chronic active hepatitis B. Clinical investigators then will be
selected and patients enrolled for studies. SAB/Bioclones has further reported
interest among Hepatologists to additionally evaluate Ampligen in the treatment
of hepatitis C.
The Company resolved a long standing legal suit with a former note holder
of the Company. The litigation had been simultaneously pursued by the parties in
both the Federal Court of Eastern Pennsylvania as well as in the State Court of
Florida in Palm Beach County. The noteholder also filed a motion for a
preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offering in the amount of $5.8 million,
which motion was granted in November, 1995. On February 15, 1996. the Company
reached an agreement to settle this matter. Terms and conditions of the
settlement included payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.
In February, 1996, the Company entered into an agreement with Helix
BioPharma, a Canadian based pharmaceutical and biochemical and biomedical
company to jointly develop the Company's lead product for certain viral
disorders and diseases of immunological dysregulation. Helix BioPharma is the
parent company of Rivex Pharma, Inc. with which the Company has an agreement for
marketing and distribution services in Canada. Helix BioPharma, headquartered in
Richmond, British Columbia, is developing, licensing, marketing and distributing
biomedical and pharmaceutical products and services principally to the Canadian
markets.
The Company was a defendant in a lawsuit instituted in 1991 by participants
in a double-blind placebo-controlled clinical trial of Ampligen therapy for
ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised
them that they would receive Ampligen after the placebo-controlled study at no
cost for periods ranging from "until marketable" or "for life." Plaintiffs
sought compensatory and punitive damages. The court granted the Company's
motions for summary judgement upon all claims alleged by the plaintiffs in this
case. The plaintiffs have
56
appealed from these orders before the United States Court of Appeals for the
Ninth Circuit. In January, 1996, the Court of Appeals denied their appeal and
sustained the Company's position. On the basis of the Court of Appeals favorable
decision, the Company believes the lawsuit is over with no material effect on
the Company.
Properties
The Company leases and occupiesoccupy a total of approximately 18,850 square feet
of laboratory and office space in two states. The corporatestates and some office space in Paris,
France. Our headquarters is located in Philadelphia, Pennsylvania are located inconsisting of
a suite of offices of approximately 15,000 square feet. TheWe also lease space of
approximately 3,850 square feet in Rockville, Maryland for research of
development, our pharmacy, packaging, quality assurance and quality control
laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850space. Approximately 2,000 square
feet
approximately 2,000 of which are dedicated to the pharmacy, packaging, quality assurance and quality control
product release functions. The Company believesWe believe that itsour Rockville facilities will meet its productionour requirements, including sufficient quantities of
Ampligen
for planned clinical trials and treatment protocols through 1997, at2004 and possibly
longer after which time itwe may need to increase its manufacturing capacityour Rockville facilities either
through third parties or by building or acquiring commercial-scale facilities.
In addition,We currently occupy and use the Company has entered intoNew Brunswick, New Jersey laboratory and
production facility owned by ISI. We are in the SAB Agreement, which provides
the Companyprocess of acquiring title to
these facilities pursuant to our second asset acquisition agreement with 24.9 %ISI.
This acquisition consists of the capital stocktwo buildings located on 2.8 acres. One building is
a two story facility consisting of a companytotal of 31,300 square feet. This facility
has offices, laboratories production space, 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.
50
We also have a 24.9% interest in Ribotech, Ltd. located in South Africa.
Ribotech was established by Bioclones to develop and operate a new manufacturing
facility to be financed by SAB/Bioclones.facility. Manufacturing at the pilot facility commenced in 1996. The Company expectsWe expect that
manufacturing atRibotech will start construction on a new commercial production facility in the
commercial facility will commence in 1998,future, although no assurance can be given that this will occur. Legal ProceedingsWe 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.
LEGAL PROCEEDINGS
On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The Company isaction 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 legal actions that arise indisparagement
and the ordinary course of their business. Management believes that the ultimate
liability, if any, with respect to these claims and legal actions will not havecourt granted us a material effectdirected verdict on the financial position or results of operations ofcounterclaim. On July 2, 2002
the Company.
In March 1995,Court entered an order granting us a new trial against Asensio for
defamation and disparagement. Thereafter, Asensio appealed the Company instituted a declaratory judgment action against
the February 1992 noteholdergranting of a $5 million convertible note and a second
defendant in the United State District Court for the Eastern District of
Pennsylvania ("the Pennsylvania action") to declare as void, set aside, and
cancel the February 1992 convertible note between the Company and the noteholder
("the Note"). In addition, the noteholder instituted suit against the Company on
the Note in the Circuit Court of the 15th Judicial District in and for Palm
Beach County, Florida, seeking judgment on the note, plus attorneys fees, costs
and expenses; in August 1995, this action was stayed by the Florida Courtnew
trial. This appeal is now pending the outcome of the Pennsylvania action. The noteholder also filed a
motion for a preliminary injunction in the Pennsylvania court to enjoin the
Company from disbursing the proceeds of a public offering in the amount of $5.8
million, which motion was granted in November, 1995. On February 15, 1996, the
Company reached an agreement to settle this matter. Terms and conditions of the
settlement include payment of $6,450,000 to the noteholder to cover the unpaid
note balance and legal expenses. The
57
noteholder and related parties returned approximately 282,000 Common Stock
Purchase Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.
In November 1994, the Company filed suit against Temple University
("Temple") in the Superior Court of Pennsylvania.
In June 2002, a former ME/CFS clinical trial patient and her husband filed
a claim in the StateSuperior Court of Delaware ("Superior Court")
seekingNew 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 declaratory judgment that the Temple Agreement remains in full forceresult of negligence and effect and seeking monetary damages in excess of $10 million for Temple's
alleged breach of its obligations of good faithwarranties. We
believe the claim is without merit and fair dealing and certain
terms ofwe are defending the Temple Agreement. Templeclaim against us
through our product liability insurance carrier.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
motion to dismiss this lawsuit
uponclaim 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 groundsBelgium ME/CFS clinical trial as a result of lacknegligence and breach
of personal jurisdiction.warranties. We believe the claim is without merit and we are defending the
claim against us through our product liability insurance carrier.
In January 1995, TempleMarch 2003, the law firm of Schnader, Harrison, Segal & Lewis, LLP
filed separate litigation against the Companya complaint in the Court of Common Pleas of Philadelphia County seeking declaratory judgment that the Temple Agreement has
been lawfully terminated as of July 1, 1994, together with an award of costs
including attorneyagainst us
for alleged legal fees in bringing the action.sum of $65,051. The Companysuit was settled for $12,000
and Temple settled
their disputedismissed.
On September 16, 2003, we filed and subsequently served and moved for
expedited proceedings on, a complaint filed in December, 1996, dropping all litigation and reinstating the
1988 license agreement.
The Company was a defendant in a lawsuit instituted in 1991 by participants
in a double-blind placebo-controlled clinical trial of Ampligen therapy for
ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised
them that they would receive Ampligen after the placebo-controlled study at no
cost for periods ranging from "until marketable" to "for life. " Plaintiffs
sought compensatory and punitive damages. The court granted the Company's
motions for summary judgment upon all claims alleged by the plaintiffs in this
case. The plaintiffs have appealed from these orders before the United States
Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals
denied their appeal and sustained the Company's position. On the basisOf Chancery of the
CourtState of Appeals favorable decision,Delaware, New Castle County, against ISI. The Complaint seeks specific
performance, and declaratory and injunctive relief related to the Company believesfirst and
second asset acquisition agreements with ISI. Specifically, we allege that ISI
has delayed its performance pursuant to the lawsuit is
concluded with no current or future material effect onagreements and, as a result, the
Company's financial
position.
Scientific Advisory Board
The Company established its Scientific Advisory Board in March 1991. The
Scientific Advisory Board consists of individuals who the Company believes have
particular expertise in immunology, virology, pharmacology, cancer therapeutics,
biochemistry and related fields. These individuals advise the Company about
present and long-term scientific planning, research and development. The
Scientific Advisory Board holds annual meetings as required by the clinical
studies in progress by the Company. In addition, individual Scientific Advisory
Board members sometimes consult with, and meet informally with, employeessecond asset purchase did not close within 180 days of the Company on a more frequent basis. All membersdate of the
Scientific Advisory Board
are employed by employers other than the Company and may have commitments to, or
consulting and/or advisory agreements with, other entities, including potential
competitorsagreements. Paragraph 7.7 of the Company,second asset purchase agreement states that
may limit their availability to the Company.
The time spent by Scientific Advisory Board members on the Company's affairs
varies. Although individual members of the Scientific Advisory Board may devote
significant time and energy to the affairs of the Company, no member is expected
to devote more than a small portion of his time to the Company. Members of the
Scientific
58
Advisory Board are compensated at a rate of $1,500 per meeting attended or day
devoted to Company affairs. In addition, Doctors Cheng and Brodsky have been
granted options to acquire 4,608 and 5,253 shares of Common Stock, respectively,
at exercise prices of $4.34 and $1.06 per share, respectively. As described
elsewhere herein, Dr. Brodsky is aeither party to the Hahnemann Agreement,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
51
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 and accepted the agreement
of the parties pursuant to which hethe date on which ISI may exercise its
termination right is entitledextended until no earlier than two weeks following trial.
In response to receive certain royalties from the Company with respectour complaint, ISI has filed a motion to sales of Ampligen. See "Business - Research and Development, Licensing and
Collaboration Agreements."dismiss.
MANAGEMENT
The following sets forth biographical information is furnished with respect to membersabout each of our
directors and executive officers as of the Scientific Advisory Board:
NAME POSITIONS INSTITUTION
- ---- --------- -----------
Isadore Brodsky, M.D. Professor of Medicine and Head, Medical College of
Division of Hematology/Oncology Pennsylvania and Hahnemann
University, School of Medicine,
Philadelphia, Pennsylvania
Yung-Chi Cheng, Ph.D. Director, Developmental Therapeutics/ Yale University School of
Chemotherapy Program Medicine, New Haven, Connecticut
Professor of Pharmacology and Yale University Center, New Haven
Comprehensive Internal Medicine Center, New Haven, Connecticut
Clyde Crumpacker, M.D. Professor of Medicine Harvard Medical School,
Boston, Massachusetts
Physician Harvard Medical School,
Brigham & Women's Hospital,
Beth Israel Hospital, Boston,
Massachusetts
Robert A. Good, Ph.D. Distinguished Professor Departments of Pediatrics
and M.D., D.Sc. Microbiology, University
of South Florida, Tampa,
Florida
Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida
James Greene, Ph.D. Associate Professor of Biology Catholic University,
Washington, D.C.
Anthony L. Komaroff, M.D.,
Ph.D. Professor of Medicine, Harvard Medical School,
Chief, Division of General Medicine Brigham & Women's
Hospital,
Boston, Massachusetts
59
William Mitchell, M.D.,
Ph.D Professor of Pathology Vanderbilt School of
Medicine,
Nashville, Tennessee
Phillip Roane, Ph.D. Associate Professor of Howard University,
Microbiology Washington, D.C.
Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium
Data Safety Monitoring Board
Because the Company periodically conducts placebo-controlled clinical
studies in chronic incurable diseases, it has designated a Data Safety
Monitoring Board compriseddate of independent physicians, scientists and patient
advocates. During the conduct of a placebo-controlled clinical trial (i.e.
involving the use of placebo for certain patients involved in the trial), the
Data Safety Monitoring Board meets at pre-determined intervals to evaluate the
safety, efficacy and/or ethical implications of a placebo-controlled trial.
Members of the Data Safety Monitoring Board are compensated at a rate of $1,500
per meeting attended. Members are not allowed to hold stock in the Company.
The following are members of the Data Safety Monitoring Board:
NAME POSITIONS INSTITUTION
- ---- --------- -----------
Robert A. Good, M.D., Distinguished Professor Departments of Pediatrics and
Ph.D., D.Sc. Microbiology, University of South Florida,
Tampa, Florida
Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida
Lewis Marshall, M.D. Associate Professor of Medicine Howard University College of
Medicine, Washington, D.C.
Chief, Infectious Diseases Providence Hospital,
Washington, D.C.
Chief, Infectious Diseases Columbia Hospital for Women,
Washington, D.C.
The Rev. Daniel Paul
Matthews D.D. Rector Parish of Trinity Church,
Wall Street, New York
Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium
60
MANAGEMENT
Directors, Executive Officers and Key Employees
The directors, executive officers, key employees and advisors of the
Company are as follows:this prospectus:
Name Age Position
---- --- --------
William A. Carter, M.D. 5965 Chairman, Chief Executive Officer, and
President
R. Douglas Hulse 53 Chief Operating Officer
Robert E. Peterson 6066 Chief Financial Officer
Harris Freedman 63 Vice President, Corporate Communications
Sharon D. Will 38 Vice President, Investor Relations
Peter W. Rodino III 43 Director, Secretary
Cedric C. Philipp 74 Director, Associate Secretary, Special
Advisor to the Board/International
Richard C. Piani 70 Director
David R. Strayer, M.D. 5157 Medical Director, Director of Regulatory Affairs
Carol A. Smith, Ph.D. 4551 Director of Manufacturing and Process
Development
JosephineRichard C. Piani 76 Director
William M. Dolhancryk 34 Treasurer, AssistantMitchell, M.D. 68 Director
Ransom W. Etheridge 64 Director and Secretary
Executive Officers
WilliamEraj Kiani 58 Director
Antoni Esteve 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,CARTER, M.D., the co-inventor of Ampligen, joined the CompanyHemispherx in
1978, and has served asas: (a) the Company'sHemispherx's Chief Scientific Officer since May
1989,1989; (b) the Chairman of the Company'sHemispherx's Board of Directors since January 19921992;
(c) the Company'sHemispherx's Chief Executive Officer since July 1993,1993; (d) the Company'sHemispherx's
President since April, 1995,1995; and (e) a director since 1987. From 1987 to 1988,
Dr. Carter served as the Company'sHemispherx's Chairman. Dr. Carter was a leading
61
innovator
in the development of human interferon for a variety of treatment indications
including various viral diseases and cancer. In this context, heDr. 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 the Company'sHemispherx's Chief Executive Officer and Chief Scientist. He received his
M.D. degree from Duke University and underwent his post-doctoral training at the
National Institutes of Health and Johns Hopkins University. Dr. Carter also
servesserved as Professor of Neoplastic Diseases at Hahnemann Medical University, a
position he has held since 1980. He is alsofrom 1980 to 1998. Dr. Carter served as Director of Clinical
Research for Hahnemann Medical University's Institute for Cancer and Blood
Diseases. Dr. Carter has servedDiseases, and as a professor at Johns Hopkins School of Medicine Hahnemann University and the State
University of New York at Buffalo. R. Douglas Hulse was named Chief Operating OfficerDr. Carter is a Board certified physician and
author of more than 200 scientific articles, including the editing of various
textbooks on June 1, 1996. Since July
1995, he had been Special Advisor for Licensinganti-viral and New Product Development to
the Company's Board of Directors. Since 1995 heimmune therapy.
ROBERT E. PETERSON has served as Executive Director
of The Sage Group, a health care consulting firm specializing in pharmaceutical
and biotechnology business development and strategic planning. Between 1991 and
1994, Mr. Hulse was Vice President of Business Development for Enzon, Inc., a
biopharmaceutical company with proprietary drug delivery technologies, and from
1986 to 1991, Mr. Hulse served as an independent financial and business
development consultant to various biotechnology companies. He was President and
CEO of i-STAT Corporation, a manufacturer of medical biosensors, from 1984 to
1986 and Vice President of Strategic Planning for Engelhard Corporation from
1982 to 1984. Mr. Hulse held several executive positions with Halcon
International, Inc., a leading chemical company, from 1968 to 1982. Mr. Hulse
received Masters degrees in Industrial Management and Chemical Engineering
Practice from M.I.T. and a Bachelors degree in Chemistry from Princeton
University.
Robert E. Peterson has served asour Chief Financial Officer of the Company since April,
1993 and served as an independent financial advisorIndependent Financial Advisor to the Companyus from 1989 to April,
1993. Also, Mr. Peterson has also served since 1990 as Vice President of the Omni Group, Inc., a
business consulting group based in Tulsa, Oklahoma.
During the period 1983 through 1992,Oklahoma since 1985. From 1971 to
1984, Mr. Peterson was self-employed as a
financial consultant to businessesworked for PepsiCo, Inc. and served in various industries. Mr. Peterson wasfinancial
management positions including Vice President and Chief Financial Officer of
PepsicoPepsiCo Foods International from 1979
to 1983 and responsible for financial management of this multinational operating
unit with approximately $500 million in annual revenues.PepsiCo Transportation, Inc. Mr. Peterson is a
graduate of Eastern New Mexico University.
Harris Freedman has52
DAVID R. STRAYER, M.D. who served as Vice President for Strategic Alliances since
August 1994 and has been a private venture capitalist and business consultant
for more than the past five years. He is the Secretary of Bridge Ventures, Inc.
("Bridge Ventures") and SMACS Holding Corp., both of which are private venture
capital companies, positions he has held for more than five years. His business
experience has encompassed developing significant business contacts and acting
as an officer or director of several companies in the pharmaceutical, health
care and entertainment fields. Mr. Freedman was Vice President of U.S. Alcohol
Testing of America, Inc., from August 1990 to February 1991. Additionally, he
was Vice President--East Coast Marketing for
62
MusicSource U.S.A., Inc. from October 1992 to January 1994. Mr. Freedman
attended New York University from 1951 to 1954.
Sharon D. Will has been Vice President for Corporate Communications and Investor
Relations since November 1994. Prior to that time, she was a registered sales
representative and Senior Vice President for Institutional Sales at Westfield
Financial Corporation from September 1994 to October 1994. She was a registered
sales representative with Marsh Block Corporation from July 1994 to September
1994. From October 1993 to July 1994 she served as a registered sales
representative at Seaboard Securities Corp. From October 1991 to present, Ms.
Will has been President of Worldwide Marketing Inc. a manufacturers'
representative of various companies selling to the retail trade markets. Ms.
Will was the National Sales Manager of Innovo, Inc., a domestic manufacturer of
textiles, from October 1989 to November 1991. She attended Baylor College as an
undergraduate for two years with a primary focus on chemistry.
Peter W. Rodino III has served as a director of the Company since July 1994 and
Secretary of the Company since November 1994. He had previously served on the
Company's Board of Directors from 1987 to 1989. From 1988 through the present he
has served as Managing Partner of the law firm Rodino and Rodino, which
primarily deals in corporate, commercial, insurance, real estate, environmental,
bankruptcy and immigration law. He was a partner in the law firm of Rodino and
Scalera, Inc. from 1988 to 1991. He has served as Chairman of the Board of
Directors of the Foundation Health Plan of New Jersey, an IPA/HMO providing
health care services, from 1983 to 1988 and as a Director of Columbus Hospital
from 1986 to 1990. Mr. Rodino earned a B.S. in Business Administration from
Georgetown University in 1973 and a J.D. from Seton Hall University School of
Law in 1976.
Cedric C. Philipp has served as a director of the Company since July 1994 and as
Special Advisor for International Marketing since 1993. He is President of
Philipp Pharmaceutical Marketing, a consulting firm which he founded in 1987.
From 1957 to 1987, he was with Wyeth International, a division of American Home
Products, during which time he served in various capacities in international
marketing and sales, most recently as Executive Assistant to the President. Mr.
Philipp received his A.B. degree from Columbia College and later attended
Columbia Law School and the Graduate School of Princeton University.
Richard C. Piani has served as a director of the Company since May 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 since 1995. Mr. Piani provided consulting to the Company in 1993, with
respect to general business strategies for the Company's European operations and
markets. He served as Chairman of Industrielle du Batiment-Morin, a building
materials corporation, from 1986 to 1993. Previously he was Professor of
International Strategy at Paris Dauphine University from 1984 to 1993. From 1979
to 1985 Mr. Piani served as Group Director in Charge of International and
Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 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
63
degree from Faculte de Droit, Paris Sorbonne and a Business Administration
degree from Ecole des Hautes Etudes Commerciales, Paris.
David R. Strayer, M.D., who serves as Professor of Medicine at the Medical
College of Pennsylvania and Hahnemann University, has acted as theour Medical
Director of
the Company since 1986. He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and immune system
disorders. Dr. Strayer has served as principal investigator in studies funded by
the Leukemia Society of America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of Medicine at the
University of California at Los Angeles where he received his M.D. in 1972.
Key Employees
CarolCAROL A. Smith,SMITH, Ph.D. has served as the Company'sour 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.Ampligen(R). Dr. Smith has also beenwas
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.
Josephine M. Dolhancryk joined the Company in 1990RICHARD C. PIANI has been a director of Hemispherx since 1995. Mr. Piani
has been employed as Office Manager, was
promoted to Executive Assistanta principal delegate for Industry to the City of Science
and Industry, Paris, France, a billion dollar scientific and educational
complex. Mr. Piani provided consulting to Hemispherx in 1993, with respect to
general business strategies for Hemispherx's European operations and markets.
Mr. Piani served as Chairman of the BoardIndustrielle du Batiment-Morin, a building
materials corporation, from 1986 to 1993. Previously Mr. Piani was a Professor
of International Strategy at Paris Dauphine University from 1984 to 1993. From
1979 to 1985, Mr. Piani served as Group Director in Charge of International and
Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 he was Chairman and
Chief Executive Officer of Societe "La Cellophane", the French company which
invented cellophane and several other worldwide products. Mr. Piani has a Law
degree from Faculte de Droit, Paris Sorbonne and a Business Administration
degree from Ecole des Hautes Etudes Commerciales, Paris.
RANSOM W. ETHERIDGE has been a director of Hemispherx since October 1997,
and presently serves as our Secretary. Mr. Etheridge first became associated
with Hemispherx in 19911980 when he provided consulting services to Hemispherx and
Assistant Secretary, Treasurerparticipated in negotiations with respect to Hemispherx's initial private
placement through Oppenheimer & Co., Inc. Mr. Etheridge has been practicing law
since 1967, specializing in transactional law. Mr. Etheridge is a member of the
Virginia State Bar, a Judicial Remedies Award Scholar, and Executive Administrator
in 1995. From 1989 to 1990 Ms. Dolhancryk washas served as
President of Medical/Business
Enterprises. Ms. Dolhancryk was employed by Children's Hospitalthe Tidewater Arthritis Foundation. He is a graduate of PhiladelphiaDuke
University, and received his Law degree from 1984 to 1989,the University of Richmond School
of Law.
WILLIAM M. MITCHELL, M.D. has been a director of Hemispherx since July
1998. Dr. Mitchell is a Professor of Pathology at Vanderbilt University School
of Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns
Hopkins University, where she alsohe served as research coordinator onan Intern in Internal Medicine, followed
by a drug studyFellowship 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 19861987 to 1988. Ms. Dolhancryk attended Saint Joseph's University and
Delaware County College.
Board Committees
The1989.
IRAJ E. KIANI, M.B.A., Ph.D., was appointed to the Board of Directors maintains anon
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
53
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 became a member of our Board of Directors in November 2003.
Dr. Esteve is a Member of the Executive Committee consistingand 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.
Committees of the Board
The board of directors maintains the following committees:
Audit Committee. Our Audit Committee of the Board of Directors consists of
Richard Piani, Committee Chairman, William Mitchell, M.D. and Iraj-Eqhbal Kiani.
Mr. Piani, Dr. Mitchell and Iraj-Eqhbal Kiani are Independent Directors. We do
not have a financial expert as defined in Securities and Exchange Commission
rules on the committee in the true sense of the description. However, Mr. Piani
is a Businessman and has 40 years of experience of working with budgets,
analyzing financials and dealing with financial institutions. We believe Mr.
Piani, Dr. Mitchell and Iraj-Eqhbal Kiani to be independent of management and
free of any relationship that would interfere with their exercise of independent
judgment as members of this committee. 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.
Executive Committee. The Executive Committee is composed of William A.
Carter, Chief Executive Officer and PeterPresident, Ransom W. Rodino III, whichEtheridge, Secretary
and Iraj-Eqhbal Kiani. The Executive Committee makes recommendations to
management regarding general business matters of the Company; aHemispherx.
Compensation Committee. The Compensation Committee consistingis composed of PeterRansom
W. Rodino IIIEtheridge, Secretary and director, and Richard C. Piani, whichdirector. The
Compensation Committee makes recommendations concerning salaries and
compensation for employees of and consultants to the Company; an Audit Committee consisting of Cedric C. Philipp,
which reviews the results and scope of the audit and other services provided by
independent auditors; and a Strategic Planning Committee consisting of William
A. Carter, Peter W. Rodino III and Cedric C. Philipp, which makes
recommendations to the Board of priorities in the application of the Company's
financial assets and human resources in the fields of research, marketing and
manufacturing.
64
Hemispherx.
Compensation of Directors
During the fourth quarterPrior to September 10, 2003, Board member compensation consisted of fiscal 1995,an
annual retainer of $35,000 plus $1,000 per meeting attended. Committee chairmen
each non-employee directors
received $3,750 as compensation for serving onan additional retainer of $5,000 per year and committee members
each receive an additional retainer of $3,000 per year. On September 10, 2003,
the Board of Directors or any
committee thereof. Certainrevised compensation for directors to consist of an
annual retainer of $50,000 per director and $50,000 in common stock. All
non-employee directors receivereceived some compensation as
consultants to the Company andin 2001 for special project
work performed on our behalf. All directors have been granted options to
purchase Common
Stockcommon stock under the Company'sour 1990 Stock Option Plan and Rule 701and/or Warrants to
purchase Common Stock of the Company. All of the directors are reimbursed for
their expenses incurred in attending meetings of the Board of Directorscommon stock. We believe such compensation and its
committees. Currently, non-management directors receive an annual retainer of
$15,000 and receive $600 for each Board or committee meeting they attend and
will be reimbursed for out of pocket expenses incurred in attending meetings.
The Company believes such payments are necessary
in order for the Companyus to attract and retain qualified outside directors.
In addition, in October 1994, the Board of Directors granted to Cedric C.
Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and 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 1% of all products
manufactured by SAB/Bioclones. The Company may prepay in full the obligation to
provide commissions up to $1,050,000 within a ten year period. These rights were
granted to Mr. Philipp in exchange for his services in the negotiation of the
SAB Agreement and his services in connection with various marketing and
licensing opportunities for the Company. In addition, the Company further agreed
to provide a monthly retainer of $2,000 to Mr. Philipp in exchange for
consulting services related to general pharmaceutical and international
marketing services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $128,000
pursuant to these arrangements through December 31, 1996.
In June 1995, the Board of Directors of BioAegean, a subsidiary of the
Company, issued an aggregate of 550,000 BioAegean Options at an exercise price
of $1.00 per share to Dr. William A. Carter, Cedric C. Philipp and Peter Rodino,
III, directors of the Company.
In October and November 1994, the Company granted an aggregate of 1,480,000
Rule 701 Warrants to purchase shares of Common Stock at $3.50 per share to Dr.
Carter, Mr. Philipp and Mr. Rodino, directors of the Company, and Maryann
Charlap Azzato a former director of the Company. See "Certain Transactions."
In 1994 and 1993 the Company issued shares of Series C Preferred Stock at
$5.00 per share to certain directors in various transactions including certain
sales of Series C Preferred Stock and conversion of certain debt. See "Certain
Transactions."
6554
Executive Compensation
Summary Compensation Table. The followingsummary compensation table below sets forth certain
information with respectthe aggregate compensation
paid or accrued by us for the fiscal years ended December 31, 2002, 2001 and
2000 to the compensation of the Company's(i) our Chief Executive Officer and the other(ii) our four most highly compensatedpaid
executive officers other than the CEO who were serving as executive officers at
the end of the Company
for thelast completed fiscal year ended December 31, 1996.and whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executives").
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Name and Other Annual Restricted Stock Option All other
Principal Position Year Salary Compensation($)(1) Awards($) Awards Compensation($)(2)
- ------------------ ---- ------ ------------------ --------- ------ ------------------
William A. Carter 1996 $ 400,522(3) -- -- -- 7,778
Chairman of the Board 1995 363,420(3) -- -- 300,000(5) 7,778
Chief Executive Officer 1994 363,420(3) -- -- 1,400,000(6) 7,778
Robert E. Peterson 1996 128,000 -- -- 50,000(7) --
Chief Financial Officer(4) 1995 120,000 -- -- 50,000(8) --
1994 110,000 -- -- -- --
Sharon Will 1996 126,000 -- -- -- --
Vice President 1995 125,000 -- -- 50,000(8) --
1994 -- -- -- 200,000(9) --
David R. Strayer, M.D 1996 130,427(11) -- -- -- --
Medical Director 1995 115,083 -- -- -- --
1994 -- -- -- --
Harris Freedman 1996 126,000 -- -- -- --
Vice President 1995 112,500 -- -- 150,000(8) --
1994 -- -- -- 400,000(10)Name and Year Salary ($) Restricted Warrants & All Other
Principal Stock Options Compensation
Position Awards Awards (1)
- -------------------------------------------------------------------------------
William A. Carter 2002 $468,830 --
(8)1,000,000 $25,747
Chairman of 2001 (4) 456,608 -- (2) 386,650 22,917
the 2000 (4) 539,620 -- (5) 100,000 17,672
Board and CEO
Robert E. Peterson 2002 $151,055 -- (8) 200,000 --
Chief 2001 146,880 -- (3) 40,000 --
Financial 2000 145,944 -- -- --
Officer
David R. Strayer, 2002 $178,594 -- (8) 50,000 --
M.D. 2001 174,591 -- (7) 10,000 --
Medical Director 2000 (6) 172,317 -- -- --
Carol A. Smith, 2002 $128,346 -- (8) 20,000 --
Ph.D. 2001 124,800 -- (7) 10,000 --
Director 2000 124,800 -- -- --
of
Manufacturing
- ----------------------
(1) The Company makes available certain non-monetary benefits to its officers
with a view to attracting and retaining qualified personnel and
facilitating job performance. The Company considers such benefits to be
ordinary and incidental business costs and expenses. The aggregate value of
such benefits, which cannot be precisely ascertained but which is less than
10% of the cash compensation of each of the above-named executive officers,
is not included in the table.
(2) Consists of insurance premiums paid by the CompanyHemispherx 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 $63,000a bonus of $90,397 paid in 2000. Also includes funds previously
paid to Dr. Carter by Hahnemann Medical University where he servesserved as a
professor.
66
(4) Mr. Peterson joined the Companyprofessor until 1998. This compensation was continued by us and totaled
$79,826 in April 19932000 and is paid on a fee basis.2001, and $82,095 in 2002.
(5) BioAegean OptionsRepresents warrants to purchase 300,000common stock exercisable at $6.25 per
share.
55
(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
2000, 2001 and 2002.
(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 of BioAegean
Corp., a subsidiary ofat $2 per
share.
The following table sets forth certain information regarding stock
warrants granted during 2002 to the Company, at $1.00 per share, which were grantedexecutive officers named in May 1995 (the "BioAegean Options").
(6) Rule 701 Warrants to purchase Common Stock at $3.50 per share granted in
October 1994. These Rule 701the Summary
Compensation Table.
- ------------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE OF
NUMBER OF TOTAL WARRANTS POTENTIAL REALIZABLE VALUE AT
SECURITIES GRANTED TO ASSUMED RATES OF STOCK PRICE
UNDERLYING EMPLOYEES IN APPRECIATION FOR WARRANTS TERM
WARRANTS GRANTED FISCAL YEAR EXERCISE PRICE ---------------------------------
NAME (1) 2002(2) PER SHARE (3) EXPIRATION DATE 5% (4) 10%(4)
- ------------------------------------------------------------------------------------------------------------------------------------
Carter, W.A. 1,000,000 61.6% $2 8/13/07 $1,879,500 $1,969,000
- ------------------------------------------------------------------------------------------------------------------------------------
Peterson, R. 200,000 12.3% $2 8/13/07 $375,900 $393,800
- ------------------------------------------------------------------------------------------------------------------------------------
Smith, C. 20,000 1.2% $2 8/13/07 $37,590 $39,380
- ------------------------------------------------------------------------------------------------------------------------------------
Strayer, D. 50,000 3.1% $2 8/13/07 $93,975 $98,450
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Warrants vest in 1/3 increments over a 36
month period. Rule 701 Warrants areperiod ranging from two to four years.
(2) Total warrants which were issued to officers,
directors and consultantsemployees in 2002 were 1,622,000.
(3) The exercise price is equal to the closing price of the Company in reliance upon Rule 701 of the
Securities Act.
(7) Warrants to purchase Common Stock at $3.50 purchase granted in March 1996.
(8) BioAegean Options.
(9) Rule 701 Warrants to purchaseour common stock at
$3.50 per share granted in
November 1994.
(10) Rule 701 Warrants to purchasethe date of issuance.
(4) Potential realizable value is based on an assumption that the market price
of the common stock appreciates at $3.50 per share granted in
August 1994.
(11) Includes $80,427 paid to Dr. Strayerthe stated rates compounded annually,
from the date of grant until the end of the respective option term. These
values are calculated based on requirements promulgated by Hahneman University.
67
Year End Option Table.the Securities
and Exchange Commission and do not reflect our estimate of future stock
price appreciation.
The following table sets forth certain information regarding the stock
options held as of December 31, 19962002 by the individuals named in the above
Summary Compensation Table.
56
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) atEnd Numbers At Fiscal Year End (9)End(1) Dollars
Name Shares Acquired Value ----------------------------- ---------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
Acquired on Realized ($)
Exercise (#)
- ------ --------------- ------------ ----------- ------------- ----------- --------------------------------------------------------------------------------------------------------------------------------------
William A. Carter --- --- 1,473,021(1) 766,667(2) 245,000 ----- -- 3,552,044(2) 753,334(3) $ 209,200 $ 97,500
Robert E. Peterson ___ ___ 10,368(3) 103,456(4) --- ---
Sharon Will ___ ___ 513,333(5) 216,667(6) 190,000 ---
Harris Freedman ___ ___ 989,827(7) 283,333(8) 182,500 ----- -- 300,416(4) 103,334(5) 6,300 6,300
David Strayer -- -- 101,666(6) 28,334(7) 3,250 3,250
Carol Smith -- -- 28,457(8) 13,334(9) 1,300 1,300
- ------------------------
(1) IncludesComputation based on $2.13, the December 31, 2002 closing bid price for
the common stock on the American Stock Exchange.
(2) Consists of (i) 933,333 currently250,000 warrants exercisable Rule 701 Warrants to purchase
Common Stock at $3.50 per share; (ii) 73,728 stock options to purchase
Common Stock at $3.50 per share; (iii) 960 warrants to purchase Common
Stock at $3.50 per share; and (iv) warrants to purchase 465,500 shares of
Common Stock at $1.75 per share.
(2) Includes 300,000 BioAegean Options, for which there is no public market,
and 466,667 Rule 701 Warrants.
(3) Stock options to purchase Common Stock at $4.34 per share.
(4) Includes 50,000 BioAegean Options, 50,000 warrants to purchase Common Stock
at $3.50$2.00 per share and 3,456 stock optionsexpiring
on August 13, 2007, (ii) 188,325 warrants exercisable at $4.34$6.00 per share.
(5) Includes 133,333 currentlyshare
expiring on February 22, 2006, (iii) 188,325 warrants exercisable Rule 701 Warrants and 380,000at $9.00
per share expiring on February 22, 2006, (iv) 100,000 warrants to purchase Common Stockexercisable
at $1.75$6.25 per share.
(6) Includes 150,000 BioAegean Options and 66,667 Rule 701 Warrants.
(7) Includes (i) 266,667 Rule 701 Warrants currently exercisable; (ii) 292,161share expiring on April 8, 2004, (v) 25,000 warrants
exercisable at $6.50 per share expiring on September 17, 2004 (vi) 25,000
warrants to purchase common stock at $3.50$8.00 per share; (iii) 365,000share expiring September
17, 2004 and 6,666 stock option exercisable at $8.00 per share expiring on
January 3, 2011. Also include 2,768,728 warrants to purchase Common Stock at $1.75 per share; and (iv) 66,000 Class
A Warrants to purchase Common Stockoptions held in the
name of Carter Investments, L.C. of which W. A. Carter is the principal
beneficiary. These securities consist of (i) 340,000 warrants exercisable
at $4.00 per share.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 January 1,
2008, (v) 465,000 warrants exercisable at $1.75 expiring on June 3, 2005,
(vi) 1, 400,000 warrants exercisable at $3.50 per share expiring on
October 16, 2004 and 73,728 stock options exercisable at $2.71 per share
until exercised.
(3) Consists of (i) 750,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and (ii) 3,334 start options exercisable at $4.03 per
share expiring on January 3, 2011.
(4) Consists of (i) 6,666 stock options exercisable at $4.03 per share
expiring on January 3, 2011 (ii) 13,750 stock options exercisable at $3.50
per share expiring on January 22, 2007, (iii) 100,000 warrants exercisable
at $2.00 per share expiring on August 13, 2007, (iv) 50,000 warrants
exercisable at $3.50
57
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) 100,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and (ii) 3,334 stock options exercisable at $4.03 per
share expiring on January 3, 2011.
(6) Consists of (i) 25,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007, (ii) 50,000 warrants exercisable at $4.00 per share
expiring on February 28, 2008, (iii) 6,666 stock options exercisable at
$4.08 expiring on January 3, 2011 and (iv) 20,000 stock options
exercisable at $3.50 per share expiring on January 22, 2007.
(7) Consists of 25,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007 and 3,334 stock options exercisable at $4.03 per share
expiring on August 13, 2007.
(8) Includes 133,333 Rule 701 WarrantsConsists of (i) 10,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007, (ii) 5,000 warrants exercisable at $4.00 per share
expiring on June 7, 2008, (iii) 6,666 stock options exercisable at $4.03
per share expiring on January 3, 2016, and 150,000 BioAegean Options.(iv) 6,791 stock options
exercisable at $3.50 per share expiring on January 22, 2007.
(9) Computation basedConsists of 10,000 warrants exercisable at $2.00 per share and 3,334 stock
options exercisable at $4.03 per share expiring on $2.25, the December 31, 1996 closing price for the
Common Stock.
68
Option Grant Table.January 3, 2004.
Equity Compensation Plan Information
The following table sets forth certaingives information regardingabout our Common Stock that may be
issued upon the exercise of options, granted during the fiscal year endedwarrants and rights under all of our equity
compensation plans as of December 31, 1996 by the
Company to the individuals named in the above Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Options Granted to
Granted Employees in Exercise Price Expiration
Name (#) Fiscal Year $/Share Date
- ---- -------- ----------- ------------- ----------
Robert E. Peterson 50,000 17% $3.50 3/1/06
692002.
Number of Number of securities
Securities to be Remaining available
issued upon Weighted-average For future issuance
exercise of Exercise price of under equity
outstanding outstanding compensation plans
options, warrants Options, warrants (excluding securities
And rights And rights Reflected in column
---------- ---------- -------------------
Plan Category
(a) (b) (c)
Equity compensation plans
approved by security holders: 294,665 $ 3.57 258,293
Equity compensation plans
not approved by security
holders: -- -- --
------- -------- -------
Total 294,665 $ 3.57 258,293
58
Employment Agreements
The Company entered into an employment agreement with Sharon Will providing
for her employment as Vice President for Corporate Communications and Investor
Relations on November 1, 1994. The agreement provides for Ms. Will to be
employed for a one-year term (which was extended to three years in July 1995) at
a base salary of $120,000 and provides for termination of the agreement upon
certain circumstances including termination by the Company or Ms. Will on 14
days written notice or the sale of Ms. Will's stock in the Company. Pursuant to
the agreement, Ms. Will was granted Rule 701 Warrants to purchase 200,000 shares
of Common Stock of the Company at $3.50 per share. Ms. Will's agreement provides
that she shall devote 60% of her business time, attention and energies to the
Company during regular business hours. In the event that Ms. Will's employment
is terminated for any reason other than breach of contract, she shall be
entitled to receive accrued and unpaid compensation plus an additional three
months' compensation.
The Company entered into an employment agreement with Harris Freedman
providing for Mr. Freedman's employment as Vice President for Strategic
Alliances on August 1, 1994. The agreement provides for Mr. Freedman to be
employed for a one year term (which was extended to three years in July 1995) at
a base salary of $120,000 and provides for termination of the agreement upon
certain circumstances including termination by the Company or Mr. Freedman on 14
days written notice or the sale of Mr. Freedman's stock in the Company. Pursuant
to the agreement, Mr. Freedman was granted Rule 701 Warrants to purchase 400,000
shares of Common Stock of the Company at $3.50 per share. Mr. Freedman's
agreement provides that he shall devote 30% of his business time, attention and
energies to the Company during regular business hours. In the event that Mr.
Freedman's employment is terminated for any reason other than breach of
contract, he shall be entitled to receive accrued and unpaid compensation plus
an additional three months' compensation.
The CompanyWe entered into an amended and restated employment agreement with our
President and Chief Executive Officer, Dr. William A. Carter, dated as of
July 1, 1993 and as amended in July 1995,December 3, 1998, which providesprovided for his employment until May 8, 20012004 at an
initial base annual salary of $295,832,$361,586, subject to annual cost of living
increases. In addition, Dr. Carter maycould receive an annual performance bonus of
up to 25% of his base salary, inat the sole discretion of the Boardboard of Directors.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 the Companyus from any joint venture or corporate
partnering arrangement, up to an aggregate maximum incentive bonus of $250,000
for all such transactions. It is contemplated that Dr. Carter will be entitled to this
incentive bonus upon receipt of the gross proceeds from the SAB Agreement (as
defined in "Certain Transactions"). Dr. Carter's agreement also provides that he shall be paid
hisa base salary and benefits through May 8, 19962004 if he is terminated without
"cause,""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 the Company's Common Stockour common
stock at an exercise price of $2.71 per share. Dr. Carter has the right to
terminate his employment upon not less than 30 days prior written notice.
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, in order to facilitate our need to obtain financing, 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. 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.
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 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. During 2002, Mr. Peterson also received 200,000
warrants to purchase shares of common stock with an exercise price of $2.00.
1993 Stock Option Plan
Our 1993 Stock Option Plan ("1993 Plan"), provides for the grant of
options for the purchase of up to an aggregate of 138,240 shares of common stock
to our employees, directors, consultants and others whose efforts are important
to the success of Hemispherx. The 1993 Plan is administered by the Compensation
Committee of the board of directors, which has complete discretion to select the
eligible individuals to receive and to establish the terms of option grants. The
1993 Plan provides for the issuance of either non-qualified options or incentive
stock options, provided that incentive stock options must be granted with an
exercise price of not less than fair market value at the time of grant and that
non-qualified stock options may not be granted with an exercise price of less
than 85% of the fair market value at the time of grant. The number of shares of
common stock available for grant under the 1993 Plan is subject to adjustment
for changes in capitalization. This plan terminated as of July 7, 2003. No
options were granted under the 1993 Plan.
59
1992 Stock Option Plan
The Company'sOur 1992 Stock Option Plan (the "1992("1992 Plan"), provides for the grant of
options for the purchase of up to an aggregate of 92,160 shares of Common Stockcommon stock
to the Company'sour employees, directors, consultants and others whose efforts are important
to the success of the Company.Hemispherx. The 1992 Plan is administered by the Compensation
Committee of the Boardboard of Directors,directors, which has complete discretion to select the
eligible individuals to receive and to establish the terms of option grants. The
1992 Plan provides for the issuance of either non-qualified options or incentive
stock options, provided that incentive stock options must be granted with an
exercise price of not less than fair market value at the time of grant and that
non-qualified 70
stock options may not be granted with an exercise price of less
than 50% of the fair market value at the time of grant. The number of shares of
Common Stockcommon stock available for grant under the 1992 Plan is subject to adjustment
for changes in capitalization. To date, noThis plan expired as of December 3, 2002. No
options have beenwere granted under the 1992 Plan.
1990 Stock Option Plan
The Company'sOur 1990 Stock Option Plan, as amended (the "1990("1990 Plan"), provides for the
grant of options to employees, directors, officers, consultants and advisors of
the CompanyHemispherx for the purchase of up to an aggregate of 460,798 shares of Common Stock.common
stock. The 1990 plan is administered by the Compensation Committee of the Boardboard
of Directors,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 Stockcommon stock available for grant under the 1990 Plan is subject to adjustment
for changes in capitalization. As of December 31, 1996,10, 2003, options to acquire an
aggregate of 234,953449 shares of the Common Stockcommon stock were outstandingavailable for grants under the
1990 Plan.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, the Companywe established a defined contribution plan, effective
January 1, 1995, entitled the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement (the "401(K) Plan").Agreement. All full time employees of the companyHemispherx are eligible to
participate in the 401(K) Planplan 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 commissionscommissions) per
annum. Participants' contributions to the 401(K) Planplan may be matched by
the CompanyHemispherx at a rate determined annually by the Boardboard of Directors.directors. Each
participant immediately vests in his or her deferred salary contributions, while
CompanyHemispherx contributions will vest over one year. In 1996 the Company2002 Hemispherx provided
matching contributions to each employee for up to 6% of annual pay or
$31,580.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1996, the membersfor a total
of the
Company's Compensation Committee were William A. Carter, Peter W. Rodino III,
and E. Gerald Kay. Dr. Carter is an officer of the Company. The Company's
Compensation Committee currently consists of Peter W. Rodino III and Richard C.
Piani. The following transactions describe certain relationships between the
Company and present and former members of the Compensation Committee:
In May 1995, Dr. Carter and certain other individuals and entities entered
into a 1995 Standby Financing Agreement with the Company pursuant to which they
were collectively obligated to invest during 1995 an aggregate of $5,500,000 in
the Company in the event the Company was unable to secure alternative financing
and the Board of Directors determined that the sale of securities to such
persons was advisable (the "1995 Standby Financing Agreement"). In exchange$38,000 for entering into the 1995 Standby Financing Agreement, the Company issued to each
of the parties ten-year warrants to purchase 50,000 shares of the Company's
Common Stock at an exercise price of $1.75 per share for each $100,000 of
standby financing obligation assumed by the party, resulting in warrants to
purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995,
the parties to the 1995 Standby Financing Agreement, including Dr. Carter,
agreed to extend their obligations through December 31, 1996.
In June 1995, the directors of BioAegean Corp., a subsidiary of the
Company, issued 10-year options to purchase an aggregate of 1,000,000 shares of
common stock of BioAegean at an exercise price of $1.00 per
71
share (the "BioAegean Options") to its officers and directors. The BioAegean
Options are conditional upon the recipient's agreement to serve BioAegean as
needed for at least 24 months unless fully incapacitated. William A. Carter,
M.D., serves as Chairman, Chief Executive Officer and a Director of BioAegean
and received 300,000 BioAegean Options. Peter W. Rodino III serves as
Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and
received 150,000 BioAegean Options. R. Douglas Hulse serves as Chief Operating
Officer of BioAegean and received 50,000 BioAegean Options. Richard C. Piani
serves as a director and the Advisor for European Affairs of BioAegean and
received 50,000 BioAegean Options.
In March 1995, the Company received an interest-free loan from William A.
Carter in the amount of $35,000. In March 1995, the Company repaid the loan from
Dr. Carter.
In February 1995, the Company issued notes in the aggregate principal
amount of $600,000 in connection with the Tisch/Tsai Restructuring (as defined
below). The notes were secured by a pledge by Dr. Carter of 112,925 shares of
Series C Preferred Stock and 240,756 shares of Common Stock. The notes have been
paid off and the shares are being returned.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law ("DGCL"), the Company
has adopted provisions in its Amended and Restated Certificate of Incorporation
which eliminate the personal liability of its directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances and which require the Company to indemnify its
directors, officers and other agents, by Bylaw, agreement, vote of directors or
stockholders or otherwise, to the fullest extent permitted by law.
The Company has entered into separate indemnification agreements with its
directors and its officers. These agreements require, among other things, the
Company to indemnify directors and officers against certain liabilities that may
arise by reason of their status or service as directors and officers and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company believes that these provisions in
its Amended and Restated Certificate of Incorporation and the indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. See "Business--Legal Proceedings".
72
Security Ownership of Certain Beneficial
Owners and Management
---------------------all employees.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 19, 1997,December 10, 2003, the recordnumber and
percentage of outstanding shares of common stock beneficially owned by:
o Each person, individually or as a group, known to us to be deemed the
beneficial ownershipowners of Common Stockfive percent or more of our issued and outstanding
common stock;
o each of our directors and the Company by each officerNamed Executives; and
director,o all of our officers and directors as a group,group.
This table is based upon information supplied by Schedules 13D and each person known to13G, if any,
filed with the Company to own beneficially or of record five percent or more of the outstanding
shares of the Company:
Shares
Officers, DirectorsSecurities and Beneficially Percent of Shares
Principal Stockholders Owned Beneficially Owned (1)
- ---------------------- ----- ----------------------
William A. Carter 3,733,255(2) 21.0%
R. Douglas Hulse 172,500(3) 1.0%
Robert E. Peterson 110,368(4) *
Harris Freedman 1,285,328(5) 7.4%
Sharon D. Will 613,333(6) 3.6%
Peter W. Rodino III 31,765(7) *
Cedric C. Philipp 36,333(8) *
Richard C. Piani 18,063(9) *
David R. Strayer, M.D. 18,745 *
Josephine Dolhancryk 50,820(10) *
Jerome Belson 1,684,600(11) 9.7%
Belson Enterprises, Inc.
495 Broadway
New York, NY 10012
AllExchange Commission, and information obtained from
our directors 6,051,765 30.6%
executive officers
as a group (9 persons)
*Less than 1%
(1)and named executives. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any
60
shares of Common Stockcommon stock which such person has the right to acquire such shares within 60 days
of March 19, 1997.December 10, 2003. For purposes of computing the percentage of outstanding
shares of Common Stockcommon stock held by each person or group of persons named above,in the
table, 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, the Company believeswe believe, 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 Stockcommon stock which they beneficially
own. (2) Includes irrevocable proxies to vote 1,205,000As of December 10, 2003, 38,626,456 shares of Common Stock on
all matters that come beforeour common stock were
outstanding. Unless otherwise noted, the stockholdersaddress of each of the Company until such
timeprincipal
stockholders is care of us at One Penn Center, 1617 JFK Boulevard, Philadelphia,
Pennsylvania 19103.
Name and Address Shares % Of Share
of Beneficial Owner Beneficially Owned Beneficially Owned
- --------------------------------------------------------------------------------
William A. Carter, M.D. 5,618,607(1) 12.9%
Robert E. Peterson 300,416(2) *
Ransom W. Etheridge 414,316(3) *
2610 Potters Rd
Virginia Beach, VA 23452
Richard C. Piani 196,747(4) *
97 Rue Jeans-Jaures
Levaillois-Perret
France 92300
William M. Mitchell, M.D. 175,640(5) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232
Antoni Esteve 347,445(6) *
Laboratorios Del Dr. Esteve S.A.
AV. Mare de Deu de Montserat
Barcelona, 08041, Spain
David R. Strayer, M.D. 87,246(7) *
Carol A. Smith 28,457(8) *
61
Iraj-Eqhbal Kiani 12,000(9) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648
All directors and executive
officers as (i) the Company shall have achieved a market capitalization of
$300,000,000 or greater for at least 20 consecutive days of trading in the
public markets or (ii) the Company shall have received a bona fide offer
for acquisition or merger, the net
73
effect of which, if consummated, would be to establish a market
capitalization of the Company of not less7,180,874 15.8%
group (8 persons)
- ----------
* Less than $300,000,000. This proxy
shall be terminated upon the sale of such shares in an arm's length public
sale. Also includes1%
(1) Includes (i) an option to purchase 73,728 shares of Common Stockcommon stock from
the CompanyHemispherx at an exercise price of $2.71 per (ii) warrants to
purchase 960 shares of Common Stock at an exercise price of $3.50 per
share (iii)and expiring on August
8 2004, (ii) Rule 701 Warrants to purchase 933,3331,400,000 shares of Common Stockcommon
stock at a price of $3.50 per share, (does not include 466,667 which are
non-exercisable); and (iv)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. Dr. Carter has pledged 112,925 shares of Series C
Preferred and 240,756 shares of Common Stock to the Tisch/Tsai Entities as
security for the repayment of the $660,000 note executed in March 1995. The
note has been paid off and the shares are being returned.
(3) Includes 172,500 warrants to purchase Common Stock exercisable at $3.50 per
share held by The Sage Group, of which Mr. Hulse is an Executive Director.
Does not include 100,000 warrant to purchase Common Stock at $1.75 per
share and 217,500 options to purchase Common Stock at $3.50 per share.
(4) Consists of 10,368 options to purchase Common Stock at an exercise price of
$4.34 per share and 100,000 warrants to purchase Common Stock at an
exercise price of $3.50 per share.
(5) Includes (i) 80,000 shares of Common Stock held by SMACS Holding Corp. of
which Mr. Freedman is an officer; (ii) 58,000 shares of Common Stock held
by Bridge Ventures,Inc. of which Mr. Freedman is an officer, (iii) 50,000
shares of Common Stock held by Bridge Ventures Defined Benefit Plan, of
which Mr. Freedman is Trustee; (iv) warrants to purchase 292,161 shares of
Common Stock at an exercise price of $3.50 per share owned of record by
Bridge Ventures, Inc.; (v) warrants to purchase 365,000 shares of Common
Stock which are exercisablecommon stock at $1.75 per share issued in connection
with the 1995 Standby Financing Agreement owned of record by Bridge Ventures,
Inc.;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) 266,667 Rule 701 Warrants25,000 warrants to purchase Common Stockcommon stock
at $6.50 per share and expiring on September 17, 2008; (vii) 25,000
warrants to purchase common stock at $8.00 per share and expiring on
September 17, 2004; (viii) 100,000 warrants to purchase common stock at
$6.25 per share and expiring on April 8, 2004; (ix) 20,000 warrants to
purchase common stock at $4.00 per share originally expiring January 1,
2003 was extended to January 1, 2008, (x) 188,325 common stock warrants
exercisable at $6.00 per share and expiring on February 22, 2006; (xi)
188,325 common stock warrants exercisable at $9.00 per share and expiring
on February 22, 2006 (xii) 300,000 common stock warrants granted in 1998
that are exercisable at $6.00 per share and expiring on January 1, 2006
(xiii) options to purchase 6,666 shares of the
Companycommon stock at $4.03 per share
and expiring on January 3, 2011 (xiv) 250,000 warrants exercisable $2.00
per share on August 13, 2007 and 1,450,000 warrants to purchase common
stock at $2.20 per share and expiring on September 9, 2008 and 616,560
shares of common stock.
(2) Includes (i) 13,750 options to purchase common stock at an exercise price of $3.50 (does not include 133,333 which are
non-exercisable); (vii) 86,000 Class A Warrants, 40,000 of which are owned
by SMACS Holding Corp. and 46,000 of which are owned by Bridge Ventures,
Inc; and (viii) 37,500 shares of Common Stock underlying Series E
Preferred. Bridge Ventures, Inc. has given an irrevocable proxy to vote its
58,000 shares to William A. Carter on the same terms as the proxy described
in Note 2.
(6) Includes Rule 701 Warrants to purchase 133,333 shares of Common Stock at anaverage
exercise price of $3.50 per share, (does not include 66,667 which are
non-exercisable). Also includes 100,000 shares of Common Stock owned of
record by Worldwide Marketing, a company for which Ms. Will serves as
President. Also includes 380,000expiring on January 22, 2007 (ii)
warrants to purchase Common Stock of the
Company at an exercise price of $1.75. Worldwide Marketing has given an
irrevocable proxy to vote its shares to William A. Carter on the same terms
as the proxy described in Note 2.
(7) Includes Rule 701 Warrants to purchase 13,33350,000 shares of Common Stock at
$3.50 per share (does not include 6,667 which are non-exercisable).
(8) Includes (i) Rule 701 Warrants to purchase 13,333 shares of Common Stock at
$3.50 per share (does not include 6,667 which are non-exercisable); (ii)
options to purchase 20,000 shares of Common Stock
74
at $3.50 per share; and (iii) 2,000 shares of Common Stock and 1,000 Class
A Warrants owned by the Cedric C. Philipp and Sue Jones Philipp Trust, of
which Mr. Philipp and his wife are Trustees.
(9) Includes options to purchase 4,608 shares of Common Stock at an exercise
price of $4.34 and 4,608 shares of Common Stock owned of record by Mr.
Piani's wife.
(10) Consists of options to purchase 820 shares of Common Stock at an exercise
price of $3.80 and 50,000 Warrants to purchase Common Stock at an exercise
price of $3.50 per share.
(11) Includes 392,000 Class A Warrants, of which (i) 25,000 are owned of record
by Mr. Belson's wife; and (ii) 27,000 are owned of record by The Jerome
Belson Foundation, of which Mr. Belson is Trustee. Also includes (i) 45,000
shares of Common Stock owned of record by The Jerome Belson Foundation;
(ii) 125,000 shares of Common Stock underlying Series E Preferred; and
(iii) warrants to purchase 550,000 shares of Common Stock at $1.75 per
share owned of record by Belson Enterprises, Inc. of which Mr. Belson is an
officer.
75
RESALES BY SELLING SECURITYHOLDERS
This Prospectus relates to the proposed resale by the Selling
Securityholders of the Securities. The following table sets forth as of March
19, 1997 certain information with respect to the persons for whom the Company is
registering the Securities for sale to the public except as footnoted below.
None of such persons has had a material relationship with or has held any
position or office with the Company or any of its affiliates within three years,
other than as footnoted below (see "Certain Transactions"). The Company will not
receive any of the proceeds from the sale of the Securities. If the C Warrants,
R Warrants and Series E Warrants are exercised, the Company would receive
$2,608,659.
Names of Selling Securities Beneficially Securities Offered
Security Holders Owned Prior to March, 1997 By Beneficial Owner
- ---------------- -------------------------- -------------------
Seymour Cohn(1) 239,616 239,616
Myron Cherry(2) 20,000 20,000
Charles Moore(3) 84,608 84,608
Maurice Schlang(4) 276,864 276,864
Julian & Eunice Cohen
Investments LP(5) 1,536 1,536
Sidney Stoneman(5) 1,536 1,536
Michael C. Burrows(5) 3,072 3,072
Frank B. Carr(5) 1,536 1,536
Michael J. Dubilier(5) 6,145 6,145
Keys Foundation(5) 6,145 6,145
Maryann Charlap(5) 10,554 10,554
Lloyd DeVos(5) 1,536 1,536
William A. Carter(5)(6) 960 960
Maryann Charlap & Abraham E
Ostrovsky & Paul E. Charlap,
Trust(5) 1,275 1,275
Myron Cherry(5) 1,636 1,636
FLF Associates(7) 72,000 72,000
Gerald Tsai(7) 43,200 43,200
Lincoln Trust(7) 28,800 28,800
Joseph C. Roselle(8) 25,000 25,000
Joseph Giamanco(8) 137,500 137,500
Bost & Co. FBO Fairfax
County Public Schools(8) 250,000 250,000
Topworks & Co. FBO Montgomery
County Employee Retirement
System(8) 250,000 250,000
Ell & Co. FBO AT&T
Investment Management Corp.(8) 750,000 750,000
Lindemann Capital Partners, LP(8) 150,000 150,000
Jerome Belson(8) 125,000 125,000
Bridge Ventures, Inc.(8)(9) 37,500 37,500
Alan Howard(8) 25,000 25,000
Michael Lauer(8) 30,000 30,000
76
Lancer Offshore, Inc.(8) 345,000 345,000
Lancer Partners, LP(8) 325,000 325,000
Lancer Voyage Fund(8) 50,000 50,000
John Bendall(10) 50,000 50,000
Hermitage Capital(10) 150,000 150,000
(1) Represents (i) a C Warrant to purchase 119,808 shares of Common Stock
exercisable during the four year period commencing November 2, 1995, at an
exercise price of $10.85 per share; and (ii) the Common Stock underlying said C
Warrant.
(2) Represents (i) a C Warrant to purchase 5,000 shares of Common Stock
exercisable at any time commencing November 1, 1994 and expiring December 31,
1998, at an exercise price of $3.50 per share; (ii) a C Warrant to purchase
5,000 shares of Common Stock exercisable at any time commencing March 20, 1995
and expiring March 31, 1999, at an exercise price of $3.50 per share; and (iii)
the Common Stock underlying said C Warrants.
(3) Represents (i) two C Warrants to purchase 20,000 shares of Common Stock
each, exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; (ii) a stock option to purchase 2,304 shares
of Common Stock exercisable during the ten year period commencing April 16,
1996, at an exercise price of $4.34 per share; and (iii) the Common Stock
underlying said C Warrants.
(4) Represents (i) a C warrant to purchase 120,000 shares of Common Stock
exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; (ii) a stock option to purchase 18,432 shares
of Common Stock exercisable during the ten year period commencing January 25,
1995, at an exercise price of $4.34 per share; and (iii) the Common Stock
underlying said C Warrants.
(5) Represents shares of Common Stock underlying R Warrants exercisable during
the four year period commencing December 31, 1993, at an exercise price of $3.50
per share.
(6) Dr. Carter is the President and Chief Executive Officer of the Company.
(7) Represents shares of Common Stock underlying R Warrants exercisable during
the five year period commencing December 30, 1992, at an exercise price of $2.00
per share.
(8) Represents shares of Common Stock underlying Series E Preferred.
(9) Harris Freedman, a Company Vice President, is an officer of Bridge Ventures,
Inc.
(10) Represents Series E Warrants to purchase shares of Common Stock at an
exercise price of $3.00 per share during the three year period commencing March
1, 1997.
The Selling Securityholders may effect the sale of their Securities from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Securities, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.
The Company is not aware of any agreements, undertakings or arrangements
with any Underwriters or broker-dealers regarding the sale of their securities
in the United States, nor to the Company's knowledge is
77
the sale of Securities on behalf of the Selling Securityholders in the United
States. The Selling Securityholders may effect such transactions by selling the
Securities, as applicable, directly to purchasers or to or through
broker-dealers which may act as agents or principals. Such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Securityholders, and/or the purchasers of their Securities, as
applicable, for which such broker-dealers may act as agents or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). The Selling Securityholders and any
broker-dealers that act in connection with the sale of their Securities might be
deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act.
The Company has notified the Selling Securityholders of the prospectus
delivery requirements for sales made pursuant to this Prospectus and that, if
there are material changes to the stated plan of distribution, a post-effective
amendment with current information would need to be filed before offers are made
and no sales could occur until such amendment is declared effective. The Company
has agreed with one Selling Securityholder to promptly prepare, file with the
Commission and obtain effectiveness of any such post-effective amendment.
78
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1997, Bridge Ventures, Inc. purchased 75 shares of Series E
Preferred at $1,000 per share in a private offering pursuant to Rule 506 the
Securities Act and Regulation D promulgated thereunder. Harris Freedman, the
Company's Vice President, is an officer of Bridge Ventures, Inc.
In May 1996, the Company entered into two agreements with The Sage Group.
Under the first agreement, R. Douglas Hulse will serve as Chief Operating
Officer of the Company. In exchange, The Sage Group will receive from the
Company; (i) a monthly retainer of $10,000 starting June 1, 1996, replacing the
$5,000 monthly retainer provided in the June 1995 agreement; and (ii) options to
purchase 250,000 shares of the Company's Common Stock at an exercise price of
$3.50 per share. Under the second agreement, The Sage Group agreed to introduce
the Company to and assist the Company in negotiations with certain foreign
distribution partners. In exchange, The Sage Group will receive from the
Company; (i) a bonus payment of $500,000 if total sales of Ampligen in Canada
and Europe exceed $10 million for 1996 and 1997 combined; and (ii) options to
purchase 140,000 shares of the Company's Common Stock at an exercise price $3.50
per share. R. Douglas Hulse, Chief Operating Officer of the Company, is an
Executive Director of the Sage Group.
In March and October 1996, William A. Carter assigned and transferred an
aggregate of 60,000 warrants to purchase Common Stock, at $1.75 per share, to
three outside parties that had loaned the Company money in 1995. These loans
were repaid in 1995. The assigned warrants are subject to a lockup agreement.
In March 1996, Harris Freedman assigned and transferred 160,000 warrants to
purchase Common Stock at $1.75 per share to Sharon Will, an officer of the
Company and one other shareholder. These warrants are subject to a lockup
agreement.
In March 1996, the Compensation Committee of the Board of Directors
approved a grant of 250,000 warrants to purchase common stock at an exercise price of
$3.50 per share, expiring on March 1, 2006 (iii) warrants to Michael C. Burrows. This grantpurchase
100,000 shares of common stock at $5.00 per share, expiring April 14, 2006
(iv) 30,000 warrants to purchase common stock at $5.00 per share, expiring
on February 28, 2009 (v) options to purchase 6,666 shares at $4.03 per
share that expires on January 3, 2011 (vi) 100,000 warrants exercised at
$2.00 per share expiring on November 13, 2007 and (v) 500 shares of common
stock.
(3) Includes 20,000 warrants to purchase common stock at $4.00 per share,
originally expiring on January 1, 2003 and was made in
accordance withextended 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
expiring on December 4, 2013; and 44,316 shares of common stock.
(4) Includes (i) 20,000 warrants to purchase 25,000 shares of common stock at
$6.50 per share (ii) warrants to purchase 25,000 shares of common stock at
$6.50 per share (iii) 25,000 warrants to purchase at $8.00 per share, all
expiring on September 17, 2004; (iv) 100,000 warrants exercisable at $2.00
per share expiring on August 13, 2007, (v) 8,847 shares of common stock
owned by Mr. Piani (vi) 12,900
62
shares of common stock owned jointly by Mr. And Mrs. Piani; and (vii)
5,000 shares of common stock owned by Mrs. Piani.
(5) Includes (i) warrants to purchase 12,000 shares of common stock at $6.00
per share, expiring on August 25, 2008; (ii) 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 on August 13, 2007 and
13, 640 shares of common stock.
(6) Consists of 347,445 shares of our common stock owned by Provesan SA, an
affiliate of Laboratorios Del Dr. Esteve S.A. Dr. Esteve is a Letter Agreement dated January 15, 1996, in which Mr. Burrows
agreed to provide consulting services toMember of
the Company for twenty four months. Mr.
Burrows served asExecutive Committee and Director of the Company in past years.
In March 1996 the Compensation CommitteeScientific and Commercial
Operations of the BoardLaboratorios Del Dr. Esteve S.A.
(7) Includes (i) stock options to purchase 20,000 shares of Directors approved
grants ofcommon stock at
$3.50 per share; (ii) 50,000 warrants to purchase common stock at $4.00
per share; (iii) 2,500 stock options exercisable at $4.03 per share and
expiring on January 3, 2011 and; (iv) 14,746 shares of common stock.
(8) Consists of 5,000 warrants to purchase common stock at $4.00 per share
expiring June 7, 2008; 6,791 stock options exercisable at $3.50 expiring
January 22, 2007, 10,000 warrants exercisable at $2.00 per share expiring
in August 13, 2007 and options to purchase 6,666 shares of common stock at
$4.03 per share expiring on January 3, 2011.
(9) Consist s of 12,000 warrants exercisable at $3.86 per share expiring on
April 30, 2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 C. Piani, another of our directors, lives in
Paris, France and assists our European subsidiary in dealings with medical
institutions and the European Medical Evaluation Authority. William M. Mitchell,
M.D., another of our directors, works with David R. Strayer, M.D. (our Medical
Director) in establishing clinical trial protocols as well as other scientific
work for us from time to time. For these services, these directors were paid an
aggregate of $170,150 in the year 2002. No individual director was paid in
excess of $60,000.
William A. Carter, our Chief Executive Officer, received an aggregate of
$12,486 in short term advances in 2002 which were repaid as of December 31,
2002. All advances bear interest at 6% per annum. We loaned $60,000 to Ransom W.
Etheridge, a director in November, 2002 for the purpose of exercising 15,000
Class A Redeemable warrants. This loan remains outstanding and bears interest at
6% per annum. Dr. Carter's short term advances and Mr. Etheridge's loan were
approved by the Board of Directors.
We paid $33,450 to Carter Realty for the rental of property used by us for
business purposes at various times in 2002. 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.
63
SELLING STOCKHOLDERS
We have registered all 11,086,341 shares of common stock covered by this
prospectus on behalf of the selling stockholders named in the table below. We
issued the shares, the Debentures convertible into shares, and the warrants
exercisable for shares to the selling stockholders in private transactions. We
have registered the shares to permit the selling stockholders and their
respective transferees, assignees or other successors-in-interest that receive
their shares from a selling stockholder to resell the shares, from time to time,
when they deem appropriate.
The table below identifies the selling stockholders who will be offering
shares and other information regarding the beneficial ownership of the common
stock held by each of the selling stockholders. For the Debenture holders (the
first two stockholders listed below), the second column lists the number of
shares of common stock beneficially owned by each selling stockholder as of
December 10, 2003, based on each selling stockholder's ownership of Debentures
and warrants, and assumes the conversion of all the Debentures, the payment of
all interest in stock and the exercise of all warrants. Because the conversion
price of the Debentures and the exercise price of $3.50
per sharethe warrants are subject to
each of Robert E. Peterson, CFOadjustment for anti-dilution protection, the interest on the Debentures may be
paid in cash or common stock, and Josephine Dolhancryk, Assistant
Secretarythe value attributed to any shares issued to
the investors as interest (the "Interest Shares") depends on the average closing
price of the Company. Such warrants are not exercisable for a period of one
year from issuance.
In March 1995,common stock during the Company instituted a declaratory judgment action against
a February noteholder, Seymour Cohn, of a $5,000,000 convertible note and a
secured defendant in United States District Court for the Eastern District of
Pennsylvania to declare as void, set aside, and cancel the February 1992
convertible note between the Company and Mr. Cohn (the "Note"). In addition, Mr.
Cohn instituted suit against the Companyfive consecutive business days ending on
the Note inthird business day immediately preceding the Circuit Courtapplicable interest payment
date, and the number of the
15th Judicial District in and for Palm Beach County, Florida, seeking judgmentrepayment shares depends on the Note, plus attorney fees, costs and expenses; in August 1995, this action
was stayed by the Florida Court pending the outcome of the Pennsylvania action.
Mr. Cohn also filed a motion for a preliminary
79
injunction in the Pennsylvania court to enjoin the Company from disbursing the
proceeds of a public offering in the amount of $5.8 million, which motion was
granted November, 1995. On February 15, 1996,our
consolidated revenues, the Company reached an agreement
to settle this matter. Termsnumbers listed in the second column may change. For
the other selling stockholders, the second column lists the number of shares of
common stock beneficially owned by the selling stockholder as of December 10,
2003, based on each selling stockholder's ownership of shares of common stock,
and conditionsdoes not assume the conversion of any of the settlement includeDebentures, the exercise of any
warrants or the payment of $6,450,000any interest on the Debentures in the form of common
stock rather than cash.
The third column lists each selling stockholder's portion, based on
agreements with us, of the 11,086,341 shares of common stock being offered by
this prospectus. With regard to Mr. Cohnthe first two selling stockholders, the number
of shares being offered by this prospectus was determined in accordance with the
terms of the registration rights agreement with them, in which we agreed to
coverregister the unpaid balance Note balance, legal expensesresale of 135% of (w) the number of shares of common stock issuable
upon conversion of the July and October Debentures, plus (x) the number of
shares of common stock issuable upon exercise of the related July and October
2008 Warrants, plus (y) an estimate of the number of Interest Shares that may be
issued to the selling stockholders as interest payments on the July and October
Debentures (assuming interest is paid exclusively in Interest Shares over the
full term of these debentures, rather than in cash), plus (z) the number of
shares of common stock issuable upon exercise of the June 2008 Warrants. As we
stated above, the number of shares that will actually be issued may be more or
less than the 11,086,341 shares being offered by this prospectus.
Under the terms of the July and October Debentures, the related July and
October 2008 Warrants and the retentionJune 2008 Warrants, no selling stockholder who
owns any of certain warrants granted prior to the lawsuit. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlementthese securities may convert any of their debentures or exercise any
of the litigation.
In January 1996, the Company engaged the Research Works, Inc. to produce
four research reports with respect to the securities of the Company over a 13
month period. In exchange for this service, the Company granted 60,000foregoing warrants to the Research Works,extent that the conversion or exercise would
cause the selling stockholder, together with its affiliates, to beneficially own
more than 4.99% of the shares of our then outstanding common stock following
such conversion or exercise. For purposes of making this determination, shares
of common stock issuable upon conversion of those debentures which have not been
converted and upon exercise of the warrants which have not been exercised are
excluded. The number of shares in the second and third columns does not reflect
this limitation.
64
Any selling stockholder may sell all, some or none of its respective
shares in this offering. See "How The Shares May Be Distributed" below.
Common Stock Common Stock
Owned Prior No. of Shares Owned After
Selling Stockholder To Offering Being Offered The Offering
- --------------------------------------------------------------------------------
Portside Growth & Opportunity Fund 2,994,298(1) 2,994,298 --
- --------------------------------------------------------------------------------
Leonardo L.P. 3,633,763(2) 3,419,379 --
- --------------------------------------------------------------------------------
Interferon Sciences, Inc. exercisable at $4.00 per share.
In January 1996,10,928 10,928(3) --
- --------------------------------------------------------------------------------
The American National Red Cross 314,465 314,465(3) --
- --------------------------------------------------------------------------------
GP Strategies Corporation 243,796 243,796(3) --
- --------------------------------------------------------------------------------
Cardinal Securities LLC 478,750(4) 478,750(4) --
- --------------------------------------------------------------------------------
H. David Coherd 478,750(5) 478,750(5) --
- --------------------------------------------------------------------------------
Robert L. Rosenstein 483,750(5) 483,750(5) --
- --------------------------------------------------------------------------------
Scott Koch 479,750(5) 479,750(5) --
- --------------------------------------------------------------------------------
Bridge Ventures, Inc. 405,160(6) 310,000(3) 95,160
- --------------------------------------------------------------------------------
Sharon Will 430,000(7) 325,000(3) 105,000
- --------------------------------------------------------------------------------
CEOCast, Inc. 15,000 15,000 --
- --------------------------------------------------------------------------------
Stephen H. Lieberman 5,682 5,682 --
- --------------------------------------------------------------------------------
================================================================================
(1) Represents (a) up to 1,010,369 shares of common stock issuable upon
conversion of the Company entered intoJuly Debentures, (b) up to 253,551 shares of common
stock issuable upon exercise of the July 2008 Warrants, (c) up to 500,000
shares of common stock issuable upon exercise of the June 2008 Warrants,
(d) up to 1,025,311 shares of common stock issuable upon conversion of the
October Debentures, and (e) up to 205,067 shares of common stock issuable
upon exercise of the October 2008 Warrants. Ramius Capital Group, LLC
("Ramius Capital") is the investment adviser of Portside Growth &
Opportunity Fund ("Portside") and consequently has voting control and
investment discretion over securities held by Portside. Ramius Capital
disclaims beneficial ownership of the shares held by Portside. Peter A.
Cohen, Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon are the
sole managing members of C4S& Co., LLC, the sole managing member of Ramius
Capital. As a one year consulting agreement
with Millenium International Communications, Ltd. ("Millenium"). The
consideration for such services is $120,000,result, Messrs. Cohen, Stark, Strauss and Solomon may be
considered beneficial owners of any shares deemed to be paidbeneficially owned
by Ramius Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim
beneficial ownership of these shares.
(2) Represents (a) up to 1,435,450 shares of common stock issuable upon
conversion of the Company in either
monthly payments or balloon payments, inJuly Debentures, (b) up to 253,551 shares of common
stock issuable upon exercise of the Company's discretion. Millenium
shall consult withJuly 2008 Warrants (c) up to 500,000
shares of common stock issuable upon exercise of the June 2008 Warrants,
(d) 214,387 shares of common stock, (e) up to 1,025,311 shares of common
stock issuable upon conversion of the October Debentures, and render advice(f) up to
205,067 shares of common stock issuable upon exercise of the Company specifically concerning
strategic planning, public relations and other related matters. The President of
Millenium, David C. DrescherOctober 2008
Warrants. Angelo, Gordon & Co., L.P. ("Angelo, Gordon") is related to Steve Drescher, a formerthe sole
director of the Company.
In December 1995, the Company retained the law firmgeneral partner of Akin, Gump, Strauss,
Hauer & Feld, LLP (the "Akin Group"Leonardo, L.P. ("Leonardo") to provide general legal counsel, advice
and
representation. Initially, the Akin Group will represent the Company in
matters pertaining to the Foodconsequently has voting control and Drug Administration ("FDA"). The agreement
includes incentive payments for obtaining FDA approval of Ampligen for HIV
Disease treatment.
In November 1995, the Company sold 5,313,000 Units ofinvestment discretion over securities
through an
initial public offering. Each Unit consists of one share of Common Stock and one
Class A Warrant.
In August 1995, in connection with the settlement of a lawsuit broughtheld by a
former employeeLeonardo. Angelo, Gordon disclaims beneficial ownership of the
Company againstshares held by Leonardo. Mr. John M. Angelo, the CompanyChief Executive Officer
of Angelo, Gordon, and David Fries,Mr. Michael L. Gordon, the Chief Operating Officer
of Angelo, Gordon, are the sole general partners of AG Partners, L.P., the
sole general partner of Angelo, Gordon. As a former
directorresult, Messrs. Angelo and
Gordon may be considered beneficial owners of the Company, the Company, Dr. Fries, the Canaan Entitiesany shares deemed to be
65
beneficially owned by Angelo, Gordon. Messrs. Angelo and Dr.
William A. Carter, President, Chairman and CEOGordon disclaim
beneficial ownership of the Company, entered into an
agreement pursuant to which the Company hasthese shares.
(3) These Selling Stockholders have agreed to reimburse Dr. Fries for
expenses incertain periodic limitations on
the amountnumber of $50,000 incurred in connection with such litigation.
As part of such agreement, the parties agreed to mutual releases of certain
claims for expenses and damages arising out of the litigation or arising in
connection with Dr. Fries' service as a director of the Company. The payment of
$50,000 to Dr. Fries is evidenced by an interest-free promissory note pursuant
to which the final payment is due on or before November 15, 1995. The note was
assigned to the Canaan Entities.
In June 1995, the Company entered into an agreement with The Sage Group
pursuant to which The Sage Group has agreed to introduce the Company to and
assist the Company in negotiations with certain prospective distribution
partners listed in the agreement. In exchange, The Sage Group will receive from
the Company: (i) a monthly retainer of $5,000 which began accruing July 1, 1995
and (ii) at The Sage Group's option, a percentage of the proceeds,shares that they sell.
(4) Represents up to an
aggregate of $150,000, from the Company's first distribution agreement with a
partner listed in the agreement or the sum of $125,000 from such agreement. In
connection with this agreement, the Company will also issue to The Sage Group
options to purchase 100,000478,750 shares of the
80
Company's Common Stockcommon stock issuable upon exercise of
warrants owned by Cardinal of which (i) 78,750 of which are exercisable at
a price of $1.74 per share, (ii)112,500 are exercisable at a price of
$2.57 per share, and (iii) 200,000 shares of common stock issuable upon
exercise of additional warrants at an exercise price of $1.75$2.50 per share.
R. Douglas
Hulse, Chief Operating OfficerThe members of the Company,Cardinal are H. David Coherd, Robert Rosenstein and Scott
Koch. Excludes 6,000 unsold shares issued to Cardinal's members.
(5) The selling stockholder is an Executive Director of The
Sage Group.
In May 1995, William A. Carter, M.D., President, Chairman and CEO of the
Company, Bridge Ventures, Sharon Will, a Vice President of the Company,
Associated Funding Services, Inc., Jerome Belson, a director of one of the Company's subsidiaries and a principal shareholder and E. Gerald Kay, a former
directorthree members of Cardinal Securities
LLC. Accordingly, the Company, entered into a 1995 Standby Financing Agreement with
the Company pursuantshares beneficially owned by Cardinal are deemed to
which they are collectively obligated to invest during
1995 an aggregate of $5,500,000 in the Company in the event the Company is
unable to secure alternative financing and the Board of Directors determines
that the sale of securities to such persons is advisable. In exchange for
entering into the 1995 Standby Financing Agreement, the Company issued tobe beneficially owned by each of Cardinal's members. In the parties ten-year warrants to purchase 50,000second column,
represents (a) 5,000 shares of the Company's
Common Stockcommon stock owned by Mr. Rosenstein, 1,000
shares owned by Mr. Kock and no shares owned by Mr. Coherd and, for each
of these stockholders (b) up to 478,750 shares of common stock issuable
upon exercise of warrants owned by Cardinal of which (i) 78,750 of which
are exercisable at a price of $1.74 per share, (ii)112,500 are exercisable
at a price of $2.57 per share, (iii) 200,000 shares of common stock
issuable upon exercise of additional warrants at an exercise price of
$2.50 per share and (iv) 87,500 shares of common stock exercisable at
$2.42 per share. The third column excludes all of the shares issuable upon
exercise of the warrants owned by Cardinal.
(6) In the second column, represents 310,000 shares issuable upon exercise of
warrants exercisable at $1.75 per share for each $100,000expiring on June 30, 2005 and
95,160 shares issuable upon exercise of standby financing obligation assumedwarrants exercisable at $3.50
expiring on October 15, 2004 owned of record by the party, resulting in warrants to
purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995,
the parties agreed to extend their obligations under the 1995 Standby Financing
Agreement through December 31, 1996. Harris Freedman, a Vice President of the
Company, and his wife are officers of Bridge Ventures. Gerald Brauser is
President of Associated Funding Services, Inc.
In June 1995,The third
column excludes the Board of Directors of BioAegean Corp, a subsidiary of the
Company, issued an aggregate of 1,200,000 BioAegean Options95,160 shares at an exercise price
of $1.00$3.50 per share to its officers and directors, including certainshare. The principal
shareholders, officers and directors of the Company. In consideration for the BioAegean Options, the
recipients agreed to serve BioAegean's needs for at least 24 months unless fully
incapacitated. William A. Carter, M.D., Chairman, President and Chief Executive
Officer of the Company, serves as Chairman, Chief Executive Officer and a
Director of BioAegean and received 300,000 BioAegean Options. Peter W. Rodino
III, a director and Secretary of the Company, serves as Vice-Chairman,
Secretary, Corporate Counsel and a director of BioAegean and received 150,000
BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of the
Company and BioAegean and received 50,000 BioAegean Options. Robert Peterson
serves as Chief Financial Officer of both the Company and BioAegean and received
50,000 BioAegean Options. Sharon Will, Vice President of Investor Relations and
Corporate Communications for the Company, serves as Vice President of Marketing
for BioAegean and received 150,000 BioAegean Options.Bridge Ventures are Harris
Freedman serves as
Vice President for Strategic Alliances for bothand Annelies Freedman.
(7) In the Company and BioAegean and
received 150,000 BioAegean Options. Richard C. Piani, a director of the Company,
serves as a director and the Advisor for European Affairs of BioAegean and
received 50,000 BioAegean Options. E. Gerald Kay served as a director for both
the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's
remaining director, Jerome Belson, a principal stockholder of the Company,
received 50,000 BioAegean Options.
In March 1995, the Company issued the Original Brauser Note, to Gerald A.
Brauser in the principal amount of $200,000. The Original Brauser Note also
provided for the issuancesecond column, represents 325,000 shares issuable upon exercise of
warrants to purchase 50,000 shares of the Company's
Common Stockexercisable at $1.75 per share.shares expiring on June 30, 2005 owned
of record by Sharon Will and 105,000 shares issuable upon exercise of
warrants exercisable at $3.50 per share expiring on October 15, 2004 owned
by SAGGI Capital Corp. Sharon Will is the sole shareholder, officer and
director of SAGGI. The third column excludes the shares issuable upon
exercise of the SAGGI warrants.
THE SELLING STOCKHOLDERS HAVE NOT BEEN EMPLOYED BY, HELD OFFICE IN, OR HAD
ANY OTHER MATERIAL RELATIONSHIP WITH US OR ANY OF OUR AFFILIATES WITHIN THE PAST
THREE YEARS EXCEPT AS DESCRIBED BELOW.
HOW THE SHARES MAY BE DISTRIBUTED
The shares to be sold in this offering have been or are in the process of
being listed on the American Stock Exchange, subject to official notice of
issuance. The selling stockholders may sell their shares of common stock from
time to time in various ways and at various prices. The shares may be sold in
one or more transactions at fixed prices, at prevailing market prices at the
time of the sale, at varying prices determined at the time of sale, or at
negotiated prices. These sales may be effected in transactions that may involve
crosses or block transactions. Some of the methods by which the selling
stockholders may sell the shares include:
66
o on any national securities exchange or quotation service on which
the shares may be listed or quoted at the time of sale;
o in the over-the-counter market;
o in transactions otherwise than on these exchanges or systems or in
the over-the-counter market;
o through the writing of options, whether such options are listed on
an options exchange or otherwise;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o privately negotiated transactions;
o block trades in which the broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by that
broker or dealer for the selling stockholder's account under this
prospectus;
o sales under Rule 144 rather than by using this prospectus;
o through the settlement of short sales;
o a combination of any of these methods of sale; or
o any other legally permitted method.
In May 1995,connection with sales of the Company restructuredshares or otherwise, the Original Brauser Noteselling
stockholders may enter into hedging transactions with broker-dealers, which may
in turn engage in short sales of the shares in the course of hedging in
positions they assume. The selling stockholders may also sell shares short and
issueddeliver shares to close out short positions, provided that the New Brauser Noteselling
stockholders may not close out short positions entered into prior to Mr. Brauserthe
effective date of the registration statement of which this prospectus is a part
with any shares included in this prospectus. The selling stockholders may also
pledge their shares as collateral for a margin loan under their customer
agreements with their brokers. If there is a default by the selling
stockholders, the brokers may offer and sell the pledged shares from time to
time under this prospectus or an amendment to this prospectus under Rule
424(b)(3) or other applicable provisions of the Securities Act amending the list
of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus.
Brokers or dealers may receive commissions or discounts from the selling
stockholders (or, if the broker-dealer acts as agent for the purchaser of the
shares, from that purchaser) in amounts to be negotiated. These commissions may
exceed those customary in the types of transactions involved.
We cannot estimate at the present time the amount of $100,000 alongcommissions or
discounts, if any, that will be paid by the selling stockholders in connection
with warrants to purchase 25,000 sharessales of the Company's Common Stock at $1.75 per share. As partshares.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in sales of the restructuring, Mr.
Brauser agreedshares may be deemed to (i) purchase 100,000 shares of Common Stock with $50,000be
"underwriters" within the meaning of the Original Brauser NoteSecurities Act in connection with such
sales. In that event, any commissions received by the broker-dealers or agents
and (ii) apply $50,000any profit on the resale of the Original Brauser Note
towards a Bridge Loanshares purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The selling
stockholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of the shares. There is no underwriter or coordinating broker acting in
connection with the Bridge Financing. The New Brauser
Noteproposed sale of $100,000shares by the selling stockholders. In
addition, each of the selling stockholders who is a registered broker-dealer or
is affiliated with a registered broker-dealer has advised us that:
67
o it purchased the shares in the ordinary course of business; and
o at the $50,000 Bridge Loantime of the purchase of the shares to be resold, it had no
agreements or understandings, directly or indirectly, with any
person to distribute the shares.
Under the securities laws of certain states, the shares may be sold in
those states only through registered or licensed broker-dealers. In addition,
the shares may not be sold unless they have been paid off. In connection
with bothregistered or qualified for
sale in the Original Brauser Noterelevant state or unless they qualify for an exemption from
registration or qualification.
We do not know whether any selling stockholder will sell any or all of the
shares registered by the shelf registration statement of which this prospectus
forms a part.
We have agreed to pay all fees and expenses incident to the New Brauser Note, Bridge Venturesregistration
of the shares, including certain fees and disbursements of counsel to certain of
the selling stockholders. We have agreed 81
to permitindemnify the Companyselling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Certain of the selling stockholders have also agreed to collateralize these notes withindemnify us, our
directors, officers, agents and representatives against certain liabilities,
including certain liabilities under the Company's patent
estate, which collateral had previously been grantedSecurities Act.
The selling stockholders and other persons participating in the
distribution of the shares offered under this prospectus are subject to Bridge Ventures. Bridge
Ventures further guaranteed the
Original Brauser Note with certain publicly
traded common stock, which guarantee was released by Mr. Brauserapplicable requirements of Regulation M promulgated under the Exchange Act in
connection with the restructuring. Harris Freedman, a Vice Presidentsales of the Company, and
his wife are both officers of Bridge Ventures.
In March and April 1995, in connectionshares.
We have agreed with the Bridge Financing,selling stockholders to keep the Company issued Bridge Notes to certain lenders in the aggregate principal amountregistration
statement of $1,500,000, including a Bridge Note in the amount of $250,000 to Stephen
Drescher and a Bridge Note in the amount of $150,000 to Jerome Belson.
Additionally, in connection with the Bridge Loans, the Company has issued
options to purchase 166,665 Bridge Units at $.50 per Bridge Unit to Mr. Drescher
and options to purchase 100,000 Bridge Units at $.50 per Bridge Unit to Jerome
Belson. In July 1995, Mr. Drescher assigned the $250,000 Bridge Note and his
options to purchase 166,665 Bridge Units to certain other investors. Mr.
Drescherwhich this prospectus is a former director of the Company and presently serves as the
Director of Corporate Finance at Monroe Parker, one of the Underwriters. Jerome
Belson is a principal shareholder and director of BioAegean, a subsidiary of the
Company.
In March 1995, the Company received interest-free loans from William A.
Carter and Harris Freedman in the amounts of $35,000 and $12,000, respectively.
In March 1995, the Company repaid the loan from Dr. Carter. In April 1995, the
Company repaid the loan from Mr. Freedman.
In December 1992 and February 1993, the Company issued to the Tisch/Tsai
Entities, in a private placement, promissory notes in the aggregate principal
amount of $2,400,000 due on April 30, 1994, and warrants to purchase an
aggregate of 36,864 shares of the Company's Common Stock or 40,000 shares of
Series C Preferred Stock at an exercise price of the (i) $13.02 or $12.00 per
share, respectively or (ii) the per share price of Common Stock in the initial
public offering. The warrants expire on December 31, 1997. One-half of the
principal amount of the notes and one-half of the warrants were purchased by FLF
Associates. James S. Tisch, a former director of the Company, is a principal of
FLF Associates. The remaining half of the principal amount of the note and
one-half of the warrants were purchased by Gerald Tsai, Jr. and Lincoln Trust
Company, Custodian FBO Gerald Tsai, Jr. Mr. Tsai is a former director of the
Company. Interest on the notes is payable quarterly at an annual rate of 12% (6%
prior to May 1, 1993).
In February 1995, the Company entered into a settlement agreement with the
Tisch/Tsai Entities to restructure the December 1992 and February 1993
promissory notes in the aggregate principal amount of $2,400,000 and settle
certain threatened claims made by the Tisch/Tsai Entities against the Company
(the "Tisch/Tsai Restructuring"). This debt restructuring consisted of (i) the
repayment by the Company of $1,200,000 in principal, (ii) the issuance of
replacement notes in the aggregate principal amount of $600,000 to the
Tisch/Tsai Entities which notes are due on the earlier of the closing of a
public offering or May 28, 1996 and bear interest at the rate of 8% per annum,
which interest is payable in quarterly installments from an interest reserve
established by the Company, (iii) the conversion of $600,000 of principal into
172,414 shares of Series C Preferred Stock at the rate of $3.48 per share, (iv)
the amendment and restatement of certain warrants issued in connection with the
original notes in order to increase the number of shares of stock issuable
thereunder by 64,000 shares to provide for warrants to purchase a total of
144,000 shares of Common Stock at an exercise price of $2.00 per share, which
warrants are exercisablepart effective until December 31, 1997, and (v) the
82
release by all parties of any claims. The replacement notes were secured by a
pledge by Dr. William A. Carter, President, Chief Executive Officer and Chairman
of the Company, of 112,925 shares of Series C Preferred Stock and 240,756 shares
of Common Stock. In March, 1996 the notes were repaid and the shares
of stock
are being returned.
In November 1994, the Company restructured a $100,000 note issued in June
1993 to Myron Cherry (the "Cherry Note"), a stockholder, pursuant to which the
repayment date of the principal amount of the Cherry Note was extended to the
closing date of the Company's initial public offering and the accrued but unpaid
interest subsequent to September 30, 1993 was converted into Common Stock of the
Company at a price of $5.43 per share. Pursuant to the restructuring, in the
event that the Company's initial public offering was not completed by February
28, 1995, the principal amount would be repaid by the Company or Bridge Ventures
Inc. by March 6, 1995. In addition, the Company issued to Mr. Cherry 5,000
immediately exercisable warrants with an exercise price of $3.50 per share and
Bridge Ventures agreed that the unpaid principal on the Cherry Note would be
collateralized by the Company's patents on the same terms as the Bridge
Financing arranged by Bridge Ventures. In March 1995, the Company and Mr. Cherry
agreed to extend the maturity of the promissory note from March 1, 1995 to March
31, 1995. During this extended period, the Company agreed to pay 8% interest and
grant Mr. Cherry a warrant to purchase 5,000 shares of Common Stock exercisable
at $3.50. The Company further agreed to either register all of Mr. Cherry's
2,770 shares of Common Stock and 10,000 warrants to purchase Common Stock in
connection with this Public Offering or reduce the exercise price of Mr.
Cherry's warrants to $1.75 per share. Because Mr. Cherry has not advised the
Company of his election, the Company has reduced the exercise price of his
warrants to $1.75 per share. As of July, 1995, the Company has repaid the entire
principal amount of the Note, including accrued interest. Harris Freedman, a
Vice President of the Company, and his wife are officers of Bridge Ventures.
In October and November 1994, the Company granted Rule 701 Warrants to
purchase 20,000 shares of Common Stock at $3.50 per share to Cedric C. Philipp
and Peter Rodino III, directors of the Company and Maryann Charlap Azzato and E.
Gerald Kay, former directors of the Company. In addition, the Company granted
the following Rule 701 Warrants to purchase shares of Common Stock at $3.50 per
share: 1,400,000 warrants to William A. Carter; 200,000 warrants to Sharon Will,
Vice President of Investor Relations and Corporate Communications; and 400,000
warrants to Harris Freedman, Vice President for Strategic Alliances.
From July 1994 to November 1994, the Company completed a private placement
in which it sold 2,050,000 shares of Common Stock to certain accredited
investors for an aggregate consideration of $1,025,000 (the "1994 Common Stock
Financing"). In connection with the private placement, Bridge Ventures
introduced a number of investors and lenders to the Company. Harris Freedman,
Vice President of the Company, and his wife are officers of Bridge Ventures. In
conjunction with the 1994 Common Stock Financing, the Company agreed to
collateralize certain of its patents until the earlier of the effectiveness of
the initial public offering or the consummation of corporate alliances or
licensing arrangement which provide sufficient operating capital and clinical
development support to the Company. Pursuant to the agreement with Bridge
Ventures in connection with the 1994 Common Stock Financing, Messrs. Philipp,
Rodino and Kay were elected to the Board of Directors. Purchasers of 1,950,000
of the shares of Common Stock issued pursuant to the 1994 Common Stock Financing
executed irrevocable proxies naming William A. Carter, the Company's President,
83
Chief Executive Officer and Chairman, as proxy, with full power to vote their
shares on all matters to be voted on by the stockholders of the Company until
the achievement by the Company of a market capitalization of $300,000,000 or
greater under certain circumstances or the receipt by the Company of a bona fide
offer for acquisition or merger, the net effect of which, if consummated, would
be to establish a market capitalization of at least $300,000,000.
In October 1994, in connection with the 1994 Common Stock Financing, the
Company sold 50,000 shares of Common Stock at a price of $.50 per share to
Stephen J. Drescher, a former director of the Company, 80,000 shares of Common
Stock to the Belfort Family Trust, of which Mr. Drescher serves as Trustee, at a
price of $.50 per share and 50,000 shares of Common Stock at a price of $.50 per
share to Jerome Belson, a director of BioAegean. Mr. Drescher also received
300,000 warrants in connection with general consulting services. In addition, in
October 1994, the Company received a certain loan in the aggregate principal
amount of $150,000 from the Belfort Family Trust. In March 1995, the loan was
repaid without interest from the proceeds from the Bridge Loans. In October
1995, the Belfort Family Trust sold 80,000 shares of Common Stock to Carol
Schiller at a price of $2.00 per share.
In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
associated with The South African Breweries Limited ("SAB"). In connection with
the execution of SAB Agreement, the Company granted Cedric C. Philipp, a
Director of the Company, an option to purchase 20,000 shares of Common Stock at
$3.50 per share. In addition, in October 1994, the Board of Directors granted to
Mr. Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and 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. In addition, the Company
further agreed to provide a monthly retainer of $2,000 to Mr. Philip in exchange
for consulting services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $90,000 to date
in connection with these arrangements.
In September 1994, Maryann Charlap Azzato, formerly Vice President of
Investor Relations and Corporate Communications and the former Vice Chairman and
director of the Company, entered into an agreement with Lloyd DeVos, a
stockholder, former director and holder of a note in the principal amount of
$100,000 (the "DeVos Note") in order to settle a lawsuit filed against the
Company and William A. Carter by Mr. DeVos in the United States District Court
for the Southern District of New York alleging breach of contract, conversion
and certain violations of the federal securities laws in connection with the
issuance of the DeVos Note. Pursuant to the settlement agreement, principal and
interest on the DeVos Note were repaid by Ms. Azzato as well as certain expenses
incurred by Mr. DeVos in the approximate amount of $2,600 and 1,536 shares of
Common Stock of the Company were transferred to Mr. DeVos by Ms. Azzato in
exchange for the assignment to Ms. Azzato by Mr. DeVos of the right to repayment
by the Company of the DeVos Note and warrants to purchase 1,667 share of Series
C Preferred Stock. In addition, certain options to purchase 6,912 shares of
Common Stock of the Company previously issued to Mr. DeVos were delivered to Mr.
DeVos. In
84
exchange for the above agreement, Mr. DeVos, the Company and William A. Carter
executed mutual releases of all claims and Mr. DeVos dismissed the suit.
In September 1994, the Company incorporated three wholly-owned subsidiaries
- - BioPro Corp. ("BioPro"), Core BioTech, Corp. ("Core BioTech") and BioAegean
Corp. - in Delaware. In September 1994, the Company granted exclusive worldwide
licenses and/or sublicenses to certain of its patents and assigned certain other
patents to BioPro (the "BioPro License"), Core BioTech (the "CoreBiotech
License") and BioAegean (the "BioAegean License"). Bridge Ventures, which has
rights in the Company's patents pursuant to the collateralization of such
patents in connection with the 1994 Common Stock Financing, agreed to release
its rights in the licensed or assigned patents. Harris Freedman, the Vice
President for Strategic Alliances for the Company and BioAegean, and his wife
are officers of Bridge Ventures.
In May 1994, the Company entered into an agreement to borrow $100,000 from
Bridge Ventures for 60 days in exchange for warrants to purchase 92,160 shares
of Common Stock at $3.50 per share. In August 1994, the $100,000 loan was
converted to 200,000 shares of Common Stock and warrants to purchase 200,000
shares of Common Stock at an exercise price of $3.50 per share. Bridge Ventures
transferred 150,000 of its shares of Common Stock to Gerald Kay, a former
director of the Company. In addition, Bridge Ventures received a $50,000
consulting fee for general business and financial consulting services rendered
from January 1994 to July 1994, which it converted into 100,000 shares of Common
Stock as part of the 1994 Common Stock Financing. Harris Freedman, the Company's
Vice President, and his wife are officers of Bridge Ventures. Pursuant to the
agreement with Bridge Ventures, Messrs. Kay, Philipp and Rodino were elected to
the Board of Directors. In November 1994, each of Bridge Ventures and Gerald Kay
sold 50,000 shares of Common Stock at a price of $.50 per share to Worldwide
Marketing. Sharon Will, an officer of the Company, is President of Worldwide
Marketing.
In April 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, purchased 20,000 shares of Series C Preferred Stock at $5.00
per share. Also Maryann Charlap Azzato purchased 30,000 shares of Series C
Preferred Stock at $5.00 per share and agreed to purchase an additional 10,000
shares at $5.00 per share.
In May 1994, Maryann Charlap Azzato guaranteed payment of two promissory
notes in the aggregate amount of $76,000 payable by the Company representing
payments due in connection with the Temple Agreement (the "Temple Notes"). In
return for the guarantee, the Company assigned all rights, patents and related
technology in the Company's Oragen and Diagen products to Ms. Azzato, which
rights will revert to the Company upon repayment of the principal on the Temple
Notes, 12% interest, and Ms. Azzato's fees and expenses which are expected to be
paid from the proceeds of this Public Offering. The Company also received a
right of first refusal with respect to the sale or assignment by Ms. Azzato of
this technology.
In January 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, sold an aggregate of 122,880 shares of Common Stock at $3.26
per share for an aggregate price of $400,000 to Michael Dubilier, Keys
Foundation, Canaan Venture Limited Partnership ("Canaan Venture"), Canaan
Venture Offshore Limited Partnership, C.V. ("Canaan Offshore"), James Tisch and
an unaffiliated individual. Using the proceeds of this sale, Dr. Carter
purchased 80,000 shares of Series C Preferred Stock at $5.00 per share from the
Company. In addition, Maryann Charlap Azzato purchased 3,600 shares of Series C
Preferred Stock
85
at $5.00 for an aggregate price of $18,000, representing her remaining
commitmentregistered under the 1993 Standby Financing Agreement.
86
registration statement have been resold.
DESCRIPTION OF SECURITIES BEING REGISTERED
The Companyfollowing section does not purport to be complete and is qualified in
all respects by reference to the detailed provisions of our certificate of
incorporation and by-laws, as amended, copies of which have been filed with the
Securities and Exchange Commission.
Our authorized to issue up to 50,000,000capital stock consist of: (i) 100,000,000 shares of Common Stock,common
stock, $.001 par value per share,value; and (ii) 5,000,000 shares of Preferred Stock, $.01preferred stock, .01 par
value per share ("Preferred Stock").value. 38,626,456 shares of common stock were issued and outstanding as of the
date of this prospectus.
Common Stock
AsShares of March 19, 1997, there were 16,353,086 shares of Common Stock
outstanding and held of record by approximately 355 stockholders, not including
shares of Common Stock held in street name. These outstandingour common shares
include 30,550 shares of Common Stock contained in outstanding Units. The
holders of Common Stockstock are entitled to one vote per share, either in
person or by proxy, on all matters tothat may be voted onupon by stockholders, and stockholders havethe owners of our
shares at meetings of our stockholders. There is no rightsprovision for cumulative
voting with respect to cumulative votes in the election of directors. Subject to prior dividend rights and preferences ofdirectors by the holders of common stock.
Therefore, the holder of more than 50% of our shares of Preferred Stock,outstanding common stock
can, if any,they choose to do so, elect all of our directors. In this event, the
holders of Common Stock are
entitledthe remaining shares of common stock will not be able to receive suchelect any
directors.
68
The holders of common stock:
o have equal rights to dividends as may be declared by the Board of Directors from funds legally available
therefor. Upon liquidation or dissolutiontherefore, when and if declared by our board of the
Company, subjectdirectors;
o are entitled to prior liquidation rightsshare ratably in all of holders of Preferred Stock, if
any, theour assets of the Company available for
distribution to stockholders will
be distributed ratably among the holders of Common Stock. The holderscommon stock upon liquidation,
dissolution or winding up of Common
Stockour affairs; and
o do not have no preemptive or other subscription rights, and there are no
conversion rights, or redemption orof
sinking fund provisions with respect to such shares.
All of theprovisions.
The outstanding shares of Common Stockour common stock are fully paid and nonassessable
and the shares of Common Stock sold by the Company in this offering will beduly authorized, validly
issued, fully paid and nonassessable.
Preferred Stock
As of March 19, 1997, there were 5,000 shares of Series E Preferred issued
and outstanding. These preferred shares are convertible into Common Stock.
The Board of Directors are authorized, without further action or vote of
the stockholders, to issue up to 4,500,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series. The
Company has no present plans to issue any shares of Preferred Stock. Issuance of
Preferred Stock, which may be accomplished through a public offering, a private
placement or otherwise may dilute the voting power of holders of Common Stock,
may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interest, and may have the effect of
delaying, deferring or preventing a change in control of the Company.
Warrants
In connection with various debt financings and other agreements, the
Company has issued warrants to acquire an aggregate of up to 6,425,297
(exclusive of Class A Warrants) shares of Common Stock at a weighted average
exercise price of $2.93 per share. In addition, the Company issued Rule 701
Warrants to the Company's directors and certain officers in October and November
1994, to purchase an aggregate of
87
2,080,000 shares of Common Stock at $3.50 per share. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions." All of these warrants, except for (i) the Rule 701
Warrants which vest in 1/3 increments over 36 months and (ii) the 100,000
warrants which may be issued to The Sage Group which vest upon the occurrence of
certain conditions, are currently exercisable by the holders.
Class A Redeemable Warrants
As of March 19, 1997, there were 6,313,000 Class A Redeemable Warrants (the
"Class A Warrants") outstanding. The Class A Warrants (including the Class A
Warrants included in 30,550 outstanding Units and 1,000,000 Bridge Units) were
issued pursuant to an agreement, dated November 2, 1995 (the "Warrant
Agreement"), between the Company and Continental Stock Transfer and Trust
Company (the "Warrant Agent"). The following discussion of certain terms and
provisions of the Class A Warrants is qualified in its entirety by reference to
the detailed provisions of the Warrant Agreement.
Each Class A Warrant represents the right of the registered holder to
purchase one share of Common Stock at an exercise price equal to $4.00, subject
to adjustment (the "Purchase Price"). The Class A Warrants will be entitled to
the benefit of adjustments in the Purchase Price and in the number of shares of
Common Stock and/or other securities deliverable upon the exercise thereof in
the event of a stock dividend, stock split, reclassification, reorganization,
consolidation, merger or the issuance of Common Stock or options to purchase
Common Stock at a price below the Purchase Price then in effect. The Company has
the right to reduce the Purchase Price or increase the number of shares of
Common Stock issuable upon the exercise of the Class A Warrants.
Unless previously redeemed, the Class A Warrants may be exercised at any
time commencing November 2, 1996 and prior to the close of business on November
2, 2000 (the "Expiration Date"). On and after the Expiration Date, the Class A
Warrants become wholly void and of no value. The Company may, upon 30 days
written notice to all holders of the Class A Warrants, reduce the exercise price
or extend the Expiration Date of all outstanding Class A Warrants for such
increased period of time as it may determine. The Class A Warrants may be
exercised at the office of the Warrant Agent.
The Company has the right at any time after November 2, 1997 to redeem the
Class A Warrants at a price of $.05 each, by written notice mailed 30 days prior
to the redemption date to each Class A Warrant holder at his address as it
appears on the books of the Warrant Agent. Such notice shall only be given
within 10 days following any period of 20 consecutive trading days during which
the high closing bid price of the shares of Common Stock (if then traded on the
Nasdaq or on a national securities exchange) exceeds $9.00, subject to
adjustments for stock dividends, stock splits and the like. If the Class A
Warrants are called for redemption, they must be exercised prior to the close of
business on the date prior to the date of any such redemption or the right to
purchase the applicable shares of Common Stock will lapse.
No holder, as such, of Class A Warrants shall be entitled to vote or
receive dividends or be deemed the holder of shares of Common Stock for any
purpose whatsoever until such Class A Warrants have been duly exercised and the
Purchase Price has been paid in full.
88
If required, the Company will file a new registration statement with the
Commission with respect to the securities underlying the Class A Warrants prior
to the exercise of the Class A Warrants and deliver a prospectus with respect to
such securities to all Class A Warrant holders as required by Section 10(a)(3)
of the Securities Act. See "Risk Factors--Current Prospectus and State `Blue
Sky' Registration Required to Exercise the Redeemable Warrants."
Units
Pursuant to the IPO in November 1995, the Company registered and issued
5,313,000 Units. Each Unit consists of one share of Common Stock and one Class A
Warrant. On July 12, 1996, the Units were de- coupled into their component
parts. On August 16, 1996, the Company voluntarily delisted the Units. As of
March 19, 1997 there were 30,550 Units outstanding.
Bridge Units
In connection with the Bridge Loans, the Company issued to the holders of
the Bridge Loans Bridgeholders Options to purchase 1,000,000 Bridge Units at an
exercise price of $.50 per Bridge Unit. Each Bridge Unit originally contained
one share of Common Stock, one Class A Warrant and one Class B Redeemable
Purchase Warrant (collectively, the "Class B Warrants"). The Company and the
purchasers amended the Bridge Units to eliminate the Class B Warrants such that
each Bridge Unit contains one share of Common Stock and one Class A Warrant. The
Company registered the Bridgeholder Options and the securities underlying them
in the IPO. The Class A Warrants included in the Bridge Units are identical to
the Class A Warrants offered by the Company in the IPO. All holders of
Bridgeholder Options have exercised the options at an exercise price of $.50 per
Bridge Unit. The Bridge Units and the securities contained therein are not
transferable until the earlier of 13 months from November 2, 1995 or at such
earlier date as may be permitted by the Company. The Bridge Units were
de-coupled into their component parts on July 12, 1996, along with the Units.
Rule 701 Warrants
In October 1994, the Company issued 2,080,000 warrants to purchase Common
Stock at $3.50 per share pursuant to Rule 701 under the Securities Act ("Rule
701 Warrants") to certain officers and employees of the Company. These Rule 701
Warrants vest in 1/3 increments over a thirty six month period and are
exercisable until September 30, 1999. In the event that the number of Rule 701
Warrants issued by the Company exceeds the aggregate monetary limits set forth
under Rule 701, the number of Rule 701 Warrants issued to the holders will be
reduced pro rata and the remaining warrants will not be subject to the
provisions of Rule 701. See "Shares Eligible for Future Sales and Registration
Rights."Anti-Takeover Provisions
Delaware Law
and Certain Charter and By-Law Provisions
The Company will beWe are subject to the provisions of Section 203 of the Delaware General
Corporation Law, of Delaware.as amended, which restricts certain business combinations with
interested stockholders even if such a combination would be beneficial to all
stockholders. In general, Section 203 prohibitswould require a publicly-held Delaware
corporation from engaging intwo-thirds vote of
stockholders for any business combination (such as a "business combination" withmerger or sale of all or
substantially all of our assets) between us and an "interested stockholder"
for a period of three years after the date of theunless such transaction in
which the person became an interested stockholder, unless, among other
exceptions, the business combination is approved by (i) the Board of Directors
prior to the date the interested stockholder obtained such status or
89
(ii) the holders of two-thirdsa majority of the outstanding shares of each classdisinterested directors
or series
of stock entitled to vote generally in the election of directors, not including
those shares owned by the interested stockholder. A "business combination"
includes mergers, asset sales andmeets certain other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, anrequirements. An "interested stockholder" is a person
who, together with affiliates and associates, owns or(or within three years, did
own,own) 15% or more of the
corporation'sour voting stock. The Company's By-Laws containThese provisions could deprive
stockholders of an opportunity to receive a provision wherebypremium for their common stock as
part of a stockholdersale of the
Companyus or may nominate an individualotherwise discourage a potential acquirer from
attempting to obtain control of us.
Certificate of Incorporation
Provisions of our Certificate of Incorporation may make it more difficult
for someone to acquire control of us or individuals for electionour stockholders to theremove 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 only if such nomination is made in writing (i) at least ninety days in
advancehas 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 Company's annual meetingshares, together with a premium, prior to the redemption of our common
stock.
Shareholder rights plan
In November, 2002 we adopted a shareholder rights plan and, under the
Plan, our Board of Directors declared a dividend distribution of one Right for
each outstanding share of Common Stock to stockholders of record at the close of
business on November 29, 2002. Each Right initially entitles holders to buy one
unit of preferred stock for $30.00. The Rights generally are not transferable
apart from the common stock and will not be exercisable unless and until a
person or (ii) within seven
days following noticegroup acquires or commences a tender or exchange offer to acquire,
beneficial ownership of a special meeting15% or more of stockholdersour common stock. However, for William A.
Carter, M.D., our chief executive officer, who already beneficial owns 9.2% of
our common
69
stock, the election of
directors. Accordingly, itPlan's threshold will be more difficult for stockholders, including
those holding20%, instead of 15%. The Rights will expire
on November 19, 2012, and may be redeemed prior thereto at $.01 per Right under
certain circumstances.
The rights have certain anti-takeover effects. The rights will cause
substantial dilution to a majorityperson or group that attempts to acquire us on terms
not approved by our Board of the outstanding shares, to force an immediate change
in the composition ofDirectors. The rights should not interfere with any
merger or business combination approved by the Board of Directors.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. The Company's Certificate of Incorporation also contains provisions to
indemnify its directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. The Company has entered into
indemnification agreements with its current directors and certain of its
executive officers. These agreements have the practical effect in certain cases
of eliminating the ability of stockholders to collect monetary damages from such
individuals. The Company believes that these provisions and agreements have
assisted the Company in attracting and retaining qualified individuals to serve
as directors and officers.
Transfer Agent andAnd Registrar
The transfer agent and registrar for the Company's Common Stock, Class A
Warrantsour common stock and Unitswarrants is
Continental Stock Transfer and Trust Company, 2 Broadway,Co., 17 Battery Place, 8th Floor, New York,
New York 10004.
Nasdaq Quotation
The Company's Common Stock and Warrants trade on Nasdaq under the trading
symbols HEMX and HEMXW, respectively.
Shares Eligible for Future Sale and Registration Rights
The Company has 16,353,086 shares of Common Stock outstanding as of March
19, 1997. In addition, the Company has 234,953 stock options and 15,280,797
warrants outstanding. Other than 5,313,000 shares of Common Stock and 5,313,000
Class A Warrants contained in the IPO Units, all of the Company's shares of
Common Stock, options and warrants were issued in private transactions not
involving a public offering and, therefore, are treated as "restricted
securities" subject to the restrictions of Rule 144 under the Securities Act.
Approximately 9,467,968 shares of the Company's Common Stock are restricted
securities as that term is defined in Rule 144 promulgated under the Securities
Act. Approximately 3,594,720 of such shares have
90
been beneficially owned for at least two years and therefore can be sold
pursuant to Rule 144. In general, under Rule 144, subject to the satisfaction of
other conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least two years is
entitled to sell, within any three month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or if the Common Stock is quoted on a stock exchange, the average
monthly trading volume during the four calendar weeks preceding the sale.
There are approximately 5,722,664 shares subject to Rule 144(k)
restrictions. Generally, under Rule 144(k), subject to the satisfaction of
certain other conditions, a person who is presently not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least
three years is entitled to sell such shares without regard to any volume
limitations.
Prior to the IPO, the Company entered into lock up agreements with certain
shareholders. These lock up agreements ranged from eighteen (18) months to
thirty six (36) months. As of March 19, 1997, approximately 3,167,809 shares of
Common Stock remained locked up. The lock-up agreements expire as follows: (i)
265,421 shares on May 2, 1997; (ii) 1,941,225 shares on November 2, 1997; and
(iii) 961,163 shares on November 2, 1998.
LEGAL MATTERS
The validity of the securitiescommon stock offered hereby will bein this prospectus has been
passed upon for the
Companyus by Silverman Collura, ChernisSclar Shin & BalzanoByrne P.C., 381 Park Avenue South,
Suite 1601, New York, New York.York 10016.
EXPERTS
Our consolidated financial statements included in this prospectus have
been audited by BDO Siedman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of Hemispherx Biopharma,Interferon Sciences,
Inc. and
subsidiaries as of December 31, 19952002 and 1996,2001 and for each of the years in the three
year period ended December 31, 1996,2002 included in this prospectus have been so
included herein and in the
registration statement in reliance uponon the report (which contains an explanatory paragraph
relating to substantial doubt about Interferon Sciences, Inc. ability to
continue as a going concern) of KPMG Peat MarwickEisner LLP, independent certified public accountants, appearing elsewhere herein, and upon
theauditors, given on
authority of said firm as experts in accountingauditing and auditing.
ADDITIONALaccounting.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act.
The Company hasWe have filed with the Securities and Exchange Commission a post-effective amendment to the
Registration Statementregistration
statement (which contains this prospectus) on Form S-1 (including any amendments thereto, the
"Registration Statement") under the Securities Act.Act
of 1933. The registration statement relates to the shares offered by the selling
stockholders. This Prospectusprospectus does not contain all of the information set forth
in the Registration Statementregistration statement and the exhibits and schedules thereto. Forto the registration
statement. Please refer to the registration statement and its exhibits and
schedules for further information with respect to us, the Companycommon stock and the
Common Stock, reference is made to the Registration Statement,
and the exhibits and schedules thereto.Warrants. Statements contained in this Prospectusprospectus as to the contents of any
contract or any other document are not necessarily complete and, in each instance,
reference is madewe refer you to the copy of suchthat contract or document filed as an exhibit to the
Registration Statement. The Registration
StatementYou may read and obtain a copy of the registration
statement and its exhibits and schedules from the schedules thereto filedSEC, as described below.
We file annual, quarterly and special reports, proxy statements and other
information with the CommissionSecurities and Exchange Commission. You may be inspected, without charge,read and copy
any document we file at the Securities and Exchange Commission's public
reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450
91
Fifth Street, N.W. Washington, D.C. 20549, and at the Commission's Regional
Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material may also be obtained upon written
request from the Public Reference Section of the Commissionrooms at 450 Fifth Street, N.W., Washington, D.C. 20549,20549. Please call
the Securities and Exchange Commission at prescribed rates.
921-800-SEC-0330 for further information
on the public reference rooms. Many of our Securities and Exchange Commission
filings are also available to the public from the Securities and Exchange
Commission's Website at "http://www.sec.gov."
70
GLOSSARYHEMISPHERX BIOPHARMA, INC.
AND SUBSIDIARIES
Index to Financial Section
Item Page No.
Financials for the nine F-2
Months Ended September 30, 2003
for Hemispherx Biopharma, Inc.
and subsidiaries ("Hemispherx")
(unaudited)
Financials for the Year Ended F-20
December 31, 2000, 2001, and 2002
for Hemispherx
Financials for the Year Ended F-51
December 31, 2001 and 2002 for
Interferon Sciences, Inc. and
subsidiaries ("ISI")
Unaudited Proforma Financial F-79
Statements Related to the
Acquisition of Certain Assets of ISI
by Hemispherx
F-1
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31, September 30,
2002 2003
------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,256 $ 5,061
Short term investments 555 --
Inventory -- 2,545
Accounts and other
receivables 1,507 141
Prepaid expenses and other current assets 71 309
-------- ---------
Total current assets 4,389 8,056
Property and equipment, net 155 112
Patent and trademark rights, net 995 1,076
Investments in unconsolidated affiliates 408 408
Deferred acquisition costs -- 1,068
Deferred financing costs -- 270
Advance receivable -- 951
Other assets 93 51
-------- ---------
Total assets $ 6,040 $ 11,992
======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 786 $ 857
Accrued expenses 678 857
Current portion of long-term debt -- 349
-------- ---------
Total current liabilities 1,464 2,063
Long-Term Debt-net of current portion -- 969
Commitments and contingencies:
Minority interest in subsidiary 946 --
Redeemable Common Stock -- 1,600
Stockholders' equity:
Common stock 33 38
Additional paid-in capital 107,155 117,145
Accumulated other comprehensive income 35 --
Treasury stock - at cost (4,520) (21)
Accumulated deficit (99,073) (109,802)
-------- ---------
Total stockholders' equity 3,630 7,360
-------- ---------
Total liabilities and stockholders' equity $ 6,040 $ 11,992
======== =========
See accompanying notes to condensed consolidated financial statements.
F-2
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF TERMS
25A: 2", 5" oligoadenylate; a short polymerOPERATIONS
(in thousands, except share and per share data)
For the Three months ended
September 30,
---------------------------
2002 2003
---------- ----------
(Unaudited) (Unaudited)
Revenues:
Sales of ribonucleic
acid containingproduct, net $ -- $ 157
Clinical treatment programs 79 37
---------- ----------
79 194
Costs and expenses:
Cost of Goods sold -- 69
Research and development 1,194 846
General and administrative 767 1,045
---------- ----------
Total cost and expenses 1,961 1,960
Interest and other income 23 10
Interest and related expenses -- (3,666)
Equity in loss of unconsolidated affiliate (32) --
---------- ----------
Net loss $ (1,891) $ (5,422)
========== ==========
Basic and diluted loss per share $ (.06) $ (.15)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,093,066 36,830,633
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the base adenine.
25A Synthetase: A setNine months ended
September 30,
---------------------------
2002 2003
---------- ----------
(Unaudited) (Unaudited)
Revenues:
Sales of specific enzymes that join together certain
building blocks, termed nucleotides, to form 2-5A;
2-5A synthetase must be activated by a
double-stranded RNA molecule.
AIDS: Acquired Immunodeficiency Syndrome; a disease caused
by HIV infectionproduct, net $ -- $ 236
Clinical treatment programs 263 118
License fee income 563 --
---------- ----------
826 354
Costs and expenses:
Production/Cost of Goods sold -- 224
Research and development 3,732 2,574
General and administrative 2,447 2,550
---------- ----------
Total cost and expenses 6,179 5,348
Interest and other income 90 61
Interest and related expenses -- (5,795)
Equity in loss of unconsolidated affiliate (72) --
Loss on investment due to impairment (678) --
---------- ----------
Net loss $ (6,013) $ (10,728)
========== ==========
Basic and diluted loss per share $ (.19) $ (.31)
========== ==========
Basic and diluted weighted
average common shares outstanding 32,083,957 34,210,987
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-4
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the progressiveNine months ended
September 30,
-------------------------
2002 2003
------- --------
Cash flows from operating activities:
Net loss $(6,013) $(10,728)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of property and equipment 69 62
Amortization of patents rights 81 97
Amortization of deferred financing
and debt discount costs -- 5,795
Stock option and warrant compensation
and service expense 132 --
Equity in loss of unconsolidated affiliates 72 --
Loss on investment due to impairment 678
Changes in assets and liabilities:
Inventory -- (926)
Other receivable (4) 1,314
Prepaid expenses and other current assets 283 (186)
Accounts payable (190) (575)
Accrued expenses (62) 179
Advance receivavle -- (673)
Other assets 27 42
------- --------
Net cash used in operations (4,927) (5,599)
------- --------
Cash flows from investing activities:
Purchase of property and equipment -- (19)
Additions to patent rights (143) (178)
Maturity of short term investments 5,310 520
Purchase of short term investments (837) --
Deferred acquisition costs -- (160)
------- --------
Net cash provided by investing activities 4,330 163
------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 6 --
Proceeds from exercise of warrants 59 1,178
Proceeds from issuance of preferred
Stock of subsidiary 946 --
Proceeds from long-term borrowings -- 7,750
Deferred financing costs -- (687)
Purchase of treasury stock (50) --
------- --------
Net cash provided by financing activities 961 8,241
------- --------
Net increase in cash and cash equivalents 364 2,805
Cash and cash equivalents at beginning of period 3,107 $ 2,256
------- --------
Cash and cash equivalents at end of period $ 3,471 $ 5,061
======= ========
See accompanying notes to condensed consolidated financial statements.
F-5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Hemispherx BioPharma, Inc., a Delaware corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
In the opinion of management, all adjustments necessary for a fair presentation
of such consolidated financial statements have been included. Such adjustments
consist of normal recurring items. Interim results are not necessarily
indicative of results for a full year.
The interim consolidated financial statements and notes thereto are presented as
permitted by the Securities and Exchange Commission (SEC), and do not contain
certain information which will be included in our annual consolidated financial
statements and notes thereto.
These consolidated financial statements should be read in conjunction with our
consolidated financial statements included in amendment no. 1 to our annual
report on Form 10-K for the year ended December 31, 2002, as filed with the SEC
on May 20, 2003.
NOTE 2: 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 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 period presented are as follows:
September 30,
-------------
2002 2003
---- ----
Risk-free interest rate 5.23% 5.23%
Expected dividend yield -- --
Expected lives 2.5 years 2.5 years
Expected volatility 63.17% 63.17%
F-6
Had compensation cost for the Company's option plans 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 three months and nine months ended September 30, 2002 and
2003 would have been as follows:
(In Thousands)
Three Months Ended Nine Months Ended
------------------- --------------------
September 30, September 30,
------------------- --------------------
2002 2003 2002 2003
------- ------- ------- --------
Net (loss) as reported $(1,891) $(5,422) $(6,013) $(10,728)
Add: Stock based employee
compensation expense
Included in reported net loss,
net of Related tax effects -- -- -- --
Deduct:
Total stock based employee
compensation determined
under fair value method
for all awards, net
of related tax effects $ (411) (271) (137) (813)
------- ------- ------- --------
Pro forma net loss $(2,162) $(5,559) $(6,826) $(11,139)
======= ======= ======= ========
Basic and diluted loss
per share
As reported $ (.06) $ (.15) $ (.19) $ (.31)
Pro forma $ (.07) $ (.17) $ (.20) $ (.33)
Note 3: INVESTMENT In unconsolidated affiliates
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 Hemispherx Biopharma, Inc. common stock from the
treasury. On October 12, 2000, the Company issued an additional 50,000 shares of
Hemispherx Biopharma, Inc. common stock and on March 7, 2001 the Company issued
12,000 more shares of Hemispherx
F-7
Biopharma, Inc. 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
their recent investment offerings.
NOTE 4: INVENTORIES
The Company uses the body's immune system leadinglower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.
Inventories consist of the following:
September 30, 2003
------------------
Raw materials-Work in process $ 2,489,480
Finished goods 55,571
-----------
$ 2,545,051
===========
NOTE 5: REVENUE AND LICENSING 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 fatal infections
or malignancies.
Analogue: A chemical compound with a structure similarthe terms of the
Agreement, Esteve was granted the exclusive right to that
of another compound, but differing from it market Ampligen(R)in respect
to a certain component.
Antiviral: Destroying viruses or suppressing their replication.
CD4: A certain type of immune cell which protects the body
against foreign organisms such as bacteriaSpain,
Portugal and viruses.
Controlled Study: A clinical trial in which patients are divided into
two groups, one of which receives the drug being
tested, and the second of which receives either a
saline solution (see definition of "Placebo") or
another drug purported to be clinically beneficial inAndorra for the treatment of Myalgic Encephalitis/Chronic Fatigue
Syndrome ("ME/CFS"). Esteve paid the indicationinitial 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
question. In
trials whereSpain, Portugal and Andorra require the second group receives saline
solution,Company to provide the studylicensee 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.
F-8
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 referredappropriate 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.
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.
During the periods ending December 31, 2002 and September 30, 2003. The Company
did not receive any grant monies from local, state and or Federal Agencies.
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
"placebo-controlled"title is transferred to the customer. The Company has no other obligation
associated with its products once shipment has occurred.
Note 6: MINORITY SHAREHOLDER INTEREST
On March 20, 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 Myalgic Encephalitis/Chronic Fatigue Syndrome
("ME/CFS"). In trials whereaddition 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 second
group receivesfirst part of a drug purportedseries of milestone
based payments.
F-9
During March 2002, 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, 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 would
be converted into the common stock of the Company in the event that a European
IPO is not completed by September 30, 2003. The conversion rate is to be beneficial,300
shares of the studyCompany's common shares for each 1,000 Euro convertible preferred
certificate. As a result the Company recorded approximately $946,000 as minority
interest in subsidiary on its balance sheet.
On December 18, 2002, we proposed that Esteve convert its convertible preferred
equity certificates into Company 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.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan SA,
an affiliate of Esteve, in exchange for the 1,000,000 Euros of convertible
preferred equity certificates issued to Esteve and any unpaid dividends. We have
registered these shares for public sale by Provesan SA. As a result of the
exchange, minority interest in our 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.
Note 7: RECENT ACCOUNTING STANDARDS AND PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities". ("Interpretation No. 46"), which clarifies the application
of
F-10
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 referredapplicable immediately for
variable interest entities created after January 31, 2003. For variable interest
entities created prior to as "active-controlled"January 31, 2003, the provision of Interpretation No.
46 are applicable no later than July 1, 2003. This Interpretation did not have
an effect on the consolidated financial statements.
In May 2003, FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 150 "Accounting for Certain Financial Instruments with Characteristics of
Both Liability and Equity". Cytokine: Proteins released byThis Statement establishes standards for how an
issuer classifies and measures in statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a cell population on contact
with a stimulus, which act as intracellular
mediators.
Double-Blind: Refers to a study where neither the patient nor the
treating physician knows whether the patient is being
administered with drug or placebo.
Enzyme: A protein that accelerates a chemical reaction of
other substances in the body.
FDA: Food and Drug Administration; the United States
governmental agency with authority for drug approval.
Good Laboratory
Practice (GLP): Federal regulations which govern the generation of
laboratory data in a mannerfinancial instrument that is acceptable to the
FDA inwith its review of ongoing studies and New Drug
Applications (NDA) for marketing approval.
HIV: Human-immunodeficiency virus; the virus which causes
AIDS.
Interferon: IFN; A family of proteins that exert anti-viral
activity; interferons also have immune regulatory and
anti-tumor activities. IFN can be classified into
three distinct classes termed alpha, beta or gamma.
93
Interleukin: A group of protein factors, produced by immune cells.
In vitro: Refers to studies taking place within an artificial
environment suchscope
as a test tube.
In vivo: Refers to studies taking place withinliability (or assets in some circumstances) because that financial
instrument embodies an obligation. This statement shall be effective for finical
instruments entered into or modified after May 31, 2003, and otherwise shall be
effective at the beginning of the first interim period beginning after June 15,
2003, except for mandatory redeemable financial instruments of a living body.
Lymphokine: Antiviral and anticancer products, such as
interferon, produced bynonpublic
entity. To date, the adoption of this interpretation did not have an effect on
the consolidated financial statements.
Note 8: ACQUISITION OF ASSETS OF INTERFERON 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 blood cells.
Macrophage: A blood cell which ingests foreign substances.
Multicenter: Refersgenital 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 and agreed to pay
ISI 6% of the net sales of the 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 trial conducted at more than one clinical
site.
Oncogene: Referstotal of $675,000. Accordingly, certain shares issued in connection
with this transaction are and will be recorded as redeemable common stock
outside of stockholders' equity.
F-11
On March 11, 2003, we also entered into an agreement to genes withpurchase from ISI all of
its rights to the capacityproduct and other assets related to cause production
or growththe 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, 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 tumor.
Open-Label: Refersthird creditor and paying a real
estate tax liability.
On May 30, 2003, we issued the shares to a study where both the patientGP Strategies and the treating physician knowAmerican National
Red Cross. Pursuant to our agreements with ISI and these two creditors, we have
agreed to register the identityforegoing shares for public sale. The acquisition of the
drug
whichreal estate and machinery is being administered.
Placebo: A dummy treatment administeredcontingent on our receiving appropriate
governmental and shareholder approval. The value of these guaranteed shares
totaled $925,000 and are redeemable under certain conditions, accordingly they
are reflected as redeemable common stock and deferred acquisition costs on the
accompanying financial statements as of September 30, 2003.
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 of the additional 487,028 guaranteed shares to ISI and 12 months after
the date of issuance of the guaranteed shares to the control group
inAmerican National Red
Cross.
We will account for these transactions as a controlled clinical trial in orderBusiness Combination under Statement
of Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.
As a result of the first agreement, the following table summarize the estimated
fair values of the assets and liabilities assumed at the acquisition date.
At March 11, 2003
-----------------
Inventory $ 1,840,762
Fair Value of liabilities
Assumed (1,081,041)
------------
Fair Value of Common Shares
Issued $ 759,720
The above table is subject to distinguishfurther adjustment upon final determination of
estimated fair values as well as the specific and nonspecificadditional accounting for the effects of
the experimental treatments.
Placebo-Controlled: Referssecond agreement as described above.
F-12
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.
Nine Months ended September 30,
--------------------------------
2002 2003
---- ----
(in thousands except for share data)
Net revenues $ 2,473 $ 596
Operating expense 10,244 11,874
---------- ----------
Net loss $ (7,771) (11,278)
========== ==========
Basic and
diluted loss
per share $ (.24) $ (.33)
---------- ----------
Weighted average
Shares
Outstanding 32,570,957 34,697,987
========== ==========
In giving effect to the additional shares that would be issued as a trialresult of
the second agreement with ISI the weighted average shares outstanding during the
nine months ending September 30, 2002 and 2003 would have been 33,057,957 and
35,184,987 resulting in a pro forma loss per share as adjusted of $ (.24) and
$(.32) for said periods respectively.
Note 9: CONVERTIBLE DEBENTURES
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 the ("March Debentures")
and an aggregate of 743,288 Warrants expiring on March 12, 2008 to two investors
in a private placement for an aggregate gross proceeds of $4,650,000. Pursuant
to the terms of the Debentures, $1,550,000 of the proceeds from the sale of the
Debentures were to have held back and to be released to us if, and only if, we
acquire ISI's facility with in a set timeframe. In June 2003 each of the
investors collectively funded the $1,550,000 and waived the requirement to
perfect a security interest in the building to be acquired. In addition, each of
the investors waived the requirement that the company acquire the assets of ISI
pursuant to the terms of the
F-13
second ISI Asset Purchase Agreement. The Debentures mature on January 31, 2005
and bear interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately proceeding the applicable
interest payment date. Pursuant to the terms and conditions of the Senior
Convertible Debentures, we have pledged all of our assets other than
intellectual property, as collateral and are subject to comply with certain
financial and negative covenants, which include but are not limited to the
repayment of principal balances upon achieving certain revenue milestones. The
conversion rate is fixed at $1.46 per share subject to adjustment for
anti-dilution protection.
The investors also received Warrants exercisable at any time through March 12,
2008 to purchase an aggregate of 743,288 shares of common stock at a price of
$1.68 per share. On March 12, 2004, the exercise price of the Warrants will
reset to the lesser of the exercise price then in effect or a price equal to the
average of the daily price of the common stock between March 13, 2003 and March
11, 2004 (but in no event less than $1.176 per share). The exercise price (and
the reset price) under the Warrants also is subject to similar adjustments for
anti-dilution protection. All of these warrants were exercised in June 2003.
On June 25, 2003, in connection with the March 12, 2003 $5,426,000 6%
convertible debentures offering, we issued an additional warrant to each of the
Debenture holders 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) is also
subject to adjustments for anti-dilution protection.
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 due July 2008 to the same investors who purchased
the March Debentures due January 2005 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 have
been held back and were to have been released to us if, and only if, we acquire
ISI's facility with in a set timeframe. Although we have not acquired ISI's
facility yet, these funds were released (see discussion below). The Debentures
mature on July 31, 2005 and bear
F-14
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 investors accepted the same collateral as was pledged in the March 12,
2003 transaction.
The 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 Debentures was fixed at $2.14 per share: however, as part of the
subsequent debenture placement that 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 warrants received by the investors are exercisable at any time through July
31, 2008 to purchase 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 $1.72 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 registration rights agreements with the investors in connection
with the issuance of the March debentures and warrants and the July debenture
and warrants. The registration rights agreement required that we register the
shares of common stock issuable upon conversion of the debentures, shares for
interest accrued and upon exercise of the warrants issued in March, June and
July. In accordance with the agreement, we have registered these shares for
public sale.
On October 29, 2003, we issued an aggregate of $4,142,357 in the 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
($3,275.000 net of expenses). 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 October Debentures mature on
October 31, 2005 and bear interest at 6% per annum, payable
F-15
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 (net) from the October Debenture and
$1,550,000 that was withheld from the July, debentures. As noted above,
$1,550.000 of the October Debenure proceeds 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 received by the investors are to acquire at any time
through October 31, 2008 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 $1.624
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 Debentures, as
interest shares under the Debentures and upon exercise of the October 2008
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.
F-16
As of October 28, 2003, the investors had converted $4,427,580 of debt into
3,032,589 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 $1.3
million ($951,000 paid through September 30, 2003) into the debenture cash
collateral account as required by the terms of the October Debentures. These
amounts have been accounted for as advances receivable and are reflected as such
on the accompanying balance sheet as of September 30, 2003. The cash collateral
account provides partial security for repayment of the March, July and October,
2008 debentures in the event of default.
In conjunction with both the March and July 2003 6% convertible debenture
placements we paid the placement agent, Cardinal Capital, an investment banking
fee equal to 7% of the investments made by the Debenture holders. A portion of
this fee was paid with the patientsissuance of 30,000 shares of our common stock.
Placement agent also received 425,000 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 and 200,000 are exercisable at $2.50 per share. The $1.74
warrants expire on July 10, 2008 and the other warrants expire on March 12,
2008. By agreement with Cardinal Capital, we registered all shares and warrants
for public sale. In conjunction with the October 2003 private debenture
offering, we paid Cardinal an investments banking fee of $245,000 and Cardinal
will receive 87,500 five year warrants to purchase an aggregate of 87,500 shares
at an exercise price of $2.42 per share.
The March, 2008 and the July, 2008 debenture issuances of $5,426,000 and
$5,426,000, respectively, and the October 29, 2003 issuance of $4,142,357
debentures and related embedded conversion features 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 instrument, the Company determined the fair values to be ascribed to
detachable warrants issued with the convertible debentures utilizing the
Black-Scholes method.
These pronouncements also provide for fair values of contingent conversion
features of convertible debt securities to be determined when the contingent
conversion price of is less than the market value of the underlying parent
company or subsidiary common stock at the measurement date.
As a drugresult the Company recorded debt discounts of approximately $9.0 million
which, in effect, reduced the carrying value of our debt to $1.3 million. These
costs are deferred and charged to interest expense over the life of the
debentures. As of
F-17
September 30, 2003, the amount of debt discount amortized to interest expense
totaled approximately $5.4 million.
Recorded debt discounts on these debentures include an Original Issue Discount
("OID") of approximately $1.3 million as additional cost of the offerings. These
costs are also deferred and expensed as interest over the life of the
debentures.
Excluding the application of related accounting standards, our outstanding debt
as of September 30, 2003 totaled $4.9 million.
In connection with the debenture agreements, the Company has outstanding letters
of credit totaling $1 million as additional collateral. In addition, as of
September 30, 2003, the Company has $200,000 in restricted cash under other
letter of credit agreements required by our insurance carrier.
Note 10: AUTHORIZED SHARES:
On July 31, 2003, we had approximately 104,000 shares of our authorized shares
of 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
Stockholder meeting held in Philadelphia, PA on September 10, 2003. This
amendment increased our authorized shares from 50,000,000 to 100,000,000. As of
September 30, 2003, we have issued and outstanding shares totaling 37,654,543
and 16,393,990 shares reserved for use upon the conversion of the debenture and
the exercise of outstanding warrants and options.
Note 11: EXECUTIVE COMPENSATION
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 agreed to waive his right to exercise certain
warrants
F-18
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 portiongrant 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 patients receive
a placebo, and the activitycontext of the drug is comparedtotal
compensation paid to the activitychief executive officers of the placebo.
Protein Kinase: Refers to an enzyme which can modify other protein
factors leading to inhibition of viral replication or
tumor cell growth.
Randomized: Refers to a procedure where the treatment that a
patient will receive (i.e. the active drug or a
placebo) is determined by chance.
Ribonuclease: Any enzyme that decomposes ribonucleic acids, such as
viral RNA.
Ribonuclease L: A specific ribonuclease that is present in human
cells, but dormant (inactive) until activated by 2-5A
or Oragen drugs.
Transitory
Response: A tumor response which is characterized by the
subsequent recurrence of disease (notwithstanding the
continuation of treatment) after a limited period of
time.
94comparable biotechnology
companies.
F-19
HEMISPHERxHEMISPHERX BIOPHARMA, INC.
AND SUBSIDIARIES
Index to Consolidated Financial Statements Page
----- 2002
Report of Independent Auditors' Report ............................................. F-2Certified Public Accountants ..................... F-21
Consolidated Balance Sheets at December 31, 19952001 and 1996 ................ F-32002 ............. F-22
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1996 ............................... F-42002 .................... F-23
Consolidated Statements of Changes in Stockholders' Equity
and Comprehensive (Loss) for each of the years
in the three-year period ended December 31, 1996 ........................... F-52002 ..................... F-24
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1996 ............................... F-62002 ..................... F-25
Notes to Consolidated Financial Statements ............................... F-8
F-1........................... F-27
F-20
INDEPENDENT AUDITORS' REPORTReport of Independent Certified Public Accountants
The Board of Directors and Stockholders
Hemispherx BioPharma,Biopharma, Inc.:
We have audited the accompanying consolidated balance sheets of Hemispherx
BioPharma,Biopharma, Inc. and subsidiaries (the Company) as of December 31, 19952001 and 1996,
and2002 the related
consolidated statements of operations, changes in stockholders' equity and
comprehensive (loss) and cash flows for each of the three years in the three-year period
ended December 31, 1996.2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing
standards.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 re- spects,respects, the financial position of Hemispherx
BioPharma,Biopharma, Inc. and subsidiaries as of December 31, 19952001 and 1996,2002 and the
results of their operations and their cash flows for each of the three years in
the
three-year period ended December 31, 19962002 in conformity with accounting principles
generally accepted accounting principles.
February 14, 1997in the United States of America.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
F-2March 13, 2003, except for note 12, which is as of March 31, 2003
F-21
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 19952001 and 19962002
(in thousands)
December 31,
----------------------------
1995 1996
------------ ----------------------------------
2001 2002
-------- --------
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 11,291,1673,107 $ 5,279,4292,256
Short term investments (Note 3) ............... 5,310 555
Other receivables (Note 12) ................... 8 1,507
Prepaid expenses and
other current assets (Note 11) .............. 62,742 105,341
------------ ------------.......................... 381 71
-------- --------
Total current assets ....................... 11,353,909 5,384,770.......................... 8,806 4,389
Property and equipment, net .................... 53,953 83,475................... 246 155
Patent and trademarkstrademark rights, net .............. 1,245,092 1,502,816
Security deposits .............................. 46,564 28,323
------------ ------------1,025 995
Investments in unconsolidated affiliates ...... 1,878 408
Other assets .................................. 80 93
-------- --------
Total assets ............................................................... $ 12,699,51812,035 $ 6,999,384
============ ============6,040
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 1,095,637979 $ 598,078786
Accrued expenses (Note 5)4) ..................... 2,263,096 548,312
Notes payable (Note 3) ........................ 4,920,000 --
------------ ------------293 678
-------- --------
Total current liabilities .................. 8,278,733 1,146,3901,272 1,464
-------- --------
Commitments and contingencies
(Notes 3, 6, 8, 9,7,9, 10 11, 12 and 14)12)
Minority Interest in subsidiary (Note (5c) .... -- 946
Stockholders' equity
(Notes 6 and 7)(Note 5):
Preferred stock .............................. -- 50
Common stock ................................. 15,581 16,160.................................. 33 33
Additional paid-in capital ................... 47,949,530 54,080,171.................... 106,832 107,155
Accumulated other comprehensive
income (Note 2i) ........................... 17 35
Accumulated deficit .......................... (43,544,326) (48,243,387)
------------ ------------........................... (91,649) (99,073)
Treasury stock ................................ (4,470) (4,520)
-------- --------
Total stockholders' equity ................. 4,420,785 5,852,994
------------ ------------................ 10,763 3,630
-------- --------
Total liabilities and
stockholders' equity ...................... $ 12,699,51812,035 $ 6,999,384
============ ============6,040
======== ========
See accompanying notes to consolidated financial statements.
F-3F-22
HEMISPHERxHEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1996
December 31,
--------------------------------------------
1994 1995 1996
------------ ------------ ------------
Revenues:
Research and development ............... $ 75,758 $ 65,910 $ 32,044
License fees ........................... 100,000 2,900,000 --
------------ ------------ ------------
Total revenues ...................... 175,758 2,965,910 32,044
------------ ------------ ------------
Costs and expenses:
Research and development ............... 1,637,769 1,028,662 1,902,327
General and administrative (Notes 10 ) . 2,617,762 2,880,443 3,023,590
------------ ------------ ------------
Total cost and expenses ............. 4,255,531 3,909,105 4,925,917
Debt conversion expense ................. (10,500) (149,384) --
Interest income ......................... 25,091 95,887 339,384
Interest expense (Note 14) .............. (1,067,869) (843,148) --
------------ ------------ ------------
Net loss ............................ $ (5,133,051) $ (1,839,840) $ (4,554,489)
============ ============ ============
Pro forma net loss per share (Note 2(e)):
Pro forma weighted average shares
outstanding .......................... 11,536,276 14,199,701 15,718,136
============ ============ ============
Pro forma net loss per share ........ $ (.44) $ (.13) $ (.29)
============ ============ ============
2002
(in thousands, except share and per share data)
December 31,
--------------------------------------
2000 2001 2002
---------- ---------- ----------
Revenue: .......................... $ 788 $ 390 $ 341
License Fee income (Note 9) ....... -- -- 563
---------- ---------- ----------
788 390 904
Costs and expenses:
Research and development ......... 6,136 5,780 4,946
General and
administrative ............... 3,695 3,412 2,015
---------- ---------- ----------
Total costs and expenses .......... 9,831 9,192 6,961
Equity loss and write offs of
investments in unconsolidated
affiliates (Note 2c) ................ (81) (565) (1,470)
Interest and other income ........... 572 284 103
---------- ---------- ----------
Net loss ...................... $ (8,552) $ (9,083) $ (7,424)
========== ========== ==========
Basic and diluted loss per share .. $ (.29) $ (.29) $ (.23)
========== ========== ==========
Weighted average shares
outstanding .................... 29,251,846 31,433,208 32,085,776
========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4F-23
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit)
For each of the years in the three-year period ended December 31, 1996
PreferredHEMISPHERx 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, 2002
(in thousands except share data)
Common Accumulated
Common Stock Additional other Treasury Total
Stock .001 Par paid-in Deferred Comprehensive Accumulated stock stock Preferred Common Preferred Common
subscribed subscribed stock stock stock stockTreasury stockholders
Shares Value capital compensation Income (loss) deficit shares shares shares shares subscribed subscribedStock equity
------ -------- ---------- ------------ ------------ ------------ ------------ ------------------------- ----------- -------- -------- ------------
Balance at
December 31, 1993 .. 517,512 28,026 810,029 5,133,9861999 27,974,507 $28 $ 4,093,73387,972 $(310) $ 30,227
Preferred-- $(74,014) 167,935 $(1,019) $12,657
Common stock subscribed .... 130,000issued 2,393,381 2 9,860 -- -- -- 650,000(20,000) 123 9,985
Purchase of equity -- Debt to preferred/common-- 67 -- -- -- (100,000) 551 618
investment
Treasury stock
conversion ............. 3,600 300,000purchased -- 2,770 28,500 150,000
Redeemable preferred-- -- -- -- 350,800 (3,591) (3,591)
Treasury stock
dividend .....................issued in
settlement of debt -- -- 8 -- -- -- (3,089) 26 34
Stock compensation
and service
expense, net -- -- 87 310 -- -- -- -- 397
Registration costs -- -- (10) -- -- -- -- -- (10)
Net comprehensive
(loss) -- -- -- -- 34 (8,552) -- -- (8,518)
---------- --- -------- ----- ---- -------- ------- ------- -------
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 -- -- -- -- -- -- Warrants120,060 (560) (560)
Note issued for
purchase of stock -- -- (60) -- -- -- -- -- (60)
Stock issued in
connection
with imputedsettlement of debt 21,198 -- 91 -- -- -- -- -- 91
Stock and forgiven in-
terest charges ...............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 -- -- -- -- -- -- IssuanceP27,500 (50) (50)
Stock issued in
settlement of stock purchase war-
rants, net ...................debt 48,392 -- 154 -- -- -- -- -- --
Common154
Stock and stock
subscribed ........ -- 1,750,000warrant compensation
expense -- -- -- 875,000
Stock options exercised ....... -- 4,926 -- -- -- 6,104
Net loss ......................132 -- -- -- -- -- 132
Net comprehensive
(loss) -- ------------ ------------ ------------ ------------ ------------ -------------- -- -- 18 (7,424) -- -- (7,406)
---------- --- -------- ----- ---- -------- ------- ------- -------
Balance at
December 31, 1994 .. 651,112 2,082,952 810,029 5,136,756 4,772,233 1,061,331
Redeemable preferred stock
dividend ..................... -- -- -- -- -- --
Debt to preferred stock
dividend ..................... -- -- 172,414 -- -- --
Warrants issued in connection
with imputed and forgiven
interest charges ............. -- -- -- -- -- --
Preferred stock subscribed ..... 10,000 -- -- -- 50,000 --
Debt to common stock
conversion ................... -- 100,000 -- -- -- 50,000
Issuance of common stock
certificates ................. -- (2,182,952) -- 2,182,952 -- (1,111,331)
Issuance of Preferred Stock
certificates ................. (626,112) -- 626,112 -- --
Convert Redeemable to Common ... -- -- -- 343,879 -- --
Convert Preferred to Common .... (35,000) -- (1,608,555) 1,807,088 (350,000) --
Issuance of Common Stock,
net of issuance cost ......... -- -- -- 5,313,000 -- --
Warrants Exercised ............. -- -- -- 797,917 -- --
Net Loss ....................... -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .. -- -- -- 15,581,592 -- --
Warrants Exercised ............. -- -- -- 202,083 -- --
Preferred Stock Issued ......... -- -- -- 6,000 -- --
Preferred Stock Converted ...... -- -- (1,000) 376,530 -- --
Stock Option Compensation ...... -- -- -- -- -- --
Net loss ....................... -- -- -- -- -- --
Preferred Dividends ............ -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .. -- -- 5,000 16,160,205 -- --
============ ============ ============ ============ ============ ============
"C" Common stock
--------------------------- Common
.001 Additional stock Total
Preferred Par paid-in Accumulated subscriptions stockholders'
stock value capital deficit receivable equity(deficit)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993 .. $ 7,200,017 $ 5,133 $ 13,663,169 $(36,571,435) $ -- $(11,579,156)
Preferred stock subscribed .... -- -- -- -- -- 650,000
Debt to preferred/common
stock conversion ............. -- 3 1,382 -- -- 179,885
Redeemable preferred stock
dividend ..................... -- -- (372,552) -- -- (372,552)
Warrants issued in connection
with imputed and forgiven in-
terest charges ............... -- -- 631,583 -- -- 631,583
Issuance of stock purchase war-
rants, net ................... -- -- 112,500 -- -- 112,500
Common stock subscribed ........ -- -- -- -- -- 875,000
Stock options exercised ....... -- -- -- -- -- 6,104
Net loss ...................... -- -- -- (5,133,051) -- (5,133,051)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 .. 7,200,017 5,136 14,036,082 (41,704,486) -- (14,629,687)
Redeemable preferred stock
dividend ..................... -- -- (314,873) -- -- (314,873)
Debt to preferred stock
dividend ..................... 749,383 -- -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges ............. -- -- 572,681 -- -- 572,681
Preferred stock subscribed ..... -- -- -- -- -- 50,000
Debt to common stock
conversion ................... -- -- -- -- -- 50,000
Issuance of common stock
certificates ................. -- 2,183 1,109,148 -- -- --
Issuance of Preferred Stock
certificates ................. 4,472,233 -- -- -- -- --
Convert Redeemable to Common ... -- 344 3,552,863 -- -- 3,553,207
Convert Preferred to Common .... (12,421,633) 1,807 12,769,826 -- -- --
Issuance of Common Stock,
net of issuance cost ......... -- 5,313 15,825,644 -- -- 15,830,957
Warrants Exercised ............. -- 798 398,159 -- -- 398,957
Net Loss ....................... -- -- -- (1,839,840) -- (1,839,840)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1995 .. -- 15,581 47,949,530 (43,544,326) -- 4,420,785
Warrants Exercised ............. -- 202 100,839 -- -- 101,041
Preferred Stock Issued ......... 60 -- 5,395,825 -- -- 5,395,885
Preferred Stock Converted ...... (10) 377 (367) -- -- --
Stock Option Compensation ...... -- -- 634,344 -- -- 634,344
Net loss ....................... -- -- -- (4,554,489) -- (4,554,489)
Preferred Dividends ............ -- -- -- (144,572) -- (144,572)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 .. $ 50 $ 16,160 $ 54,080,171 $(48,243,387)2002 32,650,178 $33 $107,155 $ -- $ 5,852,994
============ ============ ============ ============ ============ ============35 $(99,073) 543,206 $(4,520) $ 3,630
========== === ======== ===== ==== ======== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-5F-24
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 1996
Increase (Decrease) in Cash and Cash Equivalents2002
(in thousands)
December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- --------------------------------------------
2000 2001 2002
------- ------- -------
Cash flows from operating activities:
Net loss ............................................. $(5,133,051) $(1,839,840) $(4,554,489)........................................ $(8,552) $(9,083) $(7,424)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment ...................................... 115,061 54,000 56,958................................. 131 127 91
Amortization of patent and
trademark rights ....................... 256,341 222,000 90,935
Issuance.............................. 356 397 206
Equity loss and write offs of stock purchase warrants ................. 112,500 -- --
Imputed interest charges ............................ 150,000 41,360 --
Debt conversioninvestments
in unconsolidated affiliates ......... 81 565 1,470
Stock compensation and
service expense ............................. 10,500 149,384 --
Write-off of patent rights .......................... 285,190 100,017 41,156
Stock option compensation expense ................... -- -- 634,344
Gain on disposal of property and equipment .......... 17,197 -- --.............................. 397 673 132
Changes in assets and liabilities:
Other receivables ............................. 15 52 (1,293)
Prepaid expenses
and other current assets .......... (1,506) (59,985) (42,599)................. (463) 202 104
Accounts payable ................................... 661,732 (1,156,084) (497,559).............................. 210 (271) (67)
Accrued expenses ................................... 1,565,450 547,561 (1,844,893).............................. (266) 139 385
Security deposits .................................. 8,441 2,368 18,241
----------- ----------- -----------............................. 17 (82) (13)
------- ------- -------
Net cash used in
operating activities ............................ (1,952,145) (1,939,219) (6,097,906)
----------- ----------- -----------....................... (8,074) (7,281) (6,409)
------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment ................... (40,000) (3,625) (86,480)
Proceeds from disposal of property and equipment ..... 11,000.............. (171) -- --
Additions to patent and trademark rights ........................... (351,470) (132,689) (389,815)
----------- ----------- -----------........ (197) (218) (176)
Maturity of short term investments .............. 2,157 4,613 5,293
Purchase of short term investments .............. (4,589) (5,293) (520)
Investments in unconsolidated affiliates ........ (411) (22) (--)
Other investments ............................... (34) -- --
------- ------- -------
Net (used in) cash used inprovided by investing
activities ............ $ (380,470) $ (136,314) (476,295)
----------- ----------- -----------................ (3,245) (920) 4,597
------- ------- -------
F-25
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-6
HEMISPHERxHEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
December 31,
-----------------------------------------
1994 1995 1996
----------- ----------- --------------------------------------------
2000 2001 2002
------- ------- -------
Cash flows from financing activities:
Proceeds from stock subscriptions and issuance
of common stock, net ................... $ 2,250 $ 72 $ 65
Proceeds from issuance of preferred stock ............ $ -- $ -- $ 5,395,885
Proceeds from shareholder loans ...................... 925,910 35,000 --
Proceeds from notes payable .......................... 35,000 1,762,000 --
Payments on notes payable ............................ (80,000) (1,837,000) --
Payments on stockholder notes ........................ (10,000) (2,860,911) (4,920,000)
Principal payments under capital lease obligationof .... (6,923) (23,308) --
Proceeds from exercise of stock options .............. -- -- --
Common stock subscription proceeds ................... 875,000 -- --
Preferred stock subscription proceeds ................ 650,000 -- --
Proceeds from issuance of common stock ............... -- 18,595,000 --
Stock issuance costs ................................. -- (2,764,043) --946
subsidiary
Proceeds from exercise of
stock warrants ................................... 9,985 8,075 --
398,957 101,040
Dividends paid on preferredPurchase of treasury stock .................... -- -- (14,463)
----------- ----------- -----------...................... (3,591) (560) (50)
------- ------- -------
Net cash provided by
financing activities ............................ 2,388,987 13,305,695 562,463
----------- ----------- -----------....................... 8,644 7,587 961
------- ------- -------
Net increase (decrease)decrease in cash and
cash equivalents ................................ 56,372 11,230,162 (6,011,738)........................... (2,675) (614) (851)
Cash and cash equivalents at
beginning of period ...... 4,633 61,005 11,291,167
----------- ----------- -----------year ................... 6,396 3,721 3,107
------- ------- -------
Cash and cash equivalents
at end of period ............year ................ $ 61,005 $11,291,1673,721 $ 5,279,429
=========== =========== ===========3,107 $ 2,256
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the yearIssuance of treasury stock for
interest ...............Investment ............................ $ 618 $ -- $ 186,503 $ 3,999
=========== =========== ===========
Supplemental disclosure--
======= ======= =======
Issuance of noncash investing activities:
Debt to equity conversion ............................ $ 100,000 $ 799,383 $ --
Accounts payable andcommon stock
for accrued expenses to
equity conversion ................................... 74,104 50,000 --
Forgiveness....................... $ 34 $ 91 $ 154
======= ======= =======
Issuance of interest .............................. 458,333 572,681 --
Preferredcommon stock
to equity conversion .................for note receivable ........................ $ -- $ 3,238,33460 $ 899,314--
======= ======= =======
See accompanying notes to consolidated financial statements.
F-7F-26
HEMISPHERxHEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1996
(1) Business
Hemispherx BioPharma, Inc. and subsidiaries (the Company), formerly known as HEM
Pharmaceuticals Corp., 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-configuredspecially configured ribonucleic acid (RNA). The Company's double-stranded
RNA drug product, trademarked Ampligen,Ampligen(R), is in human clinical development for
various therapeutic indications. The potential efficacy and safety of
AmpligenAmpligen(R) is being developedevaluated clinically for three anti-viral indications:
myalgic encephalomyelitis, also known as chronic fatigue syndrome (ME/CFS) (Phase II clinical trial completed and Phase
II/III clinical trial authorized);("ME/CFS"),
human immunodeficiency virus (HIV) associated disorders, (Phase II clinical trial); and chronic hepatitis BC
(HVC) virus infection
(Phase I/II clinical trial in process).infection. The Company also has clinical experience with AmpligenAmpligen(R)
used in treating patients with certain cancers including renal cell carcinoma
(kidney cancer) and metastatic malignant melanoma. The Company has other
compounds to be evaluated.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September
1994, for the purpose of developing technology for ultimate sale into certain
non-pharmaceutical specialty consumer markets.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. In November, 1995,The Company also has investments in
unconsolidated affiliates which are accounted for on the Company completed an initialequity or cost method
of accounting (see note 2c).
On March 11, 2003, we acquired from Interferon Sciences, Inc. ("ISI") ISI's
inventory of ALFERON N Injection(R), a pharmaceutical product used for the
treatment of certain types of genital warts, and a limited license for the
production, manufacturing, use, marketing and sale of this product. As partial
consideration, we issued 487,028 shares of our common stock to ISI. Pursuant to
our agreements with ISI, we are in the process of registering the foregoing
shares for public offering (IPO) of
5,313,000 units of Hemispherx BioPharma, Inc. resulting in net proceeds of
approximately $15.8 million. Each unit consists of one sharesale. Except for 62,500 of the Company's
Common Stock and one Class A Redeemable Warrant, exercisable for one shareshares issued to ISI, we have
guaranteed the market value of Common Stock at $4.00the shares retained by ISI through March 11, 2005
to be $1.59 per share.
These Class A Redeemable Warrants are subject
to redemption two years from November 2, 1995 at $.05 per warrant in the event
that the closing bid price of the Company's Common Stock exceeds $9.00 for a
specified time period. In connection with the IPO, the underwriter was grantedOn March 11, 2003, we also entered into an optionagreement to purchase 462,000 units at $5.775 per unit.
The accompanying consolidated financial statments have been prepared on a going
concern basis which assumesfrom ISI all of
its rights to the continuity of operationsproduct and the realization ofother assets and liabilities in the ordinary course of business.
Since 1987, the Company has incurred substantial operating losses and could
incur losses over the next several years. The Company's cash requirements have
exceeded its resources due to its expenditures for research and development,
obtaining regulatory approvals, fees and expenses to prosecute and maintain its
patent estate, fees and expenses related to the initial public offering ("IPO")product including, but
not limited to, real estate and various generalmachinery. This purchase is contingent on us
receiving the appropriate governmental approval. For these assets, we have
agreed to issue to ISI an additional 487,028 shares and administrative expenses. The Company's ability to achieve profitable operations is dependent on successfully developing products,
obtaining regulatory approvals on a timely basisissue 314,465 shares
and making the transition from
a research and development firm267,296 shares, respectively to an organization producing commercial products
or entering into agreements for product commercializations.two creditors of ISI. The Company will needbe
required to produce incomesatisfy other liabilities of ISI which aggregate approximately
$521,000 and which are secured by a lien on ISI's real estate. We have
guaranteed the market value of all but 62,500 of these shares on terms
substantially similar to those for the initial acquisition of the ISI assets.
We will account for these transactions as a Business Combination under Statement
of Financial Accounting Standards ("SFAS") No. 141 Accounting for Business
Combinations.
On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration ("FDA") to recover the cost recovery clinical trials in Canada and Belgium
and raise funds through equity or debt financings, collaborative arrangements
with corporate partners, off-balance sheet financing orof Ampligen(R) from other sources. The
Company's ability to raise additional capital or increase income from cost
recovery programs will be a factorpatients enrolled
in the Company's successful developmentAMP-511 ME/CFS open-label treatment protocol. The cost of
it's products.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.
F-27
In the event that the proceeds from the cost recovery clinical
trials are delayed or that additional financing is not available in 1997,1998, the Company believes that it can restructure operationsinitiated the recruitment of clinical investigators to
minimize
F-8
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995enroll 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 1996
cash expenditures, locate a partneris designed to share development coststest the safety and maintainefficiency of
Ampligen(R) in treating ME/CFS.
The ME/CFS Cost Recovery Treatment Program in Belgium was started in 1994 with
the operationapproval 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 protect the value of its various patent rights.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 bank certificates of deposit, 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 $11,291,167$2,552,000 and
$5,279,429$1,404,000 at December 31, 19952001 and 1996,2002, respectively.
(b) Short-term Investments
Investments with original maturities of more than three months and marketable
equity securities are considered available for sale. The investments classified
as available for sale include debt securities and equity securities carried at
estimated fair value of $5,310,000 and $555,000 at December 31, 2001 and 2002
respectively. The unrealized gains and losses are recorded as a component of
shareholders' equity.
(c) Investments in unconsolidated affiliates
Investments in Companies in which the Company owns 20% or more and not more than
50% are accounted for using the equity method of accounting.
Investments in Companies in which the Company owns less than 20% of and does not
exercise a significant influence are accounted for using the cost method of
accounting.
In 1998, the Company invested $1,074,000 for a 3.3% equity interest in R.E.D.
Laboratory ("R.E.D."). R.E.D. is a privately held biotechnology company for the
development of diagnostic markers for Chronic Fatigue Syndrome and other chronic
immune diseases. We have a research collaboration agreement with R.E.D. to
assist in this development. R.E.D. is headquartered in Belgium. The investment
was recorded at cost. During the three months ended June 30, 2002 and December
31, 2002 we recorded non-cash charges of $678,000 and $396,000 respectively, to
operations with respect to our investment in R.E.D. These charges were the
result of our determination that R.E.D.'s business and financial position had
deteriorated to the point that our investments had been permanently impaired.
F-28
In April, 1999 we acquired a 30% equity position in the California Institute of
Molecular Medicine ("CIMM") for $750,000 and entered into a research and
development arrangement. CIMM'S research is focused on developing therapies for
use in treating patients affected by Hepatitis C ("HCV"). We use the equity
method of accounting with respect to this investment. During the fourth quarter
of 2001 we recorded a non-cash charge of $485,000 with respect to our investment
in CIMM. This was a result of our determination that CIMM's operations have not
yet evolved to the point where the full carrying value of our investment could
be supported based on that company's financial position and operating results.
During 2002, CIMM continued to suffer significant losses resulting in a
deterioration of its financial condition. The $485,000 written off during 2001
represented the unamortized balance of goodwill included as part of the
Company's investment. Additionally, during 2001 the Company reduced its
investment in CIMM based on its percentage interest in CIMM's continued
operating losses. The Company's remaining investment at December 31, 2001 in
CIMM, representing its 30% interest in CIMM's equity at such date, was not
deemed to be permanently, 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 10. Ribotech,
Ltd. has incurred net losses since inception. The Company does not share in
those losses in accordance with the licensing agreement and is not obligated to
fund such losses. The net investment in Ribotech is zero as of December 31, 2001
and 2002. During 2000, the Company prepaid $500,000 to Ribotech, Ltd. for raw
material purchases. $110,000 of materials were delivered in 2000 and the balance
of $390,000 was applied towards the purchase of materials during 2001.
Investments in unconsolidated affiliates also includes an equity investment in
Chronix Biomedical ("Chronix"). Chronix focuses upon the development of
diagnostics for chronic diseases. The initial investment was made in May 31,
2000 through the issuance of 50,000 shares of Hemispherx Biopharma, Inc. common
stock from the treasury. On October 12, 2000 an additional 50,000 shares of
common stock were issued from the treasury for a total investment of
approximately $678,000. During 2001 additional common stock plus cash were given
to Chronix for a total investment at $700,000. The percentage ownership in
Chronix is approximately 5.4% and is accounted for under the cost method of
accounting. During the quarter ended December 31, 2002, we recorded a noncash
charge of $292,000 with respect to our investment in Chronix. This impairment
reduces our carrying value to reflect a permanent decline in Chronix's market
value based on their current proposed investment offerings.
Pursuant to a strategic alliance agreement, the Company provided Chronix with
$250,000 during 2000 to conduct research in an effort to develop intellectual
property on potential new products for diagnosing and treating various chronic
F-29
illnesses including chronic fatigue syndrome. The strategic alliance agreement
provides the Company certain royalty rights with respect to certain diagnostic
technology developed from this research and a right of first refusal to license
certain therapeutic technology developed from this research. The payment of
$250,000 was charged to research and development expense during 2000.
(d) Property and Equipment
000 omitted)
December 31,
----------------
2001 2002
---- ----
Furniture, fixtures, and equipment $ 1,178 $ 760
Leasehold improvements 96 85
------- -----
Total property and equipment 1,274 845
Less accumulated depreciation 1,028 690
------- -----
Property and equipment, consistnet $ 246 $ 155
======= =====
Property and equipment consists of furniture, fixtures, office equipment, and
leasehold improvements and vehiclesis recorded at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from five to seven years. PropertyDepreciation and
amortization expense was $131,000, $127,000 and $91,000 for 2000, 2001 and 2002,
respectively. In 2002, fully depreciated equipment held under capital leases are amortized onin the straight-line method overamount of $418,000 and
fully depreciated leasehold improvements in Europe in the shorteramount of $12,000 were
written-off due to the lease term orclosing 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 asset.
Accumulated depreciation and amortization17 year life had been accounted
for as of December 31, 1995 and 1996 is
$545,956 and $602,914, respectively.
(c) Patent and Trademark Rightsa change in accounting estimate.
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-linestraight line method over ten years.the life of the assets. The
Company reviews its patents and trademarkstrademark rights periodically to determine
whether they have continuing value. Such review includes an analysis of the
patent and trademark's ultimate revenue and profitability potential on an
undiscounted cash flow basis to support the realizability of its respective
capitalized cost. In addition,
management'sManagement's review addresses whether theeach patent and trademark continues to
fit into the Company's strategic business plans. During the years ended December
31, 19952000, 2001 and 1996,2002, the Company decided not to renew patentspursue the technology in
certain countries for strategic reasons and has recorded $100,017charges of $32,000, $38,000
and $41,156 respectively, relating to the$5,000, respectively. Amortization expense of
writing off these patents as a charge to researchwas $324,000, $359,000 and
development. Accumulated$201,000 in 2000, 2001 and 2002, respectively. The accumulated amortization as
of December 31, 19952001 and 19962002 is $903,769$2,096,000 and $795,117,$1,996,000, respectively.
In additionF-30
(f) Revenue
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Under the terms of an 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 wroteoff $240,743to provide the licensee with
technical, scientific and commercial information. The Company fulfilled the
requirements during the first quarter of fully amortized
patents and trademarks during 1996.
F-9
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
(d) Revenue
Revenue is recognized immediately for nonrefundable license fees when2002. The agreement terms requirerequired no
additional performance on the part of the Company.
RevenueThe agreement also requires the licensee to pay of 1,000,000 Euros after FDA
approval of Ampligen(R) for the treatment of ME/CFS and a fee of 1,000,000 after
issuance in Spain of final marketing approval authorization for Ampligen(R) for
the treatment of ME/CFS. See Note 6 for more detailed information.
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 payment 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 applies 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 isproject, exceed the percentage of
license fees received compared to total license fees to be earned per the
agreement. Therefore the amount of revenue recognized when earned.
(e) Proformaby the Company was limited
to the total non-refundable cash received to date of approximately $563,000.
During the periods ending December 31, 2000, 2001 and 2002 the Company did not
receive any grant monies from local, state and or Federal Agencies.
(g) Net Loss Per Share
Upon the closing of the IPO of common stock, all shares of Series A, BBasic and C
Preferred Stock (Preferred Stock) converted into Common Stock. Proformadiluted net loss per share for the years ended December 31, 1994 and 1995 are calculated by
dividing net loss byis computed using the weighted average
number of shares of common sharesstock outstanding during the period after giving effect for Common Stock equivalents arising fromperiod. Equivalent
common shares, consisting of stock options and warrants, and Preferred Stock assumed converted to Common
Stock. Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock and Common Stock equivalents issued by the Company during the
twelve months immediately preceding the IPO have been included in theare excluded from a
calculation of the shares used in the calculation of pro formadiluted net loss per share (using the treasury stock method and the public offering price). The
following table sets forth the calculation of the total number of shares used in
the computation of pro forma net loss per share.
Year ended December 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Weighted average common shares outstanding ....... 9,475,642 10,341,163 15,718,136
Incremental shares assumed to be outstanding
related to common stock, stock options and warrants
granted and convertible preferred stock based on
the treasury stock method ......................... 2,060,634 3,858,538 --
---------- ---------- ----------
Weighted average common and common stock
quiva lent shares used in computation of proforma
net loss per common share ......................... 11,536,276 14,199,701 15,718,136
========== ========== ==========
(f)since their effect is antidilutive.
F-31
(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
liabilitiesLiabilities and are measured using the enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The measurement of deferred income tax
asetsassets 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.
F-10
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
(g) Sales of Subsidiary Stock
The Company intends to account for any sales of its subsidiaries' stock as
capital transactions. However, as of December 31, 1995 and 1996, the Company
owned 100% of each subsidiaries stock.
(h) New Accounting Pronouncements
The Company adopted the provisions of FASB No. 121, "Accounting for the
impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on
January 1, 1996. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circunstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.(i) Comprehensive (loss)
On January 1, 1996,1998, the Company also adopted FASBSFAS No. 123, "Accounting130, Reporting Comprehensive
Income. Statement of Financial Accounting Standards (SFAS) No. 130 establishes
standards for Stock-Based Compensation," which permits entities to recognize as expense overreporting and presentation of the vesting periodCompany's comprehensive (loss)
and its components in a full set of financial statements. Comprehensive (loss)
consists of net loss and net unrealized gains (losses) on securities and is
presented in the fair valueconsolidated statements of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB No. 25changes in stockholders' equity and
provide pro forma net income and pro forma earnings
per share disclosures for employee stock options grants made in 1995 and future
years as if the fair-value-based method defined in FASB No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123.
(i)comprehensive (loss).
(j) Use of estimatesEstimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts reported inof assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
accompanying notes.the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
(3) Notes Payable
Notes payable(k) Foreign currency translations
Assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at December 31, 1995 consistedcurrent exchange rates as of balance sheet date.
Revenues and expenses are translated at average exchange rates during each
period. Transaction gains and losses that arise from exchange rate fluctuations
are included in the results of operations as incurred. The resulting translation
adjustments are immaterial for all years presented.
(l) Recent Accounting Standard and Pronouncements:
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities"
("Interpretation No. 46"), that clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, "to certain entities in
which equity investors do not have the characteristics of a February, 1992 convertible
notecontrolling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. Interpretation No. 46 is applicable immediately for variable
interest entities created after January 31, 2003. For variable interest entities
created to January 31, 2003, the provision of Interpretation No. 46 are
applicable no later than July 1, 2003. The Company does not expect this
Interpretation to have an effect on the consolidated financial statements.
F-32
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligation" ("SFAS 143"), which provides the accounting requirements
for retirement obligation associated with detachable warrants due February 26, 1995, interest payable quarterly
at 12% per annum, as amended, intangible long-lived assets. SFAS 143
requires entities to record the amount of $4,920,000. This note was paid in
1996 (Note 14).
F-11
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
(4) Stock-Based Compensation
In 1996, the Company granted 350,000 stock purchase warrants to certain
key employees in recognition of services performed and services to be
performed. The per share weighted average fair value of the stock purchase
warrants granted during 1996 was determinedliability for an asset
retirement obligation in the period in which it is incurred and is effective for
the Company's 2003 fiscal year. The adoption of SFAS 143 is not expected to have
a material impact on the Company's consolidated results of operations, financial
position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, "
and the accounting and reporting provision of APB Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
transactions. "This new pronouncement also amends Accounting Research Bulletin
(ARB) No. 51 "Consolidated Financial Statements, "to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
144 required that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired and also
broadens the presentation of discontinued operation to include more disposal
transactions. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and interim periods within those fiscal years. Adoption of SFAS 144 on
January 1, 2002, did not have impact on the Company's financial position, cash
flows or results of operation for the year ended December 31, 2002.
In June 2002, the FASB issued Statement No. 146, "Accounting for Cost Associated
with Exit or Disposal Activities" ("SFAS 146"), which addresses financial
accounting and reporting for costs associated with exit or disposal activities,
and nullifies Emerging Task Force (EITF) Issue No. 94-3, "Liability Recognition
for Certain Employee termination Benefits and Other Costs to Exit and Activity
(including Certain Costs Incurred in a Restructuring)" which previously governed
the accounting treatment for restructuring activities. SFAS 146 applies to costs
associated with an exit activity that does not involve an entity newly acquired
in a business combination or with disposal activity covered by SFAS 144. Those
costs include, but are not limited to, the following: (1) termination benefits
provide to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or individual deferred-compensation contract,(2) costs to terminate
a contract that is not a capital lease, and (3) costs to consolidated facilities
or relocated employees. SFAS 146 does not apply to costs associated with the
retirement of long-lived assets covered by SFAS 143. SFAS 146 will be applied
prospectively and is effective for exit or disposal activities after December
31, 2002.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", and amendment of FASB Statement No. 123
("SFAS"). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative method of transition for an entity that
voluntarily changes to the fair value based of accounting for stock-based
employee compensation. It also amends the disclosure provisions of that
Statement to require prominent disclosure about the effects on reported net
F-33
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
Black-Scholes option
pricing model with the following weighted average assumptions: expected
dividend yieldintrinsic value method of zero, risk free interest rate of 6.02%, volitility
39.71%, and an expected life of two years.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees, "but has adopted the enhance disclosure requirements of SFAS 148 (See
Note 10).
(m) Research and Development Costs
Research and development related to both future and present products are charged
to operation as incurred.
(n) Stock Compensation
The Company applies the intrinsic value method in accordance Accounting
Principles Bulletin (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for stock-based cpmpensationcompensation of its employees and,
accordingly, no compensation cost has been recognized for stock purchase
warrants and options issued to employees in the
financial statements.employees. Had the Company determined
compensation cost based on the fair value at the grant date for its stock-based
compensation of its employees in accordance with FASB 123 the Company's net loss
would have been increased to the pro forma amountamounts indicated below:
1996
-----------(In Thousands except for per share data)
For the years ended December 31, 2000 2001 2002
- -------------------------------- ---- ---- ----
Net loss-as reported $(8,552) $(9,083) $(7,424)
Add: Stock based compensation
included in net loss as reported,
net of related tax effects -- -- --
Deduct: Stock based compensation
determined under fair value based
method for all awards, net of
related tax effects (237) (632) (1,085)
------- ------- -------
Net loss As- pro forma $(8,789) $(9,715) $(8,509)
======= ======= =======
Basic and diluted loss
per share - as reported $(4,554,489)
Pro$ (.29) $ (.29) $ (.23)
======= ======= =======
Basic and diluted loss
per share - pro forma (4,782,722)
There was no stock-based compensation for$ (.30) $ (.31) $ (.27)
======= ======= =======
In 1999, the Company granted 275,000 warrants to employees in 1994recognition of
services performed and 1995.
(5)services to be performed. The fair value of the stock
purchase warrants granted during 1999 was also determined using the
Black-
F-34
Scholes option pricing model with a rate of 5.18%, volatility of 135.4%-294.31%,
and expected lives of 2 years. These warrants are included in the 2,633,000
non-public warrants outstanding as of December 31, 2000 as described in footnote
5 (ii). There were no warrants granted to employees during 2000. During 2001 the
Company granted 406,650 warrants to employees. The Company granted to employees
8,000 options in 2000 and 94,000 options in 2001. See footnote 5(i). The fair
value of stock options and warrants granted during 2001 was determined using
Black Scholes Option Pricing Model with a rate of 4.23%, volatility of 69.7% to
74.9% and expected life of three years. In 2002 1,622,000 warrants were issued
to employees in recognition of services performed and services to be performed.
The fair value of the warrants granted during 2002 was determined using Black
Scholes Option Pricing model with a rate of 5.23%, volatility of 63.17%, and
expected life of 2.5 and 4 years. The weighted average fair value of those
options and warrants granted during the years ended December 31, 2002, 2001 and
2000, were estimated as $0.62, $1.57 and $1.09, respectively.
For stock warrants granted to non-employees, the Company measures fair value of
the equity instruments utilizing the Black-Scholes method if that value is more
reliably measurable than the fair value of the consideration or service
received. The Company amortizes such cost over the related period of service.
The exercise price of all stock warrants granted was equal to the fair market
value of the underlying common stock as defined by APB 25 on the date of the
grant.
(3) Short-term investments:
Securities classified as available for sale are summarized below:
(000's omitted)
December 31, 2001
-----------------
Unrealized
-------------------------------------
Adjusted Carrying
cost Gains (Losses) Value
-------- ----- -------- --------
General Motors Commercial Paper $3,977 $13 $ -- $3,990
Ford Motors commercial paper 795 1 -- 796
Calamos Mutual Market 521 3 -- 524
------ --- ----- ------
Total $5,293 $17 $ -- $5,310
====== === ===== ======
F-35
December 31, 2002
-----------------
Unrealized
-------------------------------------
Adjusted Carrying
cost Gains (Losses) Value
-------- ----- -------- --------
Calamos Mutual Market $ 521 $34 $ -- $ 555
------ --- ----- ------
Total $ 521 $34 $ -- $ 555
====== === ===== ======
(4) Accrued Expenses
Accrued expenses at December 31, 19952001 and 19962002 consists of the following:
(000's omitted)
December 31,
----------------------------
1995 1996
---------- ----------
Deferred rent ...........................-------------
2001 2002
----- -----
Salaries . . . . . . . . . . . . . . . . . $ 228,18985 $ --6
Other Accrued payroll and benefits ............ 144,047 126,296
Accrued interest (Note 14) .............. 898,733 --
Accrued professional fees (Note 14) ..... 727,996 162,719
Accrued taxes, dividends, and other .... 264,131 259,297
---------- ----------
$2,263,096expenses . . . . . . . . . . 208 222
Fees Associated with Litigation Settlement. 450
----- -----
$ 548,312
========== ==========
(6)293 $ 678
===== =====
(5) Stockholders' Equity
(a) Preferred Stock
The Company is authorized to issue 5,000,000 shares of $.01 per value preferred
stock with such designations, rights and preferences as may be determined by the
board of directors. There were no preferred shares issued and outstanding at
December 31, 2001 and 2002.
(b) Common Stock and Exercise of Stock Warrants
The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. As of December 31, 2001 and 2002, 32,060,280 and 32,106,972 shares, net
of shares held in the treasury, were outstanding, respectively.
The exercise of stock warrants generated $9,985,000 and $8,075,000 in net
proceeds to the Company declaredin 2000 and 2001, respectively. There were no exercises
during 2002.
F-36
(c) New Equity Financing
On March 20, 2002 our European Subsidiary Hemispherx Biopharma Europe, S.A.
("Hemispherx, S.A.") entered into a 1:2.17015 reverseSales 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 splitexchange 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 changeconditions of these securities were changed so that these preferred
equity certificates will be converted into the common stock of Hemispherx
Biopharma, Inc. (HEB) in parthe event that a European IPO is not completed by
September 30, 2003. The conversion rate is to be 300 shares of Hemispherx
Biopharma, Inc.'s common shares for each 1,000 Euro convertible preferred
certificate. As a result the Company recorded approximately $946,000 as minority
interest in subsidiary on its balance sheet.
On December 18, 2002, we proposed that Esteve convert their convertible
preferred equity certificates into Hemispherx common stock pursuant to the terms
of the agreement and all unpaid dividends at the market price on that conversion
date. On January 9, 2003, Esteve accepted our proposal. We are in the process of
registering these shares for public sale.
On March 13, 2003, we issued 347,445 shares of our common stock to Provesan SA,
an affiliate of Esteve S.A., in exchange for 1,000,000 Euros of convertible
preferred equity certificates and any unpaid dividends. As a result of the
exchange, minority and subsidiary was transfer to stockholders' equity on such
date.
The contingent conversion price was more than the then market value fromof the
original $.01 parparent company's or subsidiaries' common stock at each of that respective
measurement dates. As a result and in accordance with Emerging Issues Task Force
(EITF) No. 00-27 "Application of Issue No. 98-5 (Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios) to Certain Convertible Instruments", the Company did not
ascribe any value to $.001 on shares of the Company's
Common Stock effective June 29, 1994. On November 30, 1994, the Company effected
a 2:1 forward stock split. On June 5, 1995 the Company changed its name to
Hemispherx BioPharma, Inc.
F-12any contingent conversion feature.
F-37
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
The accompanying consolidated financial statements reflect for all periods
presented the effect of the 1:2.17015 reverse stock split, 2:1 forward stock
split, and a change in par value to $.001 per common share.
(b)(d) Common Stock Options and Warrants
(i) Stock Options
The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensa- tionCompensation 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. Certain shares
become vested upon the underwritten public offering concluded by the Company in
November, 1995. The option price
represents the fair market value of each underlying share of Common Stock at the
date of grant, as determined bybased upon the Company's board of directors.public trading price.
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
December 31
-------------------
Option
price 1995 1996
---------- ------- -------
Outstanding, beginning of year....... $ .11-4.34 285,620 232,830
Granted.............................. 3.50-4.34 0 2,123
Canceled............................. .11-4.34 (52,790) 0
---------- ------- -------
Outstanding, end of year............. $1.07-4.34 232,830 234,953
2000 2001 2002
-------------------------------- --------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- -------- ------ ------ -------- ------ ----- -----
Outstanding,
beginning of
year 294,000 $1.06-6.00 $3.60 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58
Granted 8,000 $3.00-6.81 $4.88 94,000 $4.03 $4.03 -- -- -
Canceled (76,677) $3.50-4.34 $4.09 (6,304) $4.34-6.81 $5.91 (11,598) $3.00-4.34 $3.71
Exercised (6,756) $1.06-3.50 $2.75 -- -- -- -- -- -
------- ------ -------
Outstanding, end of
year 218,567 $1.06-6.81 $3.45 306,263 $1.06-4.34 $3.58 294,665 $1.06-434 $3.57
======= ======= =======
Exercisable 198,717 $1.06-6.81 $3.48 234,263 $1.06-4.34 $4.67 252,746 $1.06-4.34 $3.50
======= ======= =======
Weighted average
remaining
contractual life
(years) 3.83 years 3.57 years 3.68 years
========== ========== ==========
Exercised in
current and prior
years (37,791) (37,791) (37,791)
======= ======= =======
Available for
future grants 204,440 116,744 170,261
======= ======= =======
Exercisable.......................... 165,244 215,161
======= =======
Exercised in prior years............. (10,576) (10,576)
======= =======
Available for future grants.......... 217,392 215,269
======= =======
The outstanding options include the right to purchase 45,344 shares of the
Company's Common Stock at $3.50 per share.
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
F-38
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.
F-13
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
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 will beis administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees will beare 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 will beis
equal to the lower of 85% of the fair market value of such shares on the date of
grant or 85% of its fair market value of such shares on the date such right is
exercised. There have been no offerings under the 1993 Purchase Plan to date and
no shares of Common Stock have been issued thereunder. (ii) Warrants
TheStock warrants
Number of warrants exercisable into shares of common stock
2000 2001 2002
-------------------------------- --------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- -------- ------ ------ -------- ------ ----- -----
Outstanding,
beginning of
year 14,058,010 $1.75-10.85 $3.90 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77
Granted 293,800 $6.00-12.00 6.40 856,650 $5.00-16.00 $9.89 1,802,000 $2.00-6.00 $2.07
Canceled (341,017) $2.00-10.85 6.01 (3,396,508) $2.50-4.00 $3.89 (750,000) $3.50-6.00 $3.72
Exercised (2,386,625) $1.75-4.00 4.19 (2,157,200) $1.75-4.00 $3.75 (11,300) $1.75-7.50 $3.30
---------- ---------- --------
Outstanding, end of
year 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77 7,967,810 $1.75-16.00 $3.18
========== ===== ========= =========
Exercisable 11,624,168 $1.75-12.00 $4.05 6,927,110 $1.75-16.00 $4.77 6,345,810 $1.75-16.00 $3.48
========== ===== ========= =========
Weighted average
remaining
contractual life
(years) 2.66 years 4.05 years 4 .03 years
========== ========== ===========
Years exercisable 2001-2006 2002-2006 2003-2008
========= ========= =========
Certain of the stock warrants outstanding atare subject to adjustments for stock
splits and dividends.
F-39
Warrants issued to stockholders
In 2000, 149,807 warrants expired and 147,000 warrants were converted to common
stock. At December 31, 1996, related2000, there were 305,160 warrants remaining. In 2001,
73,000 were converted to the issuancecommon stock. At December 31, 2001 there were 232,160
warrants remaining. In 2002, 10,000 were converted to common stock. At December
31, 2002 there were 222,160 warrants remaining. These warrants have an exercise
price of former
notes payable$3.50 per share and shareholder notes payable (Note 3) which were exercisableexpire in either Common Stock, Series B or Series C Preferred Stock and subject to certain
antidilution adjustments. Upon completion of the IPO, theseOctober 2004.
Other stock warrants became
exercisable only in Common Stock.
Common Stock
---------------------
Exercise Number of
Price Shares Expiration
------- -------- ----------
Notes payable:
February 1992 5 years
convertible note (see Note 14) ..... $10.85 119,807 from
" " " ..... $2.00 160,000 IPO date
Stockholders notes:
Stockholders...................... $3.50 292,160 Oct. 1999
Stockholder....................... $3.50 300,000 Oct. 1999
Stockholders...................... $3.50 35,830 Dec. 1997
Stockholders...................... $2.00 144,000 Dec. 1997
Stockholder....................... $1.75 75,000 Mar. 2000
Stockholder....................... $3.50 10,000 Mar. 1999
---------
Subtotal: 1,136,797
=========
(iii) Other Warrants
In addition, the Company has other issued other warrants outstanding - totalling
14,184,000totaling
7,745,650 which consists of the following:
In November 1994, the Company granted Rule 701 Warrants to purchase an aggregate
of 2,080,000 shares of Common Stock to certain officers and directors. These
Warrants are exercisable at $3.50 per share and, if not exercised, were to
expire in September, 1999. FromOn February through April 1995,19, 1999 the Board of Directors extended
the expiration date for three more years. This extension resulted in a non-cash
charge of approximately $3,097,000. In 1999 235,000 warrants were exercised and
5,000 warrants were exercised in 2000. At December 31, 2000, there were
1,840,000 Rule 701 warrants remaining. In 2001 20,000 of these warrants expired,
leaving a balance of 1,820,000 in warrants outstanding at December 31, 2001.
During 2002, 420,000 warrants expired and the Company executed Bridge Loan Agreements
and promissory notes with 17 accredited lenders totaling $1,500,000. These notes
required interest at 8% per annum
F-14
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
and were paid onextended the closingexpiration
date of the IPO. Interest has been imputed at 12%
and is recognized as interest expense and additional paid in capital in 1995 to
reflect the issuanceremaining balance of additional warrants to reflect the reduction in
interest. Such agreements also included various affirmative and negative
covenants. As additional consideration, the lenders had options to purchase
1,000,000 bridge units issuable upon the effective date of the IPO at an
exercise price of $.501,400,000 for a period of five years. Management believes these
sales are a good measureyears 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
because they representof the only notable
third-party sales of Common Stock in 1994 and 1995, prior to the IPO. Such
exercise price is estimated to be at fair market value at the date of issuance
based on the then recent sales of securities to third-parties. Each bridge unit
consists of one share of Common Stock and one Class A Redeemable Common Stock
Purchase Warrant exercisable at $4.00 per share. 797,917 units were exercised in
1995 and 202,083 were exercised in 1996 at $.50 per Warrant.
inunderlying 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, 1995.1996. 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 September, 1995, the parties to this standby
agreement agreed to extend their obligations through December 31, 1996.
In1999, 290,000, in 2000, 216,500, in 2001,
200,000 and in 2002, 1,300 of these warrants were exercised, leaving a balance
of these warrants of 1,450,200. These warrants expire June 1995, the Company entered into an agreement with The Sage Group whereby,
in return for identifying certain distribution partners, The Sage Group will
receive certain percentages of the proceeds from the first distribution
agreement arising from such identification. In addition, the Company will pay to
The Sage Group a monthly retainer and has given warrants to purchase 100,000
shares of Common Stock at an exercise price of $1.75 share. In May, 1996,
additional warrants to purchase 140,000 shares of Common Stock were issued at an
exercise price of $3.50.30, 2005.
In connection with the IPO completed on November 7, 1995,stock issued in September, 1997, the Company sold
5,313,000 units. Each unit consisted of one share of common stock and one Class
A Redeemable Warrant exercisable at $4.00 per share.
Also, as part of the underwriting agreement, the underwriter receivedissued
385,067 warrants to purchase 462,000 shares of common stock at $5.775 per share as well as
462,000 Class A Redeemable Warrantsseveral entities to purchase common stock at $6.60$4 per share,
149,034 of these warrants were exercised in 1998, 173,300 were exercised in
1999, and 34,333 were exercised in 2000. The remaining 28,400 warrants expired
December 31, 2001.
In the years 2000, 2001 and 2002 the Company issued 293,800, 450,000 and 25,000
warrants, respectively, to investment banking firms for services performed on
behalf of the Company. Accordingly, the company recorded stock compensation
expense of $397,000, $673,000 and $133,000 for the years 2000, 2001 and 2002
respectively. These warrants have various vesting dates and exercise prices
ranging from $4.00 to $16.00 per share. In 2000, 75,000 of these warrants were
exercised. 1,193,800 warrants were outstanding at December 31, 2002. These
warrants expireare exercisable in five years from the date of issuance.
F-40
In 2000 2001 and 2002 the IPO.
1,877,000Company had non-public warrants have been granted to other parties, stockholdersoutstanding of
2,633,000 2,254,650 and employees for services performed.3,701,650 respectively. These warrants are exercisable
at rates of $2.50 to $4.00$10.00 per warrant.
(iv) Subsidiary Warrants
In May 1995,share of common stock. The exercise price was
equal to the officers and directorsfair market value of BioAegean Corp. were elected and
approved. The boardthe stock on the date of directors approvedgrant. During 2002,
the issuance of 6,000,000 shares of
Common Stock, of which 1,000,000 shares areCompany granted 1,777,000 warrants to be offeredemployees for sale to certain
investors at $1.00 per share. In addition, the directors approved options for
directors and officers totaling 1,200,000 shares at anservices performed.
These warrants have a weighted average exercise price of $1.00.$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 considerationaccordance FASB Interpretation No. 44, Accounting for licensing certain patents,Certain
Transactions involving Stock Compensation, no compensation expense was
recognized as the boardexercise price at the extension date exceeded the fair value
of the underlying common stock.
(e) Stock Repurchase
On February 19, 1999, the Board of Directors authorized 1,000,000the repurchase of up to
200,000 shares of the Company's common stock on the open market. On February 8,
2000, the Board authorized the repurchase of another 200,000 shares.
The Company's repurchases of shares of common stock to be issued to Hemispherx BioPharma, Inc., options for
an additional 1,000,000are recorded as "Treasury
Stock" and result in a reduction of "Stockholders' equity." When treasury shares
of common stock at the lesser
F-15
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
of the initial public offering price of BioAgean Corp. or $5.00 per share and
10,000 shares of Preferred stock to Hemispherx BioPharma, Inc. Only the common
stock shares of Hemispherx BioPharma, Inc have been issued as of December 31,
1995 and 1996.
The Company has granted certain rights to the debtholders to have their
securities registered under the Act. The Company believes the warrants have a
value which is not material for purposes of the financial statements and
accordingly, no value has been attributed to these warrants in the accompa-
nying consolidated financial statements.
(7) Series D Convertible Preferred Stock
On July 3, 1996are reissued, the Company issueduses a first-in, first-out method and sold 6,000 sharesthe excess of
Series D Convertible
Preferred Stock ("the Preferred Stock") at $1,000 per share for an aggregate
totalrepurchase cost over reissuance price is treated as a reduction of $6,000,000. The proceeds, net of issuance costs, realized by the
Company were $5,395,885. In addition to the issuance of the Preferred Stock, the
Company issued to the buyer Warrants ("the Warrants") to purchase 100,000 shares
of Common Stock at the strike price of $4.00 per share.
The Preferred Stock earns dividends at the rate of $50 per annum per share as
declared by"Additional
paid-in capital."
(f) Rights offering
On November 19, 2002, the Board of Directors of the Corporation. The dividends are
cumulative and payable quarterly commencing October 1, 1996 in cash or common
stockHemispherx Biopharma, Inc. (the
"Company") declared a dividend distribution of one Right for each outstanding
share of Common Stock to stockholders of record at the electionclose 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 Company. In October, 1996,Rights are set forth in
a Rights Agreement (the "Rights Agreement") between the Preferred
Shareholder converted 1,000Company and Continental
Stock Transfer & Trust Company, as Rights Agent.
Initially, the Rights are attached to all Common Stock certificates representing
shares then outstanding, and no separate Rights Certificates will be
distributed. Subject to certain exceptions specified in the Rights Agreement,
the Rights will separate from the Common Stock and a Distribution Date
F-41
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 Series D Convertible PreferredCommon Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock into
376,530by 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 common stock.
On September 16, 1996 the Company's registration statement registering the
common stock underlying the Preferred Stock will be issued.
(6) Segment and Related Information
The Company operates in one segment, which is the Warrants was declared
effectiveperformance of research and
development activities related to Ampligen(R) and other drugs under development.
The following table present revenues by country based on the SEC.
(8)location of the use
of the product services.
(000's omitted)
2000 2001 2002
---- ---- ----
United States $506 $274 $237
Belgium 272 107 74
Other 10 9 30
---- ---- ----
$788 $ 390 $341
==== ===== ====
In addition, the Company recorded License Fee Income in the amount of $563,000
from a Company located in Europe. The Company employs an insignificant amount of
net property and equipment in its foreign operations.
(7) Research, Consulting and Supply Agreements
The Company has entered into various clinical research agreements for the
purpose of undertaking clinical evaluations of the safety and efficacy of
Ampligen. The Company's obligation under these agreements is primarily dependent
on the number of actual patients enrolled in the study. During the years endingIn December, 31, 1994, 1995 and 1996, the Company incurred approximately $247,000,
$179,000 and $179,000 respectively, of research fees under these agreements.
In August, 1988,1999, the Company entered into a pharmaceutical use licensean agreement with Temple University (the Temple Agreement)Biovail
Corporation International ("Biovail"). In July, 1994, Temple terminated
the Temple Agreement. In November, 1994, the Company filed suit against TempleBiovail is an international full service
pharmaceutical company engaged in the Superior Courtformulation, 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 StateCompany's product in the Canadian
territories subjects to certain terms and conditions. In return, Biovail agrees
to conduct certain pre-marketing clinical studies and market development
F-42
programs, including without limitation, expansion of Delaware seeking a declaratory judgement
that the agreement was unlawfully terminated by Temple and therefore remainedEmergency Drug Release
Program in full force and effect. Temple filed a separate suit againstCanada with respect to the Company seeking
a declaratory judgement that its agreementCompany' products. Biovail agrees to work
with the Company was properly
terminated. These legal actions have now been settled. Underin preparing and filing of a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested $2.25 million in Hemispherx equity at
prices above the settlement, the
parties have entered into a new pharmaceuti- cal use license agreement (New
Temple Agreement) that is equivalentthen 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 duration and scopeorder 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
F-16
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
Temple is required to grant a license to any govrenmental agency or non-profit
organization as a condition of funding for research and development of the
patents and technology licensed to the Company. (Note 14).maintain
market exclusivity.
The Company has entered into agreements for consulting services, which are
performed at certainmedical research institutions and by certainmedical and clinical research
individuals. The Company's obligation to fund these agreements can generally be terminated
after the initial funding period, which generally ranges from one to three years
or on an as-needed monthly basis. During the yearsyear ending December 31, 1994, 19952000, 2001
and 1996,2002 the Company incurred approximately $130,000, $87,000,$924,000, $595,000 and $188,000$395,000
respectively, of consulting service fees under these agreements. In 1987, the Company entered into an agreement (the "Supply Agreement")These costs are
charged to purchase $2.7 million of compounds used in the manufacture of Ampligen which
expired in December 1992. Pursuant to the terms of the Supply Agreement, the
Company agreed to pay royalties of .5% of net sales, subject to certain minimumresearch and maximum requirements, for 5 years to the supplier of raw materials for the
manufacture of Ampligen.
In September 1995, the Company entered into an agreement with Rivex Pharma Inc.,
("Rivex"), pursuant to which Rivex will provide various services in connection
with the marketing and exclusive distribution of Ampligen in Canada on an
emergency drug release basis. Under the terms of this agreement, the Company
will supply and Rivex will purchasedevelopment expense as much Ampligen as necessary to satisfy
Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain
the exclusive right to market and distribute Ampligen in Canada.
(9)incurred.
(8) 401(K) Plan
In December 1995, theThe Company establishedhas a defined contribution plan, effective
January 1, 1995,entitled the Hemispherx BioPharma
Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). All fullFull 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 19952000, 2001 and 2002 the
Company provided matching contributions to each employee for up to 6% of annual
pay or $25,500.
The Company also absorbed the cost of employee contributions of $25,500. In 1996
the Company provided matching contributions to each employee for up to 6% of
annual pay or $31,580.
(10) Vendor Agreements
On February 20, 1996, the Company entered into an agreement to amend the lease
for its principal office. For a payment of $85,000 all outstanding rentaggregating $48,000, $48,000 and charges accrued through December 31, 1995 were forgiven by the landlord. The
term of the lease was extended through April 30, 2000 with an average rent of
$14,507 per month, plus applicable taxes and charges. Note 12, leases, reflects
these new terms. As result of this settlement and the amended lease the Company
recorded a $318,757
F-17
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
credit adjustment in earnings due to the reduction in accrued and deferred rent
liabilities. The credit is reflected as a reduction of general and
administrative expenses.
(11)$38,000 respectively.
(9) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen,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 AmpligenAmpligen(R) not to
exceed an aggregate amount of $6 million per year through 2005.
As described in Note 8,In August 1988, the Company has agreed to pay royalties underentered 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
F-43
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 its supplierthe extent Temple is required to grant a
license to any governmental agency or non-profit organization as a condition of
raw materials.funding for research and development of the patents and technology licensed to
the Company.
The Company has contractual agreements with fourtwo of its officers. The aggregate
annual base compensation under these contractual agreements for 1994, 1995, 1996
is $576,000, $540,0002000, 2001 and
$589,5522002 was $686,000, $603,000 and $620,000 respectively. In addition, certain of
these officers are entitled to receive performance bonuses of up to 25% of the
annual base salary (in addition to the bonuses described below). Pursuant to the
employment agreements, certainIn 2000, 2001
and 2002 no performance bonuses were granted. In 2001, Certain officers were
granted warrants and options under the 1990
Stock Option Plan to purchase an aggregate of 82,942 shares of the Company's
Common Stock at exercise prices ranging from $2.72-$4.34 and Rule 701 Warrants
to purchase 2,000,000426,650 shares of Common Stock at $3.50$4.01
per share. In 2002, certain officers were granted warrants and option to
purchase 1,220,000 shares of common stock at $2.00 - $4.03 per share. One of the
employment agreements provides for bonuses based on gross proceeds received by
the Company from any joint venture or corporate partnering agreement.
In October 1994, the Company entered into a licensing agreement with Bioclones
(Propriety) Limited (SAB/Bioclones) with respect to codevelopmentco-development of various
RNA drugs, including Ampligen,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)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 recordedreceived 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 developesdeveloped and operates a new manufactur- ingmanufacturing facility by SAB/Bioclones,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-thirdone third of its world-wide sales of Ampligen,Ampligen(R), excluding SAB/Bioclones-relatedBioclones
related sales. In addition, SAB/Bioclones will have the right of first refusal
for oral vaccines in the licensed territory. Prepaid expensesIn 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 current assets asin 2000 and was used for purchases of December
31, 1996, includes a $47,370 receivable from Ribotech.polymers in 2001.
In 2002, $262,000 was paid to Ribotech for delivery at Polymers.
In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SABSAB/Bioclones licensing agreement, a fee of .75% of
gross proceeds in the event that SAB Bioclones makes a tender offer for all or
sub- stantiallysubstantially all of the Company's assets, including a merger, acquisition or
related transaction, and a fee F-18
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
of 1% on all products manufactured by SAB.SAB
Bioclones. The Company may prepay in full its obligation to provide commissions
within a ten year period.
F-44
On December 5, 1995,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 Company retainedterms of the
law firmagreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump)Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to provide general legal counsel, adviseother terms and representation with respectother projected payments,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to various United States regulatory agencies.
Initially, Akin, Gump will provide representation before theHemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration (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.
In addition,connection with the agreement allows for incentive payments
for obtainingtwo agreements entered into with ISI (See Note 1), the
Company is obligated to pay ISI a letter from6% royalty on the FDA evidencing Ampligen's approvability for HIV
disease treatment.
(12)net sales of the Alferon N
Injection product.
(10) Leases
The Company has several noncancelable operating leases for the space in
which its principal offices are located and certain office equipment. See Note 10
above.\
Future minimum lease payments under noncancelable operating leases are as
follows:
(000's omitted)
Year ending Operating
December 31, leases
------------ ------
1997...................................................---------
2003. . . . . . . . . . . . . . . . . . . . $ 271,793
1998................................................... 280,413
1999................................................... 292,146
2000................................................... 91,517
----------279
2004. . . . . . . . . . . . . . . . . . . . 286
2005. . . . . . . . . . . . . . . . . . . . 240
2006. . . . . . . . . . . . . . . . . . . . 193
2007. . . . . . . . . . . . . . . . . . . . 65
-------
Total minimum lease payments........................payments. . . . . . . . $ 935,869
==========1,063
=======
Rent expense charged to operations for the years ended December 31, 1994, 19952000, 2001
and 19962002 amounted to approximately $173,000, $289,000$347,000, $294,000 and $286,000$307,000 respectively.
The Company recognized rent expense on a straight-line basis overterm 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
the difference between rent expense on a straight-line basis and the
base rental was deferred and included in accrued expenses atcharges.
(11) Income Taxes
As of December 31, 1995.
(13) Income Taxes
At December 31, 1996,2002, the Company had availablehas approximately $66,000,000 of federal
net operating loss carryforwards of approximately $44,600,000 for Federal and state income tax which expire over
various(expiring in the years 2004 through 2011. In addition, for Federal income tax purposes, the
Company has approximately $6,900 of unused investment and job tax credits2022)
available to offset future taxes, if any, expiring 1998federal taxable income. The Company also has
approximately $15,000,000 of state net operating loss carryforwards (expiring in
F-45
the years 2003 through 1999.2007) available to offset future state taxable income.
The expiration datesutilization 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 carryforwardscarryforward 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 as follows:
Expiration Tax loss
date carryforwards
---- -------------
1999....................................................... $ 130,974
2003....................................................... 1,773,967
2004....................................................... 5,402,521
2005....................................................... 3,534,484
F-19
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
2006........................................................ 8,749,039
Thereafter.................................................. 24,982,813
-----------
$44,573,798
===========
If certain substantial changes in ownership should occur there would be an
annual limitation on the amount of tax attribute carryforwards which can be
utilized in the future.
The Company has providedfully offset by a valuation allowance against allat
December 31, 2001 and 2002.
The components of itsthe net deferred tax assets.
(14)asset of December 31, 2001 and 2002
consists of the following:
(000,s omitted)
Deferred tax assets: 2001 2002
------- -------
Net operating losses $20,790 $22,440
Accrued Expenses and Other 21 (16)
Capitalized Research and development costs 4,634 3,763
------- -------
25,445 26,187
Less: Valuation Allowance 25,445 26,187
------- -------
Balance $ -0- $ -0-
======= =======
(12) Contingencies
On September 30, 1998, we filed a multi-count complaint against Manuel P.
Asensio, Asensio & Company, Inc. ("Asensio"). The Company was a defendant in a lawsuit instituted in 1991 by participants in a
double-blind placebo-controlled clinical trialaction included claims of
Ampligen therapy for ME/CFS.defamation, disparagement, tortuous interference with existing and prospective
business relations and conspiracy, arising out of the Asensio's false and
defamatory statements. The plaintiffscomplaint 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
F-46
Asensio. We denied the Company or its alleged agents promised them that
they would receive Ampligen aftermaterial allegations of the placebo-controlled study at no costcounterclaim. In July 2000,
following dismissal in federal court for periods ranging from "until marketable"lack of subject matter jurisdiction, we
transferred the action to "for life." Plaintiffs sought
compensatorythe Pennsylvania State Court. In March 2001, the
defendants responded to the complaints as amended and punitive damages. Thea 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 Company's motions for
summary judgment upon all claims alleged by the plaintiffs in this case. The
plaintiffs have appealed from these orders before the United States Court of
Appeals for the Ninth Circuit. In January 1996,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 Appeals denied
theira new trial. This appeal and sustained the Company's position. On the basis of the Court of
Appeals favorable decision, the Company believes the lawsuit will not have a
material effect on the Company.
In February 1991, a university advised the Company of its position that
employees of the university were the inventors of an issued U.S. patent
regarding the use of Ampligen in combination with various other agents
(including AZT) for the treatment of HIV infection. As issued, this patent names
the Company's Chief Executive Officer as sole inventor and the Company as sole
assignee. The university has demanded that the patent be reissued naming the
university's employees as inventors and the university as assignee. The Company
has refused to take such action. No formal claim has been filed by the
university. If such claim were filed and if such claim were found to have merit,
the loss of the patent at issue would not have a materially adverse effect on
the Company's long-range business since the university would only be able to
limit and/or prevent the Company's use of Ampligen in combina- tions with AZT in
the treatment of HIV.
In August 1988, the Company entered into a pharmaceutical use license agreement
with Temple Universuty. Under the terms of the agreement, Temple granted the
Company an exclisive world-wide license for the commercial sale of Oragen
products using patents and related technology held by Temple until the last to
expire of any releted petents then or thereafter issued. In July 1994, Temple
treminated the agreement. In November,1998, the Company filed suit against
Templeis now pending in the Superior
Court of the state of Delaware seekingPennsylvania.
In June 2002, a declaratory
judgement that the agreement was unlawfully terminated by templeformer ME/CFS clinical trial patient and therefore
remained in full force and effect. Templeher husband filed a
separateclaim 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 against the
Company seeking a declaratory judgement that its agreement with the Company was
properly terminated. In December, 1996, these legal actions were terminated.
Under the settlement, the parties have entered into a new pharmaceutical use
license agreement that is equivalent to the original agreement in duration and
scope.
F-20
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1995 and 1996
In March 1995, the Company instituted a declaratory judgment action against the
February 1992 noteholder of a $5 million convertible note and a second defendant in the United StateStates 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 action"Bad Faith Statute. On March 31, 2003 we settled
our outstanding claim with our insurance carrier for $1,500,000 relating to
reimbursement of expenses in connection with our Asensio law suits. We expect to
realize approximately $1,050,000 of this amount after payment of expenses
related to the settlement. Such amount was recorded during the fourth quarter
2002 as a reduction in General and Administrative expenses in our statement of
operations.
In March 2003, one of our former law firms filed a complaint in the Court of
Common Pleas of Philadelphia County against us for alleged legal fees in the sum
of $65,051. We believe the claim is without merit and are defending the matter.
(13) Related Party Transactions
We have employment agreements with certain of our executive officers and have
granted such officers and directors of the Company options and warrants to
purchase common stock of the Company, as discussed in Notes 2(n) and 9.
A director of the Company, is an attorney in private practice, who has rendered
corporate legal services to us from time to time, for which he has received
fees. A Director of the Company, lives in Paris, France and assists our European
subsidiaries in their dealings with medical institutions and the
F-47
European Medical Evaluation Authority. A Director of the Company, assists us in
establishing clinical trail protocols as well as performs other scientific work
for us from time to time. For these services, these Directors were paid an
aggregate of $173,500, $144,955 and $170,150 for the years ending December 31,
2000, 2001 and 2002 respectively.
William A. Carter, Chief Executive Officer of the Company, received an aggregate
of $12,486 in short term advances which were repaid as of December 31, 2001. All
advances bare interest at 6% per annum. The Company loaned $60,000 to, a
Director of the Company in November, 2001 for the purpose of exercising 15,000
class A redeemable warrants. This loan bears interest at 6% per annum.
We paid $42,775, $57,750 and $33,450 for the years ending December 31, 2000,
2001 and 2002, respectively to Carter Realty for the rent of property used at
various times in 2002 by us. The property is owned by others and managed by
Carter Realty. Carter Realty is owned by Robert Carter, the brother of William
A. Carter.
(14) Concentrations of credit risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist principally of cash. The Company places its cash with
high-quality financial institutions. At times, such amount may be in excess of
Federal Deposit Insurance Corporation insurance limits of $100,000.
F-48
(15) Quarterly Results of Operation (unaudited)
(in thousand except per share data)
2001
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenue 127 $ 101 $ 76 $ 86 $ 390
Costs and expenses 2,676 2,504 2,262 1,750 9,192
Net loss (2,480) (2,343) (2,145) (2,115) (9,083)
------ -------- ------- ------ ------
Basic and diluted
loss per share $(.08) $(.08) $(.07) $(.07) $(.29)
------ -------- ------- ------ ------
2002 (1)
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- -------- ------- -------- -------
Revenues and license
fee income $ 613 $ 134 $ 79 $ 78 $ 904
Costs and expenses 2,121 2,097 1,961 782 6,961
Net loss (1,488) (2,634) (1,891) (1,411) (7,424)
------ -------- ------- ------ ------
Basic and diluted
loss per share $(.05) $(.08) $(.06) $(.04) $(.23)
------ -------- ------- ------ ------
(1) During the fourth quarter of 2002, the Company recorded write offs of
certain investments in unconsolidated affiliates of approximately $688,000. (See
note 2(c)). Additionally, during the fourth quarter of 2002, the Company
recorded as a reduction of general and administrative expenses, an amount of
$1,050,000 representing the net settlement with its insurance carrier. (See Note
12)
(16) Debenture Financing
On March 12, 2003, We issued an aggregate of $5,426,000 in principal amount of
6% Senior Convertible Debentures due January 31, 2005 and an aggregate of
743,288 Warrants to two investors in a private placement for aggregate
anticipated gross proceeds of $4,650,000. Pursuant to the terms of the
Debentures, $1,550,000 of the proceeds from the sale of the Debentures have been
held back and will be released to us if, and only if, we acquire ISI's facility
with in a set timeframe. The Debentures mature on January 31, 2005 and bear
interest at 6% per annum, payable quarterly in cash or, subject to satisfaction
of certain conditions, common stock. Any shares of common stock issued to the
investors as payment of interest shall be valued at 95% of the average closing
price of the common stock during the five consecutive
F-49
business days ending on the third business day immediately preceding the
applicable interest payment date. Pursuant to the terms and conditions of the
Senior Convertible Debentures, we have pledged all of our assets as collateral
and are subject to comply with certain financial and negative covenants, which
include but are not limited to the repayment of principal balances upon
achieving certain revenue milestone.
The Debentures are convertible at the option of the investors at any time
through January 31, 2005 into shares of our common stock. The conversion price
under the Debentures is fixed at $1.46 per share, subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect.
The investors also received Warrants to acquire at any time through March 12,
2008 an aggregate of 743,288 shares of common stock at a price of $1.68 per
share. On March 12, 2004, the exercise price of the Warrants will reset to the
lesser of the exercise price then in effect or a price equal to the average of
the daily price of the common stock between March 13, 2003 and March 11, 2004
(but in no event less than $1.176 per share). The exercise price (and the reset
price) under the Warrants also is subject to similar adjustments for
anti-dilution protection.
We entered into a registration rights agreement with the investors in connection
with the issuance of the Debentures and the Warrants. The registration rights
agreement requires that we register the shares of common stock issuable upon
conversion of the Debentures, as interest shares under the Debenture and upon
exercise of the Warrants. In accordance with this agreement, we filed a
registration statement on form S-3 with the Securities and Exchange Commission.
If the registration statement is not declared effective within the time period
required by the agreement or, after it is declared effective and subject to
certain exceptions, sales of all shares required to be registered thereon cannot
be made pursuant thereto, then we will be required to pay to the investors their
pro rata share of $3,635 for each day any of the above conditions exist with
respect to this registration statement.
F-50
Interferon Sciences, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-52
Financial Statements:
Consolidated Balance Sheets - December 31, 2002 and 2001 F-53
Consolidated Statements of Operations - Years ended
December 31, 2002, 2001 and 2000 F-55
Consolidated Statements of Changes in Stockholders'
Equity Capital Deficiency - Years ended December 31, 2002,
2001 and 2000 F-56
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000 F-58
Notes to Consolidated Financial Statements F-59
F-51
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
Interferon Sciences, Inc.
We have audited the accompanying consolidated balance sheets of Interferon
Sciences, Inc. and subsidiary as of December 31, 2002 and 2001 and the related
consolidated statements of operations, changes in stockholders' equity capital
deficiency and cash flows for each of the years in the three-year period ended
December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. These 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 consolidated financial position of
Interferon Sciences, Inc. and subsidiary as of December 31, 2002 and 2001 and
the consolidated results of their operations and their consolidated cash flows
for each of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has experienced a significant net losses in
each of the years in the three-year period ended December 31, 2002 and at
December 31, 2002, has a capital deficiency and a negative working capital
position. These factors raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 3. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
In connection with our audit of the financial statements referred to
above, we audited Schedule II - Valuation and Qualifying Accounts for 2002. In
our opinion, this schedule, when considered in relation to the financial
statements taken as a whole, presents fairly, in all material respects, the
information stated therein.
Eisner LLP
New York, New York
June 10, 2003
F-52
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------
2002 2001
---- ----
As Restated
(See Note 4)
ASSETS
Current assets
Cash and cash equivalents $ 378,663 $ 1,184,889
Accounts and other receivables 42,739 123,389
Inventories, net of reserves of $4,678,659
and $5,538,413, respectively 28,489 109,913
Prepaid expenses and other current assets 12,179 17,608
------------ ------------
Total current assets 462,070 1,435,799
------------ ------------
Property, plant and equipment, at cost
Land 140,650 140,650
Buildings and improvements 7,793,242 7,793,242
Equipment 4,920,942 4,920,942
------------ ------------
12,854,834 12,854,834
Less accumulated depreciation (11,173,264) (10,776,342)
------------ ------------
1,681,570 2,078,492
------------ ------------
Patent costs, net of accumulated amortization
of $388,974 and $360,819 132,187 160,342
Other assets 100 10,100
------------ ------------
$ 2,275,927 3,684,733
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-53
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND CAPITAL DEFICIENCY
Current liabilities
Accounts payable $ 1,387,462 963,323
Accrued expenses 414,262 350,548
Due to American Red Cross 1,402,870 1,339,338
ISI stock subject to resale agreement
and in-kind services due Metacine 1,700,000 1,700,000
Note payable and amount due GP Strategies 413,745 495,745
Convertible Notes payable, net of debt discount 281,863
------------- ------------
Total current liabilities 5,600,202 4,848,954
------------- ------------
Commitments
Capital deficiency
Preferred stock, par value $.01 per share;
authorized - 5,000,000 shares; none
issued and outstanding
Common stock, par value $.01 per share;
authorized - 55,000,000 shares; issued
and outstanding- 21,030,405 and 20,308,031
shares, respectively 210,304 203,080
Capital in excess of par value 136,810,618 136,239,499
Accumulated deficit (140,345,197) (137,606,800)
------------- ------------
Total capital deficiency (3,324,275) (1,164,221)
------------- ------------
$ 2,275,927 3,684,733
============= ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-54
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2002 2001 2000
-------- -------- --------
As Restated As Restated
(See Note 4) (See Note 4)
Revenues
ALFERON N Injection $ 1,926,466 $ 1,498,603 $ 1,067,471
Research products and other
revenues 1,442
------------ ----------- -----------
Total revenues 1,926,466 1,498,603 1,068,913
------------ ----------- -----------
Costs and expenses
Cost of goods sold and excess/idle
production costs 1,482,006 1,485,962 1,455,929
Research and development 1,514,286 2,286,300 1,533,324
General and administrative 1,818,194 2,646,734 2,306,146
Acquisition of in-process technology 2,341,418
------------ ----------- -----------
Total costs and expenses 4,814,486 8,760,414 5,295,399
------------ ----------- -----------
Loss from operations (2,888,020) (7,261,811) (4,226,486)
Interest income 7,122 108,351 161,835
Interest expense (385,775) (91,469) (87,873)
Equity in loss of Metacine (158,582)
------------ ----------- -----------
Loss before income tax benefit (3,266,673) (7,403,511) (4,152,524)
Income tax benefit:
Gain on sale of state net operating
loss carryovers 528,276 968,553 1,483,861
------------ ----------- -----------
Net loss $ (2,738,397) $(6,434,958) $(2,668,663)
============ =========== ===========
Basic and diluted net loss per
share $ (.13) $ (.33) $ (.22)
============ =========== ===========
Weighted average number of
shares outstanding 20,575,948 19,576,312 12,097,252
============ =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-55
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CAPITAL DEFICIENCY
Total
Capital in stockholders'
Common stock excess of Accumulated Settlement equity
Shares Amount par value deficit Shares (deficiency)
----------------- -------------- ------------- ------------ ------------
Balance at January 1, 2000,
previously stated 5,327,473 $ 53,275 $129,397,259 $(128,812,179) $ (81,000) $ 557,355
Cumulative effect of
restating inventory
reserves, and effect of
correcting cost of
sales, see Note 4 (1,156,000) 309,000 81,000 (766,000)
------------------------------------------------------------------------------------
Balance at January 1, 2000,
as restated 5,327,473 $ 53,275 $128,241,259 $(128,503,179) $ 0 $ (208,645)
Net proceeds from
sale of common stock 11,635,451 116,354 6,980,595 7,096,949
Common stock issued as
compensation 20,000 200 23,550 23,750
Common stock issued under
Company 401(k) plan 78,914 789 79,409 80,198
Common stock issued
as payment against
accounts payable 870,000 8,700 (8,700)
Employee stock option
compensation 2,050 2,050
Compensation paid in
cash in settlement of obligation
to issue common stock
cash in settlement of obligation 282,506 282,506
Forgiveness of amount
due GP Strategies 129,886 129,886
Settlement shares sold 382,515 382,515
Net loss, as restated (2,668,663) (2,668,663)
------------------------------------------------------------------------------------
Balance at
December 31, 2000 17,931,838 179,318 136,113,070 (131,171,842) 0 5,120,546
The accompanying notes are an integral part of
these consolidated financial statements.
F-56
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY CAPITAL DEFICIENCY
(continued)
Common stock
issued to Metacine 2,000,000 20,000 (20,000)
Common stock issued
as compensation 50,000 500 12,780 13,280
Common stock issued
under Company 401(k) plan 323,949 3,239 106,095 109,334
Proceeds from exercise
of common stock options 2,244 23 538 561
Employee stock option compensation 5,553 5,553
Settlement shares sold 21,463 21,463
Net loss, as restated (6,434,958) (6,434,958)
------------------------------------------------------------------------------------
Balance at December 31, 2001 20,308,031 203,080 136,239,499 (137,606,800) 0 (1,164,221)
Common stock issued
under Company 401(k) plan 722,374 7,224 71,119 78,343
Fair value of warrants issued with
convertible notes and value of
beneficial conversion feature 500,000 500,000
Net loss (2,738,397) (2,738,397)
------------------------------------------------------------------------------------
Balance at December 31, 2002 21,030,405 $210,304 $136,810,618 $(140,345,197) $ 0 $(3,324,275)
The accompanying notes are an integral part of
these consolidated financial statements.
F-57
INTERFERON SCIENCES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------
2002 2001 2000
-------- -------- --------
As Restated As Restated
(See Note 4) (See Note 4)
Cash flows from operating activities:
Net loss $(2,738,397) $(6,434,958) $(2,668,663)
Adjustments to reconcile net loss
to net cash used for operating activities:
Depreciation and amortization 425,077 507,507 502,157
Acquisition of in-process research and development 2,341,418
Equity in loss of Metacine 158,582
Gain on settlements of research-related
liabilities (456,998)
Provision for notes receivable 87,500 70,000
Non-cash compensation expense 78,343 128,167 388,504
Debt discount 281,863
Change in operating assets
and liabilities:
Accounts and other receivables 80,650 1,551,409 (1,639,237)
Inventories 81,424 (4,439) (105,474)
Prepaid expenses and other current assets 5,429 (120) 9,530
Accounts payable and accrued expenses 551,385 95,845 (1,497,126)
Amount due to GP Strategies 18,000 29,106 (87,112)
----------- ----------- -----------
Net cash used for operating activities (1,216,226) (1,539,983) (5,484,419)
----------- ----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (46,994) (56,967)
Investments in Metacine and other assets (787,500) (170,000)
Reduction of other assets 10,000
----------- ----------- -----------
Net cash provided by (used for)
investing activities 10,000 (834,494) (226,967)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 500,000
Net proceeds from sale of common stock 7,096,949
Repayment of note payable to GP Strategies (100,000) (100,000)
Proceeds from exercise of common stock options 561
----------- ----------- -----------
Net cash provided by (used for) financing
activities 400,000 (99,439) 7,096,949
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (806,226) (2,473,916) 1,385,563
Cash and cash equivalents at beginning of year 1,184,889 3,658,805 2,273,242
----------- ----------- -----------
Cash and cash equivalents at end of year $ 378,663 $ 1,184,889 $ 3,658,805
=========== =========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
F-58
INTERFERON SCIENCES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
Interferon Sciences, Inc. (the "Company") is a biopharmaceutical company
that operates in a single segment and is engaged in the study, manufacture, and
sale of pharmaceutical products based on its highly purified, multispecies,
natural source alpha interferon ("Natural Alpha Interferon"). The Company's
ALFERON(R) N Injection (Interferon Alfa-n3) product has been approved by the
United States Food and Drug Administration ("FDA") for the treatment of certain
types of genital warts and the Company has studied its potential use in the
treatment of HIV, hepatitis C, and other indications. Alferon N Injection is
sold principally in the United States, however, a portion is sold in foreign
countries. For the years ended December 31, 2002, 2001 and 2000, domestic sales
totaled $1,926,466, $1,488,897, and $1,046,470, respectively, and foreign sales
totaled zero, $9,706, and $21,001, respectively. All identifiable assets are
located in the United States.
Subsequent to December 31, 2002, the Company sold its inventory and
granted a license to its products to Hemispherx Biopharma, Inc. See Note 20.
Integrated Commercialization Solutions, Inc. ("ICS"), a subsidiary of
AmerisourceBergen Corporation, is the sole United States distributor of ALFERON
N Injection. ICS distributes ALFERON N Injection to a limited number of
wholesalers throughout the United States.
Note 2. Summary of Significant Accounting Policies
Principles of consolidation -- The consolidated financial statements
include the operations of the Company and Interferon Sciences Development
Corporation ("ISD"), its wholly owned subsidiary. All significant intercompany
transactions and balances have been eliminated. The transactions and balances of
Metacine, Inc. are being accounted for under the equity method (see Note 7). The
losses of Metacine from April 9, 2001, the date of the Company's acquisition of
an 82% equity interest in Metacine through December 31, 2001, have been
reflected in the accompanying statement of operations as equity in loss of
Metacine to the extent of the Company's carrying value of the investment in
Metacine. At December 31, 2001, the carrying value was written down to $-0-.
Cash and cash equivalents -- The Company considers all highly liquid
instruments with maturities of three months or less from purchase date to be
cash equivalents.
Property, plant and equipment -- Property, plant and equipment are carried
at cost. Major additions and improvements are capitalized while maintenance and
repairs, which do not extend the lives of the assets, are expensed.
Depreciation -- The Company provides for depreciation and amortization of
plant and equipment following the straight-line method over the estimated useful
lives of such assets as follows:
Class of Assets Estimated Useful Lives
--------------- ----------------------
Buildings and Improvements 15 to 30 years
Equipment 5 to 10 years
Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $396,922, $478,082 and $472,101, respectively.
Patent costs -- The Company capitalizes costs to obtain patents and
licenses. Patent costs are amortized over 17 years on a straight-line basis. To
the extent a patent is determined to be worthless, the related net capitalized
cost is immediately expensed.
F-59
Revenue recognition -- Title passes to the customer at the shipping point
and revenue is therefore recognized when the product is shipped. The Company's
product is also tested by its quality control department prior to shipment. The
Company has no other obligation associated with its products once shipment has
occurred.
Research and Development Costs - Research and development are expensed
when incurred. The types of costs included in research and development are:
salaries, supplies, clinical costs, facility costs and depreciation. All of
these expenditures were for Company sponsored research and development programs.
During 2000, the Company settled amounts owed by the Company on various research
related liabilities at a savings to the Company of approximately $457,000. The
amount was credited against research and development expenses in 2000.
Inventories -- Inventories, consisting of raw materials, work in process and
finished goods, are stated at the lower of cost or market on a FIFO basis.
Inventory in excess of the Company's estimated usage requirements is written
down to its estimated net realizable value. Inherent in the estimates of net
realizable value is management estimates related to the Company's future
manufacturing schedules, customer demand, possible alternative uses and ultimate
realization of potentially excess inventory.
Long-Lived Assets -- The Company reviews long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets to
be disposed of are reported at the lower of the carrying amount or estimated
fair value less costs to sell.
Stock option plan - The Company accounts for its stock-based compensation
to employees and members of the Board of Directors in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation is recorded on the date of issuance or grant as the excess of the
current market value of the underlying stock over the purchase or exercise
price. Any deferred compensation is amortized over the respective vesting
periods of the equity instruments, if any. The Company has adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 123
("SFAS No. 123"), "Accounting for Stock-Based Compensation," and Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure," which was released in December 2002 as an
amendment of SFAS 123. The following table illustrates the effect on net loss
and loss per share if the fair value based method had been applied to all
awards.
Year Ended December 31,
2002 2001 2000
Reported net loss $(2,738,397) $(6,434,958) $(2,668,663)
Stock-based employee
compensation expense
included in reported net loss,
net of related tax effects -- -- --
Stock based employee
compensation determined under
the fair value based method,
net of related tax effects (94,165) (730,284) (481,151)
Pro forma net loss (2,832,562) (7,165,242) (3,149,814)
Loss per share
(basic and diluted)
As reported $ (.13) $ (.33) $ (.22)
Pro forma $ (.14) $ (.37) $ (.26)
F-60
During 2002 and 2001, the Company did not grant any stock options. The per
share weighted-average fair value of stock options granted during 2000 was $.88
on the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions: expected dividend yield of 0.0%,
risk-free interest rate of 6.1%, expected volatility of 142.4% and an expected
life of 3.0 years.
Loss per share -- Basic loss per share (EPS) are based upon the weighted
average number of common shares outstanding during the period. Diluted EPS are
based upon the weighted average number of common shares outstanding during the
period assuming the issuance of common shares for all dilutive potential common
shares outstanding. At December 31, 2002, 2001 and 2000, the Company's options
and warrants outstanding are anti-dilutive and therefore basic and diluted EPS
are the same.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Income taxes - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and for operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that includes the enactment date. At December 31, 2002
and 2001, the Company has recorded a full valuation allowance for the net
deferred tax asset.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 141, Business Combinations, ("SFAS
No. 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS No.
142"). SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations. SFAS No. 141 specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported separately from goodwill. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 as of January 1, 2002.
Upon adoption of SFAS No. 142, the Company was required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. If an intangible asset was identified as having an indefinite
useful life, the Company would be required to test the intangible asset for
impairment in accordance with the provisions of SFAS No. 142 within the first
interim period. Impairment is measured as the excess of carrying value over the
fair value of an intangible asset with an indefinite life. Any impairment loss
would be measured as of the date of adoption and recognized as the cumulative
effect of a change in accounting principle in the first interim period.
As of the date of adoption of SFAS No. 142, the Company does not have any
goodwill and has unamortized identifiable intangible assets of approximately
$160,000, all of which is subject to the transition provisions of SFAS No. 142.
F-61
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of an
entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company adopted SFAS No. 144 on January 1, 2002.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FAS Statements
4, 44 and 64, Amendment of FAS Statement 13 and Technical Corrections." SFAS No.
145 eliminates Statement 4 (and Statement 64, as it amends Statement 4), which
required gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, and thus, also the exception to
applying Opinion 30 is eliminated as well. This statement is effective for
fiscal years beginning after May 2002 for the provisions related to the
rescission of Statements 4 and 64 and for all transactions entered into
beginning May 2002 for the provision related to the amendment of Statement 13.
The Company does not expect that the adoption of SFAS No. 145 will have a
material impact on its results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan. The Company is required to
adopt SFAS No. 146 on January 1, 2003. The Company does not expect the adoption
of SFAS No. 146 will have a material impact on its results of operations or
financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment to SFAS No.
123, "Accounting for Stock-Based Compensation." Provisions of this statement
provide two additional alternative transition methods: modified prospective
method and retroactive restatement method, for an entity that voluntary changes
to the fair value based method of accounting for stock-based employee
compensation. The statement eliminates the use of the original SFAS No. 123
prospective method of transition alternative for those entities that change to
the fair value based method in fiscal years beginning after December 15, 2003.
It also amends the disclosure provisions of SFAS No. 123 to require prominent
annual disclosure about the effects on reported net income in the Summary of
Significant Accounting Policies and also requires disclosure about these effects
in interim financial statements. These provisions are effective for financial
statements for fiscal years ending after December 15, 2002. Accordingly, the
Company adopted the applicable disclosure requirements of this statement for
year-end reporting. The transition provisions of this statement apply upon the
adoption of the SFAS No. 123 fair value based method. The Company did not change
its method of accounting for employee stock-based compensation from the
intrinsic method to the fair value based alternative.
Note 3. Operations
The Company has experienced significant operating losses since its
inception in 1980. As of December 31, 2002, the Company had an accumulated
deficit of approximately $140 million. For the years ended December 31, 2002,
2001 and 2000, the Company had losses from operations of approximately $2.9
million, $7.3 million, and $4.2 million, respectively. Also, the Company has
limited liquid resources. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Although the Company received FDA approval in 1989 to market
ALFERON N Injection in the United States for the treatment of certain genital
warts, the Company has had limited success in generating revenue from the sale
of ALFERON N Injection to date.
During the year ended December 31, 2002, the Company generated $1,926,466
in revenue from the sale of ALFERON N Injection and received $528,276 from the
sale of the Company's New Jersey net operating tax loss carryovers. In addition,
the Company completed a private placement of $500,000 of convertible notes to
accredited investors. At
F-62
December 31, 2002, the Company had approximately $379,000 of cash and cash
equivalents, with which to support future operating activities and to satisfy
its financial obligations as they become payable.
On March 11, 2003, the Company sold all its inventory related to its
ALFERON N Injection product and granted a three-year license to sell the product
to Hemispherx Biopharma, Inc. ("HEB"). In exchange for the inventory and
license, the Company received HEB common stock with a guaranteed value of
$675,000, an additional 62,500 shares of HEB common stock without a guaranteed
value, and a royalty equal to 6% of the net sales of ALFERON N Injection. The
HEB common stock will be subject to selling restrictions. In addition, HEB
assumed approximately $400,000 of the Company's payables and various other
commitments. The Company and HEB also entered into another agreement pursuant to
which the Company will sell to HEB, subject to regulatory approval, the
Company's real estate property, plant, equipment, furniture and fixtures, rights
to ALFERON N Injection and all of its patents, trademarks and other intellectual
property related to its natural alpha interferon business. In exchange, the
Company will receive $675,000 of HEB common stock with a guaranteed value, an
additional 62,500 shares of HEB common stock without a guaranteed value and a
royalty equal to 6% of the net sales of all products sold containing natural
alpha interferon. HEB will assume approximately $2.3 million of the Company's
indebtedness that currently encumbers its assets. In addition, HEB will fund the
operating costs of the Company's facility pending the completion of this
transaction. In the event the Company does not obtain regulatory approval prior
to September 12, 2003, either the Company or HEB may terminate the agreement and
not complete the transaction.
Based on the Company's sale to HEB, estimates of revenue, expenses, and
the timing of repayment of creditors, management believes that the Company has
sufficient resources to enable the Company to continue operations until the
third quarter of 2003. However, actual results, may differ materially from such
estimate, and no assurance can be given that additional funding will not be
required sooner than anticipated or that such additional funding, whether from
financial markets or from other sources, will be available when needed or on
terms acceptable to the Company. Insufficient funds will require the Company to
terminate operations.
Note 4. Restatement
At December 31, 1999, the balance of the inventory reserves has been
increased to eliminate the effect of the $766,000 reversal of inventory
previously written down. This retroactive adjustment results in increasing the
Accumulated Deficit at December 31, 1999 by $766,000 and decreasing inventory
and total assets by the same amount. In addition, a restatement was required to
correct cost of sales and equity in loss of Metacine. The Net Loss and loss per
share for the years ended December 31, 2000 and 2001 have also been similarly
revised as follows:
Year Ended December 31,
2000 2001
---- ----
Net Loss as previously reported $(2,981,672) $(7,249,576)
Effect of reversing inventory write (up) down(1) (71,300) 584,898
Effect of adjusting carrying value of inventory(2) 105,474 4,439
Elimination of adjustments for common stock
held by Red Cross(3) 278,835 (65,713)
Effect of correcting equity in loss of Metacine(4) -- 290,994
----------- -----------
Net Loss as restated $(2,668,663) $(6,434,958)
----------- -----------
F-63
Basic and diluted Net Loss per share
as previously stated $ (.25) $ (.37)
Effect of reversing inventory write down -- .03
Effect of adjusting carrying value of inventory .01 --
Elimination of adjustments for common stock
held by Red Cross .02 --
Effect of correcting equity in loss of Metacine -- .01
----------- -----------
Basic and diluted Net Loss per share as restated $ (.22) $ (.33)
=========== ===========
(1) To adjust for reversal of inventory write (up) down.
(2) To adjust the carrying value of inventory for production costs not
capitalized.
(3) To adjust cost of sales for the change in market value of common stock
held by American Red Cross.
(4) To adjust for the equity in the loss of Metacine in excess of the carrying
basis.
Note 5. Agreements with Hoffmann-LaRoche
F. Hoffmann-La Roche Ltd. and Hoffmann-LaRoche, Inc. (collectively,
"Hoffmann") have been issued patents covering human alpha interferon in many
countries throughout the world. In 1995, the Company obtained a non-exclusive
perpetual license from Hoffmann (the "Hoffmann Agreement") that grants the
Company the worldwide rights to make, use, and sell, without a potential patent
infringement claim from Hoffmann, any formulation of Natural Alpha Interferon.
The Hoffmann Agreement permits the Company to grant marketing rights with
respect to Natural Alpha Interferon products to third parties, except that the
Company cannot grant marketing rights with respect to injectable products in any
country in which Hoffmann has patent rights covered by the Hoffmann Agreement
(the "Hoffmann Territory") to declareany third party not listed on a schedule of
approximately 50 potential marketing partners without the consent of Hoffmann,
which consent cannot be unreasonably withheld.
Under the terms of the Hoffmann Agreement, the Company is obligated to pay
Hoffmann an aggregate royalty on net sales (as defined) of Natural Alpha
Interferon products by the Company in an amount equal to (i) 8% of net sales in
the Hoffmann Territory, and 2% of net sales outside the Hoffmann Territory of
products manufactured in the Hoffmann Territory, up to $75,000,000 of net sales
in any calendar year and (ii) 9.5% of net sales in the Hoffmann Territory, and
2% of net sales outside the Hoffmann Territory of products manufactured in the
Hoffmann Territory, in excess of $75,000,000 of net sales in any calendar year,
provided that the total royalty payable in any calendar year shall not exceed
$8,000,000. For the years ended December 31, 2002, 2001 and 2000, the Company
recorded approximately $31,000, $60,000, and $42,000, in royalty expenses to
Hoffmann, respectively. The Hoffmann Agreement can be terminated by the Company
on 30 days notice with respect to the United States patent, any individual
foreign patent, or all patents owned by Hoffmann. If the Hoffmann Agreement is
terminated with respect to the patents owned by Hoffmann in a specified country,
such country is no longer included in the Hoffmann Territory. Accordingly, the
Company would not be permitted to market any formulation of alpha interferon in
such country.
Note 6. Research and Development Agreement with Interferon Sciences Research
Partners, Ltd.
In 1984, the Company organized ISD to act as void,the sole general partner of
Interferon Sciences Research Partners, Ltd., a New Jersey limited partnership
(the "Partnership"). The Company and the Partnership entered into a development
contract whereby the Company received substantially all of the net proceeds
($4,414,475) of the Partnership's public offering of limited partnership
interests. The Company used the proceeds to perform research, development and
clinical testing on behalf of the Partnership for the development of ALFERON Gel
containing recombinant interferon.
F-64
In connection with the formation of the Partnership, ISD agreed to make
additional cash contributions for purposes of continuing development of ALFERON
Gel if the Partnership exhausted its funds prior to development of such product.
ISD is wholly dependent upon the Company for capital to fund such commitment.
The Partnership exhausted its funds during 1986, and the Company contributed a
total of $1,997,000 during the period from 1986 to 1990, for the continued
development of ALFERON Gel. In 1987, the Company filed a Product License
Application with the FDA for approval to market ALFERON Gel. In February 1990,
the FDA indicated that additional process development and clinical trials would
be necessary prior to approval of ALFERON Gel. The Company believed, at that
time, that the costs to complete the required process development and clinical
trials would be substantial, and there could be no assurance that the clinical
trials would be successful.
As a result of the above events, in 1992, the Company withdrew its FDA
Product License Application for ALFERON Gel containing recombinant interferon.
In place of single species recombinant interferon, previously ALFERON Gel's
active ingredient, the Company commenced, in 1992, further development of
ALFERON Gel using the Company's natural source multi-species alpha interferon
("ALFERON N Gel"). However, at the present time, the Company is not actively
pursuing development of ALFERON N Gel and the Company does not have an
obligation to provide additional funding to the Partnership. Assuming successful
development and commercial exploitation of ALFERON N Gel, which to date has not
occurred, the Company may be obligated to pay the Partnership royalties equal to
4% of the Company's net sales of ALFERON N Gel and 15% of revenues received from
sublicensing ALFERON N Gel.
Note 7. Agreement with Metacine, Inc.
On July 28, 2000, the Company acquired for $100,000 an option to purchase
certain securities of Metacine, Inc. ("Metacine"), a company engaged in research
using dendritic cell technology, on the terms set aside,forth below.
On April 9, 2001, the Company exercised its option to acquire an 82%
equity interest in Metacine. Pursuant to the agreement, as amended, the Company
received 700,000 shares of Metacine common stock and cancela five-year warrant to
purchase, at a price of $12.48 per share, 282,794 shares of Metacine common
stock in exchange for $300,000 in cash, an obligation to pay Metacine $
1,850,000 and $250,000 of services to be rendered by the February 1992Company by June 30,
2002. In addition, the Company issued Metacine 2,000,000 shares of the Company's
common stock. The agreement contains certain restrictions on the ability of
Metacine to sell the Company's shares and provides for the Company to make cash
payments ("Deficiency Payments") to Metacine to the extent Metacine has not
received from the sale of the Company's common stock, cumulative net proceeds of
$1,850,000 by September 30, 2002 or $400,000 of net proceeds per quarter
beginning with the period ending September 30, 2001 and $250,000 for the quarter
ending September 30, 2002. On October 4, 2001, the Company made a Deficiency
Payment to Metacine in the amount of $400,000 for the quarter ending September
30, 2001. The Company has not made the remainder of the Deficiency Payments in
the aggregate amount of $1,450,000. If Metacine sells all of the 2,000,000
shares received and the cumulative proceeds from the sales and any Deficiency
Payments are less than $1,850,000, the Company may issue to Metacine additional
shares of common stock at the Company's full discretion. These additional shares
would be treated in the same manner as the original 2,000,000 shares. In the
event that cumulative net proceeds to Metacine from the sale of the Company's
common stock exceed $1,850,000, any Deficiency Payments previously made by the
Company ($400,000 through December 31, 2002) would be repaid to the Company to
the extent these proceeds exceed $1,850,000. All additional proceeds beyond the
$1,850,000 and repayment of Deficiency Payments, if any, would be for the
benefit of Metacine. The Company was required to put in escrow 100,000 Metacine
shares to secure its obligations to render $250,000 of services to Metacine and
462,500 Metacine shares to secure its potential obligations to make Deficiency
Payments. Since the Company has not made $1,450,000 in Deficiency Payments and
has not rendered $250,000 of services to Metcine, Metacine could request 462,500
Metacine shares currently held in escrow to satisfy the Company's past due
obligations.
Although the Company is the majority owner of Metacine, the Company must,
on many matters, vote its shares of Metacine common stock in the same proportion
as votes cast by the minority stockholders of Metacine, except for certain
matters with respect for which the Company has protective rights. In accordance
with EITF Issue No. 96-16, Investor's Accounting for an Investee When the
Investor has a Majority of the Voting Interest but the Minority Shareholder or
Shareholders have Certain Approval or Veto Rights, the minority holders have
substantive participating rights which include controlling the selection,
termination and setting of compensation for Metacine management who are
responsible for implementing policies and procedures, making operating and
capital decisions (including establishing budgets) for Metacine and most other
F-65
ordinary operating matters, and therefore, the Company does not control
Metacine. In addition, the Company only has one representative on a board of
directors consisting of three directors. Accordingly, the acquisition is being
accounted for under the equity method.
Of the $2.5 million consideration paid for Metacine, $2,341,418 was
recorded as a charge for the acquisition of in-process research and development
("IPR&D") in 2001. The charge was recorded as the acquisition of IPR&D as
Metacine's primary asset is technology that has not reached technological
feasibility and has no alternative uses. The in-process research and development
expenses relate to a patent portfolio consisting of six issued patents, eight
pending patents and four invention disclosures related to the use of dendritic
cells for the treatment of various diseases. While the patent portfolio, when
viewed as a whole, represented a new approach to the treatment of various
diseases utilizing cell therapy, the six issued patents had no independent
commercial value. While the Company did not engage the services of an
independent appraiser to assess the fair value of the purchased in process
research and development, it considered the following factors: (i) any product
or process utilizing dendritic cells as a treatment for any disease would
regulated by the FDA and therefore would require extensive clinical testing
prior to the time any revenue would be generate from the sale of a product or
process, (ii) the cost of such clinical trials would be in excess of $
50,000,000, (iii) it would take between seven to ten years to complete such
clinical trials, (iv) there could be no assurance that even if Metacine could
obtain the funding required to complete the clinical trials (which was well
beyond Metacine's capability at the time Metacine acquired rights to the patent
portfolio), that the clinical trials would have shown the product or process
tested to be safe and effective. The Company's $1,850,000 obligation to
Metacine, less the $400,000 Deficiency Payment made in October 2001, has been
recorded as a current liability at December 31, 2002 and 2001. The $250,000 of
services to be provided has also been recorded as a current liability. Services
rendered to Metacine to date were immaterial and as such, the liability remained
unchanged at December 31, 2002 and 2001. The investment has been further reduced
to zero at December 31, 2001, by the Company's equity in the loss of Metacine of
$158,582 for the period from April 9, 2001 through December 31, 2001.
On April 1, 2003, the license granted by the University of Pittsburgh to
Metacine covering Metacine's technology was terminated due to non-payment by
Metacine.
Accordingly, the Company's has not reflected its share of its equity in
the losses in Metacine for the years ended December 31, 2002 and 2001 in the
amounts of $274,846 and $290,994, respectively.
The Company is currently in discussions with Metacine with respect to a
full settlement of the Company's obligations to Metacine.
Note 8. Inventories
Inventories, consisting of material, labor and overhead, are classified as
follows:
December 31,
2002 2001
-----------------------------
As Restated
(See Note 4)
Finished goods $ 322,518 $ 1,263,696
Work in process 3,052,070 3,052,070
Raw materials 1,332,560 1,332,560
Less reserve for excess inventory (4,678,659) (5,538,413)
----------- -----------
$ 28,489 $ 109,913
=========== ===========
Finished goods inventory consists of vials of ALFERON N Injection,
available for commercial and clinical use either immediately or upon final
release by quality assurance.
In light of the results of the Company's Phase 3 studies of ALFERON N
Injection in HIV and HCV-infected patients, the Company has recorded a reserve
against its inventory of ALFERON N Injection to reflect its estimated net
realizable
F-66
value. The reserve was a result of the Company's assessment of anticipated
near-term projections of product to be sold or utilized in clinical trials,
giving consideration to historical sales levels. As a result, inventories at
December 31, 2002 and 2001, reflect a reserve for excess inventory of $4,678,659
and $5,538,413, respectively.
Note 9. Convertible Notes Payable
In August 2002, the Company completed a private placement of $500,000 of
convertible notes to accredited investors. Each note is convertible into the
Company's common stock at a price of $.05 per share (subject to adjustment to
70% of the market price of the Company's common stock under certain
circumstances) and bears interest at the rate of 10% per annum. $250,000 of the
convertible notes is due January 31, 2003 and the other $250,000 of the
convertible notes is due December 31, 2003. For each $100,000 principal amount
of notes issued, the investors received warrants to purchase an additional 10.2
million shares of the Company's common stock exercisable at $.01 per share. The
warrants were valued at $400,000 and are amortized as interest expense over the
terms of the respective notes. The transaction is subject to approval by the
shareholders of the Company. In the event that shareholder approval is not
obtained, the convertible noteholders could exercise their rights and call a
default making the convertible notes immediately due and payable. In addition,
these notes are convertible into common stock at a beneficial rate. The
beneficial conversion feature is valued at $100,000 and accounted for as debt
discount and is being amortized over the term of the notes.
Note 10. Income Taxes
As a result of the loss allocation rules contained in the Federal income
tax consolidated return regulations, approximately $5,900,000 of net federal
operating loss carryforwards, which expire from 2003 to 2006, are available to
the Company upon ceasing to be a member of GP Strategies's consolidated return
group in 1991. In addition, the Company has net federal operating loss
carryforwards for periods subsequent to May 31, 1991, and through December 31,
2002 of approximately $104,000,000 that expire from 2006 to 2022. In addition,
the Company had state net operating loss carryforwards of approximately
$32,000,000 that expire from 2005 to 2009.
The Company believes that the events culminating with the closing of its
Common Stock Private Offering on November 6, 2000 may result in an "ownership
change" under Internal Revenue Code, Section 382, with respect to its stock. The
Company believes that as a result of the ownership change, the future utility of
its pre-change net operating losses may be significantly limited. Further, the
issuance of 51,000,000 warrants in August 2002 could also result in an ownership
change and further limit use of the net operating losses carried forward.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities consist of the following as of December 31, 2002 and
2001:
Deferred tax assets 2002 2001
- ------------------- ---- ----
Net operating loss carry-forwards $ 39,530,000 34,551,000
Tax credit carry-forwards -- 150,000
Inventory reserve 1,872,000 2,114,000
Property and equipment,
principally due to differences
in basis and depreciation 661,000 588,000
In-process technology costs -- 937,000
------------ ------------
Gross deferred tax asset 42,063,000 38,340,000
Valuation allowance (42,063,000) (38,340,000)
------------ ------------
Net deferred taxes $ -- $ --
============ ============
F-67
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
determined, based on the Company's history of annual net losses, that a full
valuation allowance is appropriate. The change in the valuation allowance for
2002 and 2001 was $3,723,000 and $2,411,000, respectively.
Based on the Company's net loss before income taxes in 2002, 2001 and
2000, the Company would have recorded a tax benefit. During each of these years,
the Company recorded increases in the valuation allowance due to uncertainty
regarding the realization of deferred taxes that reduced the Company's expected
income tax benefit to zero in these years.
The Company participates in the State of New Jersey's corporation business
tax benefit certificate transfer program (the "Program"), which allows certain
high technology and biotechnology companies to transfer unused New Jersey net
operating loss carryovers to other New Jersey corporation business taxpayers.
During 1999, the Company submitted an application to the New Jersey Economic
Development Authority (the "EDA") to participate in the Program and the
application was approved. The EDA then issued a certificate certifying the
Company's eligibility to participate in the Program and the amount of New Jersey
net operating loss carryovers the Company has available to transfer. Since New
Jersey law provides that net operating losses can be carried over for up to
seven years, the Company may be able to transfer its New Jersey net operating
losses from the last seven years. The Program requires that a purchaser pay at
least 75% of the amount of the surrendered tax benefit.
During 2002, 2001 and 2000, the Company completed the sale of
approximately $6.5 million, $12 million, and $19 million of its New Jersey tax
loss carryovers and received $0.53 million, $0.97 million, and $1.48 million,
which were recorded as a tax benefit from gains on sale of state net operating
loss carryovers on its Consolidated Statement of Operations in 2002, 2001 and
2000, respectively.
Note 11. Common Stock, Stock Options, Warrants and Other Shares Reserved
The Company has a stock option plan (the "Plan"), which authorizes a
committee of the Board of Directors to grant options, to purchase shares of
Common Stock, to officers, directors, employees and consultants of the Company.
Pursuant to the terms of the Plan, no option may be exercised after 10 years
from the date of grant. The Plan permits options to be granted at a price not
less than 85% of the fair market value, however, the options granted to date
have been at fair market value of the common stock at the date of the grant.
Employee stock option activity for options under the Plan during the
periods indicated is as follows:
Number of Weighted-Average
Shares Exercise Price
---------- ----------------
Balance at December 31, 1999 1,887,260 $ .25
Granted 61,710 1.10
Forfeited (2,580) .25
---------
Balance at December 31, 2000 1,946,390 .28
Exercised (2,244) .25
Forfeited (13,525) .35
---------
Balance at December 31, 2001 1,930,621 .28
Forfeited (22,546) .41
---------
Balance at December 31, 2002 1,908,075 .27
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At December 31, 2002, the exercise prices and weighted-average remaining
contractual life of outstanding options were:
Number of
Options Life
--------- ----
$ .25 - $1.00 1,854,475 1 year
$1.01 - $1.25 53,600 1 year
At December 31, 2002, the number of options exercisable was 1,908,075, and
the weighted-average exercise price of those options was $.27.
FASB Interpretation No. 44 provides guidance for applying APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("FIN 44"). It applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status on or after
July 1, 2000, except for provisions related to repricings and the definition of
an employee that apply to awards issued after December 15, 1998. The Company has
evaluated the financial impact of FIN 44 and has determined that the repricing
of employee stock options on October 27, 1999 falls within the guidance of FIN
44. On October 27, 1999, the Company repriced 429,475 stock options to $.25 per
share. On July 1, 2000, the implementation date of FIN 44, 352,823 shares of the
429,475 shares were fully vested (exercisable) and the closing price of the
Company's common stock on such date was $1.63 per share. Beginning on and after
July 1, 2000, the Company is required to record compensation expense on the
repriced vested options only when the market price exceeds $1.63 per share and
only on the amount in excess of $1.63 per share. For the repriced unvested stock
options, the intrinsic value measured at the July 1, 2000 effective date that is
attributable to the remaining vesting period will be recognized over that future
period. The unvested stock options at July 1, 2000 (76,652) were fully vested on
January 1, 2001. On December 31, 2002, the closing price of the Company's common
stock was $.05 per share and accordingly, under FIN 44, no compensation expense
was recorded on the repriced fully vested stock options of July 1, 2000 and on
the repriced unvested stock options of July 1, 2000.
Information regarding all Options and Warrants
Changes in options and warrants outstanding during the years ended
December 31, 2002, 2001 and 2000, and options and warrants exercisable and
shares reserved for issuance at December 31, 2002 are as follows:
F-69
The following table includes all options and warrants including employee
options (which are discussed above).
Price Range Number of
Per Share Shares
----------- ---------
Outstanding at December 31, 1999 $ .25 - $77.90 2,567,032
Granted .56 - 1.50 14,631,279
Terminated .25 - 77.90 (90,975)
-------------- ----------
Outstanding at December 31, 2000 .25 - 48.00 17,107,336
Exercised .25 (2,244)
Terminated .25 - 48.00 (77,938)
-------------- ----------
Outstanding at December 31, .25 - 36.00 17,027,154
Warrants Issued .01 - .01 51,000,000
Terminated .25 - 36.00 (49,510)
-------------- ----------
Outstanding at December 31, 2002 .01 - 1.50 67,977,644
==========
Exercisable:
December 31, 2002 .25 - 1.50 16,977,644
==========
Shares reserved for issuance:
December 31, 2002 67,977,644
==========
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 500,000 shares under a warrant agreement
with GP Strategies. The warrants are priced at $1.00 per share and expire on
March 25, 2004.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 11,635,451 shares under warrant
agreements with the purchasers of a 2000 private offering. The warrants are
priced at $1.50 per share and expire on April 17, 2005.
Options and warrants outstanding and exercisable, and shares reserved for
issuance at December 31, 2002, include 2,934,118 shares under a warrant
agreement to purchase 1,467,059 units. Each unit consists of a share of common
stock and a warrant to purchase an additional share of common stock at a price
of $1.50 per share, exercisable at a price of $.66 per unit. The units were
issued as compensation for services rendered to the Company in the 2000 private
offering and expire on April 17, 2005. Options and warrants outstanding and
shares reserved for issuance, at December 31, 2002, include 51,000,000 shares
under warrant agreements (subject to shareholder approval) with the purchasers
of the convertible notes. The warrants are exercisable at $.01 per share upon
shareholder approval and expire in 2007.
Note 12. Savings Plan
The ISI Savings Plan (the "Savings Plan") permits pre-tax contributions to
the Savings Plan by participants pursuant to Section 401(k) of the Internal
Revenue Code of up to 15% of base compensation. The Company will match up to the
6% level of the participants' eligible contributions. The Savings Plan matches
40% in cash and 60% in the Company's common stock up to the 6% level. For 2002,
the Company's contribution to the Savings Plan, which was fully vested, was
$131,000, consisting of $52,657 in cash and $78,343 in stock. For 2001, the
Company's contribution to the Savings Plan was $176,000,
F-70
consisting of $66,666 in cash and $109,334 in stock. For 2000, the Company's
contribution to the Savings Plan was $124,000, consisting of $43,802 in cash and
$80,198 in stock.
Note 13. Common Stock Compensation and Profit Sharing Plan
Common Stock Compensation Plan
Effective October 1, 1997, the Company adopted the Common Stock
Compensation Plan (the "Stock Compensation Plan"), providing key employees with
the opportunity of receiving the Company's common stock as additional
compensation.
Pursuant to the terms of the Stock Compensation Plan, key employees were
to receive, as additional compensation, a pre-determined amount of the Company's
common stock in three equal installments on October 1, 1998, 1999 and 2000,
provided that the key employees remain in the employ of the Company at each such
installment date. As of October 1, 2000, 1999 and 1998, a deferred compensation
liability of $289,920, $340,821 and $412,344, respectively, was accrued for
these employees based on the common stock market price of October 1, 1997. On
October 1, 2000, 1999 and 1998, the Company paid the compensation in cash in
settlement of the Company's obligation to issue shares of common stock.
Accordingly, cash of $7,414, $2,131, and $25,947, respectively, was paid in
satisfaction of the accrued liability of $289,920, $340,821 and $412,344,
respectively. The difference of $282,506, $338,690, and $386,397 was credited to
additional paid in capital in 2000, 1999 and 1998, respectively.
Profit Sharing Plan
The Company has a Profit Sharing Plan (the "Profit Sharing Plan")
providing key employees and consultants with an opportunity to share in the
profits of the Company. The Profit Sharing Plan is administered by the Company's
Compensation Committee.
Pursuant to the terms of the Profit Sharing Plan, the Compensation
Committee, in its sole discretion, based upon the significance of the employee's
contributions to the operations of the Company, selects certain key employees
and consultants of the Company who are entitled to participate in the Profit
Sharing Plan and determines the extent of their participation. The amount of the
Company's profits available for distribution to the participants (the
"Distribution Pool") is the lesser of (a) 10% of the Company's income before
taxes and profit sharing expense and (b) an amount equal to 100% of the base
salary for such year of all the participants in the Profit Sharing Plan.
The Compensation Committee may require as a condition to participation
that a participant remain in the employ of the Company until the end of the
fiscal year for which payment is to be made. Payments required to be made under
the Profit Sharing Plan must be made within 10 days of the filing of the
Company's tax return. To date, there have been no contributions by the Company
under the Profit Sharing Plan.
Note 14. Related Party Transactions
GP Strategies owns less than 5% of the Company's common stock as of
December 31, 2002. The Company was a party to a management agreement with GP
Strategies, pursuant to which certain legal, financial and administrative
services had been provided by employees of GP Strategies. The management
agreement was terminated on March 27, 2000 (See Note 16).
See Note 16 for information with respect to royalty obligations to GP
Strategies.
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Note 15. Supplemental Statement of Cash Flow Information
The Company paid no income taxes or interest during the three-year period
ended December 31, 2002.
During the years ended December 31, 2002, 2001 and 2000 the following
non-cash financing and investing activities occurred:
2002:
None
2001:
The Company issued 2,000,000 shares, with a guaranteed value of
$1,850,000, of common stock and committed to provide $250,000 of services to be
rendered by the Company to Metacine (see Note 7).
The Company reduced capital in excess of par value and the corresponding
liability by $21,463 for settlement shares sold.
2000:
The Company issued 870,000 shares of common stock as payment related to
accounts payable (see Note 16). The Company credited capital in excess of par
value for forgiveness of $129,886 of debt due GP Strategies.
The Company reduced capital in excess of par value and the corresponding
liability by $382,515 for settlement shares sold.
Note 16. Commitments
The Company obtained human white blood cells used in the manufacture of
ALFERON N Injection from several sources, including the Red Cross pursuant to a
supply agreement dated April 1, 1997 (the "Supply Agreement"). The Company will
not need to purchase more human white blood cells until such time as production
of crude alpha interferon is resumed. Under the terms of the Supply Agreement,
the Company was obligated to purchase a minimum amount of human white blood
cells each month through March 1999 (the "Minimum Purchase Commitment"), with an
aggregate Minimum Purchase Commitment during the period from April 1998 through
March 1999 in excess of $3,000,000. As of November 23, 1998, the Company owed
the Red Cross approximately $1.46 million plus interest at the rate of 6% per
annum accruing from April 1, 1998 (the "Red Cross Liability") for white blood
cells purchased pursuant to the Supply Agreement.
Pursuant to an agreement dated November 23, 1998, the Company granted the
Red Cross a security interest in certain assets to secure the Red Cross
Liability, issued to the Red Cross 300,000 shares of common stock and agreed to
issue additional shares at some future date as requested by the Red Cross to
satisfy any remaining amount of the Red Cross Liability. The Red Cross agreed
that any net proceeds received by it upon sale of such shares would be applied
against the Red Cross Liability and that at such time as the Red Cross Liability
was paid in full, the Minimum Purchase Commitment would be deleted effective
April 1,1998 and any then existing breaches of the Minimum Purchase Commitment
would be waived. In January 1999 the Company granted the Red Cross a security
interest (the "Security Interest") in, among other things, the Company's real
estate, equipment inventory, receivables, and New Jersey net operating loss
carryovers to secure repayment of the Red Cross Liability, and the Red Cross
agreed to forbear from exercising its rights under the Supply Agreement,
including with respect to collecting the Red Cross Liability until June 30, 1999
(which was subsequently extended until December 31, 1999). On December 29, 1999,
the Company, the Red Cross and GP Strategies entered in an agreement pursuant to
which the Red Cross agreed that until September 30, 2000 it would forbear from
exercising its rights under (i) the Supply Agreement, including with respect to
collecting the Red Cross Liability, and (ii) the Security Interest. In
connection with the Asset Sale Transactions, the Company, HEB and the Red Cross
entered into a similar agreement pursuant to which the Red Cross agreed to
forbear from exercising its rights until May 31, 2003 and the Red Cross agreed
to accept HEB common stock with a guaranteed value of $500,000 in full
settlement of all of the Company's obligations to the Red Cross. Under the terms
of such agreement, if HEB does not make such payment, the Red Cross has the
right to sell the Company's real estate.
F-72
During 1999, the Red Cross sold 27,000 of the Settlement Shares and sold
the balance of such shares (273,000 shares) during the first quarter of 2000. As
a result, the net proceeds from the sales of the Settlement Shares, $33,000 in
1999 and $368,000 in 2000, were applied against the liability to the Red Cross.
The remaining liability to the Red Cross included in accounts payable on the
consolidated balance sheet at December 31, 2002 and 2001 was approximately
$1,403,000 and $1,339,000, respectively. On October 30, 2000, the Company issued
an additional 800,000 shares to the Red Cross. The net proceeds from the sale of
such shares by the Red Cross will be applied against the remaining liability of
$1,403,000 owed to the Red Cross. However, there can be no assurance that the
net proceeds from the sale of such shares will be sufficient to extinguish the
remaining liability owed the Red Cross.
Pursuant to an agreement dated March 25, 1999, GP Strategies loaned the
Company $500,000. In return, the Company granted GP Strategies (i) a first
mortgage on the Company's real estate, (ii) a two-year option (which has
expired) to purchase the Company's real estate, provided that the Company has
terminated its operations and the Red Cross Liability has been repaid, and (iii)
a two-year right of first refusal (which has expired) in the event the Company
desires to sell its real estate. In addition, the Company issued GP Strategies
500,000 shares of Common Stock and a five-year warrant to purchase 500,000
shares of Common Stock at a price of $1 per share. The common stock and warrants
issued to GP Strategies were valued at $500,000 and recorded as a financing cost
and amortized over the original period of the GP Strategies Debt in 1999.
Pursuant to the agreement, the Company has issued a note to GP Strategies
representing the GP Strategies Debt, which note was originally due on September
30, 1999 (but extended to June 30, 2001) and bears interest, payable at
maturity, at the rate of 6% per annum. In addition, at that time the Company
negotiated a subordination agreement with the Red Cross pursuant to which the
Red Cross agreed that its lien on the Company's real estate is subordinate to GP
Strategies' lien. On March 27, 2000, the Company and GP Strategies entered into
an agreement pursuant to which (i) the GP Strategies Debt was extended until
June 30, 2001 and (ii) the Management Agreement between the Company and the noteholder ("the
Note"). In addition, the noteholder instituted suit againstGP
Strategies was terminated and all intercompany accounts between the Company onand
GP Strategies (other than the Note in the Circuit Court of the 15th Judicial District in and for Palm Beach
County, Florida, seeking judgment on the note, plus attorneys fees, costs and
expenses; in August 1995, this action was stayed by the Florida Court pending
the outcome of the Pennsylvania action. The noteholder also filed a motion for a
preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offeringGP Strategies Debt) in the amount of $5.8 million,approximately
$130,000 were discharged which motion was grantedrecorded as a credit to capital in November, 1995.excess of
par value. On February 15, 1996,August 23, 2001, the Company reachedand GP Strategies entered into an
agreement pursuant to settle this matter. Termswhich the GP Strategies Debt was extended to March 15,
2002. During 2001, the Company paid GP Strategies $100,000 to reduce the GP
Strategies Debt. In addition, in January 2002, the Company paid GP Strategies
$100,000 to further reduce the GP Strategies Debt. Interest expense accrued to
GP Strategies was $18,000, $27,937 and conditions$22,500 for the years ended December
31,2002, 2001 and 2000, respectively. In connection with the Asset Sale
Transactions, the Company, HEB and GP Strategies entered into a similar
agreement pursuant to which GP Strategies agreed to forbear from exercising its
rights until May 31, 2003 and GP Strategies agreed to accept HEB common stock
with a guaranteed value of $425,000 in full settlement of all the Company's
obligations to GP Strategies. Under the terms of such agreement, if HEB does not
make such payment, GP Strategies has the right to sell the Company's real
estate.
As consideration for the transfer to the Company of certain licenses,
rights and assets upon the formation of the settlement include paymentCompany by GP Strategies, the
Company agreed to pay GP Strategies royalties of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996 and charged to the note
payable, accrued interest and accrued professional fees. Mutual releases were
executed which completed the settlement of the litigation.
The Company is subject to claims and legal actions that arise in the ordinary
course of their business. Management believes that the ultimate liability, if
any,$1,000,000, but such payments
will be made only with respect to these claimsthose years in which the Company has income
before income taxes, and legal actions will be limited to 25% of such income. Through December
31, 2002, the Company has not havegenerated income before taxes and therefore has
not accrued or paid royalties to GP Strategies.
See Notes 5 and 6 for information relating to royalties payable to
Hoffmann and the Partnership, respectively.
F-73
Note 17. Quarterly Financial Data (unaudited)
The following summarizes the Company's unaudited quarterly results for 2002 and
2001.
2002 Quarters First Second Third Fourth
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As Restated(2) As Restated(2) As Restated(2)
Thousands of dollars except per share data