FORM 10-K/A1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NO. 0-27072
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
Common Stock, $.001 par value
Class A Common Stock Redeemable
Purchase Warrant
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Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates at December
31, 1998 was $130,309,910. For purposes of this calculation, it was assumed
that all Common Stock is valued at the closing price of the stock as of March 5,
1999.
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The number of shares of the registrant's Common Stock outstanding as of December
31, 1998 was 26,162,040.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement which will be filed on or before July
15, 1999 with the Securities and Exchange Commission in connection with
Registrant's 1998 annual meeting of stockholders is incorporated by reference
into Part III of this Report as well as certain exhibits filed with the
Registrant's Registration Statement on Form S-1 (No. 33-93314).
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PART I
ITEM 1. BUSINESS
GENERAL
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Hemispherx Biopharma, Inc. ("the Company") is a biopharmaceutical company that
focuses on the development of nucleic acids to enhance the natural anti-viral
defense systems of the human body. The Company's lead product, Ampligen7, is
presently undergoing clinical trials in the United States and Europe for the
treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome (ME/CFS).
In 1998, the Company moved forward in the development of Ampligen7 regulatory
approval and commercial application in the United States and Europe. Some
significant events include:
- - The FDA authorized the expansion of the Myalgic Encephalomyelitis/Chronic
Fatigue Syndrome (ME/CFS) Cost Recovery Treatment Program in the first
quarter of 1998.
- - In early spring 1998, the Company entered into a research collaboration
agreement with R.E.D. Laboratories, a Belgium company dedicated to the
development and commercialization of CFS diagnostics. R.E.D. has developed
a new test, designated REDD, that appears to identify a subset of CFS
patients who are severely ill with ME/CFS disorders. The Company plans to
utilize the test in the United States on a research basis.
- - In February 1998, the Company entered into an agreement with Kimberly Home
Health Care, Inc. d/b/a Olsten Health Services ("Olsten"). This agreement
appoints Olsten as a distributor of products to U.S. patients enrolled in
the ME/CFS cost recovery treatment program (AMP 511). Olsten agreed to
provide initially up to $500,000 of support for other clinical trial
efforts including identification of medical and economic benefits to
patients receiving Ampligen7. The Company agreed to compensate Olsten for
certain services in connection with conducting clinical trials.
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- - In the second quarter of 1998, the Company initiated the recruitment of
clinical investigators and ME/CFS patients to participate in the
confirmatory Phase III confirmatory placebo-controlled clinical study of
Ampligen7 in the treatment of persons suffering from ME/CFS. The Company
has a target of eventually enrolling 230 patients with the severely
debilitating form of ME/CFS. As of August 3, 1998, the Company had begun
enrollment of a significant number of subjects into the pre-clinical or
baseline phase of the study.
- - The Company has entered research agreements with LabCorp., a subsidiary of
Laboratory Corporation of America (NYSE/LH), Workwell Corporation, and
Medical Graphics Corporation (NASD:MGCC) to provide high quality diagnostic
data during the Phase III study. LabCorp will carry out laboratory
diagnostics tests on samples sent from clinical trial sites to its location
in Raritan, NJ. Workwell will monitor treadmill oxygen consumption at each
clinical trial center using systems manufactured by Medical Graphics
Corporation. Testing for a specific biochemical marker (RNase L) will be
done by R.E.D. Laboratories, an affiliated company, in Brussels.
- - A liquid formulation process for Ampligen was initiated at Cook Imaging, a
major U.S.-based facility for preparing large volume parenteral drug
products under GMP ("Good Manufacturing Practice"). This liquid process is
more efficient and allows for greater volume manufacturing production
needed to meet projected requirements. Results with the product liquid
format to date have been encouraging with respect to product stability and
ease of handling. The liquid formulation format also eliminates the need
for a major pharmacy function nearby the clinical treatment site.
- - The Company completed six (6) months of accelerated and long term stability
studies on the liquid formulation product produced by Cook Imaging. These
stability studies on liquid formulated product are required by the FDA. In
December, 1998 the Company started treating ME/CFS patients in the United
States with the liquid formulation.
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- - Incorporation papers were filed and processed in Belgium to incorporate a
wholly owned subsidiary named Hemispherx Biopharma Europe NV/S.A. This
European subsidiary is based in Antwerp to serve the needs of the Company
in pursuing ME/CFS clinical tests, related clinical treatments and new drug
marketing approval in Belgium and other European (European Union)
countries. The Company has engaged the services of several senior
executives and leading medical experts to pursue this task.
- - The Company's foreign subsidiary, Hemispherx Biopharma Europe, sponsored an
international CFS Research Symposium in Rome, Italy in November, 1998. This
meeting focused on new developments in diagnosis and medical management of
CFS. Physicians and Researchers from more than fifteen (15) countries
attended.
- - The Company continued to increase the in-house clinical, regulatory and
biostatistical expertise necessary to direct and support the clinical
programs underway. A Director of Clinical Operations was recruited from a
major multinational, independent clinical research organization to oversee
the Company's clinical activity. Prior to his recruitment, these duties
were performed by the Medical Director with assistance from the clinical
research associate (CRA) staff of the Company and its strategic partner,
Olsten Health Care.
- - R.E.D. Laboratories of Brussels, Belgium reported significant progress in
developing a diagnostic test for ME/CFS. The testing platform is based on
the measurement of an abnormal form of the protein RNase L, an antiviral
enzyme found in the white blood cells of CFS patients. This abnormal enzyme
was first discovered in 1996 by researchers at Temple University who have
been actively collaborating with the Company's scientists for a number of
years. Initial research data indicates a high degree of correlation between
levels of the enzyme and the severity of the disease. These results, along
with treating ME/CFS patients with Ampligen, were discussed in detail at
the American Association of CFS Meeting in Cambridge, Massachusetts,
October, 1998.
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- - Completed and filed a full marketing application for approval in the
European Union in December, 1998.
- - Approved the spin-off of Core Biotech Corp., a wholly owned subsidiary, to
the shareholders. Core Biotech intends to pursue therapeutic projects for
the treatment of various viral diseases of the liver.
Hemispherx Biopharma, Inc. has conducted research in the biopharmaceutical field
for some 25 years primarily working with nucleic acid polymers that have
specifically configured base pairs. The Company's lead compound, Ampligen7, is
a type of double stranded Ribonucleic Acid (RNA). Over the years, the Company
has developed a large body of knowledge in the development and testing of
therapeutic product brand of nucleic acid technologies. Ampligen7 has been
clinically evaluated as an investigational drug in over 350 patients for
different therapeutic indications. The clinical profile that is emerging from
these studies is that the drug has broad-spectrum antiviral and immune
modulatory activity and is generally well tolerated.
Over the years, the Company has secured a significant patent estate consisting
of 24 patents issued in the United States and over 300 international filings.
These patents primarily cover the Company's technology platform that involves
nucleic acid polymers that have specifically configured base pairs. The
Company's policy is to file or license existing patent applications on a
worldwide basis to protect technology and improvements that are considered
important in the development of the Company's business.
Ampligen is being developed clinically for use in treating three anti-viral
indications: myalgic encephalomyelitis, also known as chronic fatigue syndrome
("ME/CFS"), chronic hepatitis B virus ("HBV") infection, and human
immunodeficiency virus ("HIV") associated disorders. Also, the Company has
clinical experience with treating patients with certain cancers. The Company's
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business strategy is designed around seeking the required regulatory approvals
which will allow the progressive introduction of Ampligen for ME/CFS and HIV
followed by HBV in the U.S., Canada, Europe and Japan. Ampligen has received
Orphan Drug designation from the FDA for four indications (HIV, renal cell
carcinoma, chronic fatigue syndrome and invasive malignant melanoma). The
Company is also developing a second generation RNA drug technology, termed
OragenJ compounds, which the Company believes offers the potential for broad
spectrum antiviral activity by oral administration.
The Company is currently conducting several clinical trials to determine the
efficacy of Ampligen7 for the treatment of ME/CFS. A confirmatory Phase III,
randomized, double-blind clinical trial is underway in the United States and a
Phase II/III open-label study is being conducted in Belgium. In addition to the
confirmatory Phase III clinical trial in the United States, the Food and Drug
Administration (FDA) has approved the enrollment of ME/CFS patients in the
confirmatory cost recovery treatment program. Patients enrolled in the cost
recovery treatment program reimburse the Company for the cost of the drug.
The development of the Company's products has required and will continue to
require the commitment of substantial resources to complete 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 may 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 Company expects to continue its research and clinical efforts for the next
several years with significant benefit accruing as a result of certain revenues
expected from various cost recovery treatment programs, notably in Canada,
Belgium and the United States. However, the Company may continue to incur
losses over the next several years due to clinical costs incurred in the
continued development of Ampligen for commercial application. Possible losses
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may fluctuate from quarter to quarter as a result of differences in the timing
of significant expenses incurred and receipt of licensing fees and/or cost
recovery treatment revenues in Belgium, Canada and the United States. The
Company is also pursuing similar programs in other countries, especially within
the European Union where resources have been increased with respect to pursuing
regulatory approvals.
The Company has focused on the treatment of diseases for which adequate
treatment is not available and for which the antiviral and immunostimulatory
properties of Ampligen7 may be beneficial. Such diseases include ME/CFS,
Hepatitis, HIV and certain cancers. In recent years, the understanding of
ME/CFS has grown substantially. The Center for Disease Control (CDC) estimates
that the prevalence rate of this disease in the United States is in excess of
500,000 cases. Other medical researchers were reporting evidence that ME/CFS
was related to viral infection and immune system disorders. These findings led
the Company to focus on pursuing the clinical development of Ampligen7 for
regulatory approval to use in the treatment of those people afflicted with
ME/CFS.
As an emerging biopharmaceutical Company, Hemispherx depends on accessing
external resources for manufacturing, distribution and research & development.
The Company currently has working relationships with Bioclones Proprietary,
Ltd., Cook Imaging, Upjohn/Pharmacia, Hahnemann University, Temple University,
Olsten Health Care, as well as research & development sponsorships or
collaborations with other academic institutions.
PRODUCT DEVELOPMENT
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In the first quarter of 1998, the FDA authorized expansion of the ME/CFS cost
recovery treatment program consisting of an open-label study using Ampligen in
the treatment of patients with severely debilitating ME/CFS. This open
treatment protocol with cost recovery has been ongoing since mid-1997 under the
auspices of the FDA. Under this protocol, the enrolled patients pay for the
Ampligen administered which totals about $7,200 for a 24 week treatment course.
Fifty (50) patients with severe forms of CFS/ME have been authorized for
treatment.
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In the second quarter of 1998, the Company initiated the recruitment of clinical
investigators and ME/CFS patients to participate in the confirmatory Phase III
placebo-controlled clinical study of Ampligen in the treatment of persons
suffering from ME/CFS. This study a multi-center, double-blind,
placebo-controlled clinical trial of the efficacy and safety of Ampligen in
treating patients with severely debilitating ME/CFS. The Company has a target
of eventually enrolling 230 patients with the severely debilitating form of
ME/CFS. In August, 1998, the Company started the enrollment of subjects into
the pre-clinical or baseline phase of the study. As of February, 1999, the
Company has engaged the clinical services of six (6) investigators in various
locations across the United States with more than 56 patients in the baseline or
active treatment phase of the study.
LabCorp., a subsidiary of Laboratory Corporation of America (NYSE/LH), Workwell
Corporation, and Medical Graphics Corporation (NASD:MGCC) have been engaged to
provide high quality diagnostic data during the ME/CFS Phase III study. Test
samples will be sent from clinical trial sites located throughout the United
States to Raritan, NJ for laboratory diagnostics. Workwell will monitor
treadmill oxygen consumption at each clinical trial center using systems
manufactured by Medical Graphics Corporation. R.E.D. Labs will be supplied with
samples for testing for a specific biochemical marker (RNase L). These clinical
research partners will help provide scientifically valid and quality assured
Phase III data.
As of year end, 1998, more than 70 patients were either being treated or in the
follow-up phase of a Belgium ME/CFS cost recovery treatment program. This
program was authorized by the Belgium authorities and initiated in 1994.
The Company has committed to work with R.E.D. Laboratories, a newly formed
Belgian company focused on the development and commercialization of diagnostic
markers for ME/CFS, based on new scientific insights of research teams in
Belgium and France. Because of the multiple symptoms and clinical presentations
of the disease, ME/CFS diagnosis can be time consuming and expensive. It is
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believed the new R.E.D. diagnostic test may identify up to 92% of CFS/ME
patients by recognizing a gene defect caused by the disease. The test may
enable doctors to more quickly identify CFS/ME patients and start immediate
medication to assure a positive medical outcome for the patient as well as a
cost-effective solution for the health-care provider. The Company will work
with R.E.D. Laboratories and various physicians in pursuing this diagnostic
process. The Company owns a minority interest in R.E.D. Laboratories.
The Company has and will continue to evaluate complimentary technology and
businesses for possibly acquiring licensing rights and/or investment.
MANUFACTURING
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A liquid formulation process for Ampligen was initiated at Cook Imaging, a major
U.S.-based facility for preparing large volume parenteral drug products under
GMP ("Good Manufacturing Practice"). This liquid process is more efficient and
allows for greater volume manufacturing production needed to meet projected
requirements. The new process allows the Company to ship ready to use doses
directly from the Company's manufacturing/quality assurance facility in
Rockville, Maryland to various clinical locations around the country. Extensive
testing in various laboratories (under direction of the Company's scientists) of
the ready to use liquid form of Ampligen has revealed it to be stable, without
the use of preservatives, under refrigerated conditions while preserving full
potency. The results of the stability and all bio-equivalency tests on the
ready-to-use liquid form of Ampligen were submitted to FDA during the third
quarter of 1998.
In October, 1998, the Company started treating ME/CFS patients in the United
States with the new ready to use liquid Ampligen dose format. Prior to the
development of the ready to use liquid form, Ampligen was supplied either as a
freeze-dried powder or in a frozen format to the clinical sites where it was
stored in a special frost free freezer. Thereafter, clinical site personnel
(nurses/physicians) were required to thaw, heat and cool the frozen product in a
water bath just prior to drug administration according to a detailed drug
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reconstitution protocol. In the alternative, hospital pharmacies were required
to combine up to 8 small vials each consisting of 50 mg freeze dried powder into
a final dosage unit by use of special sterilized environments including use of a
laminar flow hood. These time-consuming steps are no longer required with the
use of the ready to use liquid format of Ampligen. Thus, the availability of
the ready to use liquid format of Ampligen offers multiple conveniences related
to storage and administration while reducing the chance of potential mistakes
occurring during drug preparation at various locations removed from the
Company's manufacturing facility or from hospital facilities with advanced
capacity to handle parenteral products, including the availability of laminar
flow hoods.
Ribotech, Ltd. currently produces the majority of the biochemicals for the
production of the Company's lyophilized product and has also initiated a program
to produce the liquid dose product. Ribotech announced the completion of their
first pilot run of liquid doses in the third quarter of 1998. The liquid doses
produced in this run are currently undergoing extensive testing. Five lots of
Ampligen were produced in the third quarter by the Company utilizing U.S. based
facilities. The Company used these five lots to produce nearly 1,000 doses of
lyophilized product and over 3,000 doses of liquid product. These doses will be
used in the ME/CFS Cost Recovery Clinical Treatment Programs as well as the
confirmatory Phase III ME/CFS clinical trials. The Company is also actively
evaluating new manufacturing locations in Western and Eastern Europe in order to
provide similar diversity in Ampligen product formats (liquid vs. lyophilized)
similar to its U.S.-based programs.
EUROPE
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Hemispherx Biopharma Europe NV/SA was formed in Belgium as a wholly owned
subsidiary of the Company. This operation is based in Antwerp to serve the
needs of the Company in pursuing ME/CFS clinical trials, related clinical
treatments and new drug marketing approval in Belgium and other European Union
countries. The Company has engaged several European senior executives and
medical experts to pursue these tasks.
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The new drug application was filed in December 1998 for approval of Ampligen for
the treatment of ME/CFS in the European Union. In February, 1999, the Company
was notified that the application has cleared the first stage of regulatory
review by being designated "Complete" by the European Medical Evaluation Agency
(EMEA). This designation indicates that the extensive data and analysis
submitted in support of the application are sufficient for the application to
proceed to the advanced stages of the review process.
The Company has committed itself to a major collaboration with R.E.D.
Laboratories, a newly formed Belgian company focused on the development and
commercialization of diagnostic markers for ME/CFS, based on new scientific
insights of research teams in Belgium and France. The Company owns a minority
interest in R.E.D. Laboratories. It is believed the new R.E.D. diagnostic test
may identify up to 92% of CFS/ME patients by recognizing a gene defect caused by
the disease. The test may enable doctors to quickly identify CFS/ME patients
and start immediate medication to assure a positive medical outcome for the
patient as well as a cost-effective solution for the health-care provider.
MARKETING/DISTRIBUTION
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The Company's marketing strategy 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 expects that, subject to receipt of regulatory approval, Ampligen
will be utilized in three medical arenas: physicians' offices or clinics, the
hospital and the home treatment setting. The Company currently plans to use a
service provider in the home infusion (non-hospital) segment of the U.S. market
to execute direct marketing activities, conduct physical distribution of product
and handle billings and collections. Accordingly, the Company is developing
marketing plans to facilitate the product distribution and medical support for
indications, if and when they are approved, in each arena. The Company believes
that this approach will facilitate the generation of revenues without incurring
the substantial costs associated with a sales force. Furthermore, management
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believes that the approach will enable the Company to retain many options for
future marketing strategies. In February 1998, the Company and Olsten Health
Services ("Olsten") entered into a distribution/specialty agreement for the
distribution of Ampligen for the treatment of ME/CFS patients under treatment
protocols.
In Europe, the Company plans to adopt a country-by-country and, in certain
cases, an indication-by-indication marketing strategy due to the heterogeneity
regulations and alternative distribution systems in these areas. The Company
also plans to adopt an indication-by-indication strategy in Japan. Subject to
receipt of regulatory approval, the Company plans to seek strategic partnering
arrangements with pharmaceutical companies to facilitate product introductions
in these areas. The relative prevalence of people suffering from target
indications for Ampligen varies significantly by geographic region, and the
Company intends to adjust its clinical and marketing planning to reflect the
special needs of each area. In countries in South America, the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories, the Company contemplates marketing its product through its
relationship with Bioclones pursuant to the Bioclones Agreement.
SPIN-OFF OF SUBSIDIARY
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Subject to final approval, the Board of Directors has authorized the
distribution of at least 80% of the issued and outstanding shares of common
stock of Core Biotech Corp. ("Core Biotech"), a wholly-owned subsidiary, to the
Company's shareholders. Core Biotech was incorporated in the State of Delaware
in 1994. The timetable for this spin-off has not been determined.
Core Biotech would use genetic technologies to develop therapeutic products for
the treatment of viral hepatitis diseases. Genetic compounds represent a new
class of pharmaceutical products that are designed to act at the molecular level
for the treatment of viral disease. Hemispherx would license or sublicense to
Core Biotech the technology for the products that will be used by Core Biotech.
The Company believes that the proposed spin-off of Core Biotech would, among
other things, (i) provide Core Biotech with the opportunity to obtain greater
access to capital to finance its business, including research and development
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efforts; (ii) permit Core Biotech to focus exclusively on the development of a
product line that has not received sufficient attention from Hemispherx because
of the other drug development efforts of Hemispherx; (iii) improve the near-term
earnings of Hemispherx by eliminating from the Hemispherx's results of
operations the expenses associated with developing Core Biotech's hepatitis
treatment technologies; (iv) enhance the ability of Core Biotech to attract,
retain and motivate its employees by offering economic incentives and rewards
tied more directly to Core Biotech's performance; (v) ultimately permit the
management teams of Hemispherx and Core Biotech to focus on their respective
core businesses without regard to the corporate objectives and policies of the
other company; and (vi) permit the financial community to focus separately on
the Company and Core Biotech and their respective business opportunities.
The proposed spin-off contemplates one share of Core Biotech common stock for
every six shares of the Company's common stock.
In connection with the proposed spin-off, the Company would enter into certain
agreements with Core Biotech, including, but not limited to, (i) a separation
and distribution agreement, providing for, among other things, the planned
spin-off and the division between us and Core Biotech of certain assets and
liabilities; (ii) a tax allocation agreement, pursuant to which Core Biotech and
the Company will agree to allocate tax liabilities that relate to the planned
spin-off and to periods prior to the spin-off date; (iii) a services agreement,
providing for certain allocations of responsibilities with respect to various
services to be provided by the Company to Core Biotech; (iv) an employee
benefits agreement; (v) a technology license agreement; and (vi) a research and
development agreement. These agreements are in the development stage and no
final determination as to structure has been made. Further, no final
determination has been made with respect to capitalization, pro forma financial
information, management and intercompany transactions. Except for the initial
capitalization of Core Biotech, the transfer of any assets and liabilities would
not be significant. The initial capitalization provided by the Company would be
up to $5,000,000 and the affected earnings per share would be minimal. The
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results of operations of Core Biotech were not significant for the year ended
December 31, 1998. The timetable for the planned spin-off is as soon as
practicable based on financing, staffing, certain market conditions, and final
approval by the Board of Directors.
FINANCING
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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 $9.6 million in research and
development, of which $4.6 million was expended in the year ended December 31,
1998.
As of December 31, 1998, the Company had $13.6 million in cash and short term
investments of which $5 million is earmarked for Core Biotech. Based on its
current operating plan, the Company expects that the remaining $8.6 million plus
anticipated receipt of revenues from the cost recovery treatment protocols and
interest income on unused funds will be sufficient to meet the Company's
operating requirements well into 2000. In addition, the Company expects
proceeds in the form of equity from the exercise of shareholder warrants. In
1998, the Company received $8.8 million in equity from shareholders exercising
warrants. The amount of additional funding required, if any, will depend on the
timing of regulatory approval and commercialization of Ampligen.
Accordingly, the Company may raise substantial additional funds through
additional equity or debt financing, collaborative arrangements with corporate
partners, off balance sheet financing or from other sources in order to complete
the necessary clinical trials and the regulatory approval processes and begin
commercializing its products. Were adequate funds not available from operations
and were the Company not able to secure additional sources of financing on
acceptable terms, the Company's business would be materially adversely affected.
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In September, 1998, the Company raised an aggregate of $2,250,000 in gross
proceeds through two private offerings pursuant to Regulation D of the
Securities Act of 1933, as amended ("Act"), and Rule 506 promulgated thereunder.
All investors represented that they were accredited pursuant to Rule 501 of the
Act. The Company intends to use the proceeds from the offering for general
working capital and operating funds and to advance its various clinical
initiatives, including build-up of inventory and streamlining various aspects of
the overall manufacturing process.
RESEARCH AND DEVELOPMENT/COLLABORATIVE AGREEMENTS
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The Company has formed a strategic alliance with Bioclones Proprietary for
manufacturing and international market development in Africa, Australia, New
Zealand, Tasmania, the United Kingdom, Ireland and certain countries in South
Africa, of Ampligen7 and OragenJ. Bioclones is to pursue regulatory approval in
the areas of its franchise and to conduct phase III Hepatitis B and Hepatitis C
clinical trials in South Africa and Australia.
Bioclones has been given the first right to refusal, subject to pricing, to
manufacture at least one-third of the worldwide sales requirement of Ampligen
and other nucleic acid-derived drugs. Pursuant to this arrangement, the Company
received access to worldwide markets and commercial-scale manufacturing
resources, as well as a $3 million cash payment from Bioclones, a 24.9%
ownership in a company set up by Bioclones to develop and manufacture RNA drugs,
and royalties of 8% on Bioclones nucleic acid-derived drug sales in the licensed
territories.
In the United States, the Company has contracted Olsten Health Care Services to
handle marketing and distribution of Ampligen in the U.S. to patients suffering
from ME/CFS in the cost recovery treatment program. Olsten is one of the
nation's largest home health care companies with over 600 offices nationwide.
Pursuant to the agreement, Olsten will be responsible for marketing,
distribution, billing and collecting. Through this arrangement, Hemispherx
avoids the necessity of incurring significant up-front marketing and
distribution costs.
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The Company acquired a series of patents on OragenJ, potentially an oral broad
spectrum antiviral, through a licensing agreement with Temple University. The
Company was granted an exclusive worldwide license from Temple for the OragenJ
products. Pursuant to the arrangement, the Company is obligated to pay
royalties of 2% to 4% on sales of OragenJ, depending on how much technological
assistance is required of Temple. The Company currently pays minimum royalties
of $30,000 per year to Temple.
COMPETITION
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There are several publicly held companies that place emphasis on nucleic acid
technology. Some are outlined below from publicly available documents filed
with the Securities and Exchange Commission.
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 therapeutic product candidates for treating certain
viral diseases including cytomegalovirus retinitis, HIV and Hepatitis B. Gilead
reports that they have investigational drug products in Phase II clinical trials
for treating Hepatitis B and Phase II/III for treating HIV.
ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIS/NASDAQ). This company,
founded in 1989, has devoted substantially all of its resources to research,
drug discovery and development programs. Isis currently has one product,
Vitravene, a treatment for CMV Retinitis in AIDS patients, which has achieved
limited market acceptance in a small commercial market with significant
competition. Isis reports that most of their resources are being dedicated to
applying molecular biology and medicinal chemistry to discovery and development
of drug candidates based upon antisense technology.
The Company anticipates that it may 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
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products obsolete or noncompetitive prior to the Company's recovering research,
development or commercialization expenses incurred with respect to any such
products.
Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company. In addition,
many of these competitors have significantly greater experience than the Company
in undertaking research, preclinical studies and human clinical trials of new
pharmaceutical products, obtaining FDA and other regulatory approvals, and
manufacturing and marketing such products. Accordingly, the Company's
competitors may succeed in commercializing the products more rapidly or more
effectively than the Company.
GOVERNMENT REGULATION
- ----------------------
Regulation by governmental authorities in the U.S. and foreign countries is and
will be a significant factor in the manufacture and marketing of the Company's
proposed products and in its ongoing research and product development
activities. Most of the Company's proposed products and products of its ongoing
research and product development activities will require regulatory clearances
prior to commercialization. In particular, human new drug products are subject
to rigorous preclinical and clinical testing as a condition of clearances by the
FDA and by similar authorities in foreign countries. The lengthy process of
seeking these approvals, and the ongoing process of compliance with applicable
statutes and regulations, has required and will continue to require the
expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approvals could materially adversely affect the marketing of any products
developed by the Company and its ability to receive product or royalty revenue.
The Company is also 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
18
<PAGE>
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research work. The Company believes that its
Rockville, Maryland manufacturing and quality assurance/control facility is in
substantial compliance with all material regulations applicable to these
activities.
HUMAN RESOURCES
- ----------------
The Company had 45 employees as of February 15, 1999 of which 21 are full time
and 24 are utilized on a part-time basis. Such parties are paid on a per diem
or monthly basis. Twenty-six (26) of the 45 persons are engaged in the
Company's research, development, clinical, manufacturing effort, including five
individuals in Europe. Nineteen (19) perform regulatory, general
administration, data processing, including biostatistics, financial and investor
relations functions. The Company believes that this arrangement provides the
most efficient approach to drug development at this point in time. While the
Company has been successful in attracting skilled and experienced scientific
personnel, there can be no assurance that the Company will be able to attract or
retain the necessary qualified employees and/or consultants in the future.
RECENT DEVELOPMENTS
- --------------------
On February 19, 1999, the Board of Directors authorized the repurchase of up to
200,000 shares of the Company's common stock on the open market or through
private transactions through April 1, 1999. The repurchased shares will
eventually be used for acquisitions or other purposes.
19
<PAGE>
EXECUTIVE OFFICERS
- -------------------
The executive officers of the Company, whose terms will expire at such time
as their successors are elected, are as follows:
<TABLE>
<CAPTION>
Name Age Position Background
- ----------------------------- --- ----------------------- -----------------------------------------
<S> <C> <C> <C>
William A. Carter, M.D., FACP 60 Chairman, Chief HEM Pharmaceuticals Corp. (the
Executive Officer, predecessor company) since 1978. Co-
President inventor of record on more than 200
patents. A leading innovator in the
development of human interferon for a
variety of treatment indications.
Research Development Awardee of NIH
Robert E. Peterson 61 Chief Financial Officer Vice President of Omni Group, Inc.
(business consulting). Formerly VP and
CFO of several major Pepsico Divisions.
David R. Strayer, M.D. 52 Medical Director, Professor of Medicine at Allegheny
Regulatory Affairs University of the Health Sciences.
Formerly Research Associate at NIH.
Carol A. Smith, Ph.D. 46 Director, Manufacturing Virotech International, Inc., '89-91,
and Process Development Scientist/Quality Assurance Officer.
Josephine M. Dolhancryk 35 Treasurer, Assistant Medical/Business Enterprises, '89-90,
Secretary President
20
<PAGE>
Name Age Position Background
- ----------------------------- --- ----------------------- -----------------------------------------
Richard Piani 71 Director Principal Delegate for Industry to the
City of Science and Industry, Paris,
France, a scientific and educational
complex since 1995. Chairman of
Industrielle du Batiment-Morin, a
building materials corporation, from
1986-1993. Professor of International
Strategy at Paris Dauphine University
from 1984-1994. Law degree from Faculte
de Droit, Paris Sorbonne. Business
Administration degree from Ecols des
Hautes Etudes Commerciales, Paris
William Mitchell, M.D., Ph.D. 63 Director Professor of Pathology at Vanderbilt
University School of Medicine. MD from
Vanderbilt University. Ph.D. from Johns
Hopkins University, and Fellowships at
Johns Hopkins University and the
University of Lausanne as an Eleanor
Roosevelt International Cancer Scholar.
Published over 200 papers dealing with
viruses and anti-viral drugs. Consultant
to the National Institutes of Health
including service on the AIDS and Related
Research Review Group. Served as a
director of the Company from 1987 to
1989.
Harris Freedman 65 Vice President for Business consultant for emerging
Strategic Alliances technology companies and private venture
capitalist.
Sharon Will 40 Vice President, Registered sales representative,
Corporate Worldwide Marketing Inc. (a
Communications manufacturer's representative), private
venture capitalist.
21
<PAGE>
Name Age Position Background
- ----------------------------- --- ----------------------- -----------------------------------------
Ransom Etheridge 58 Director Attorney specializing in commercial and
transactional law. A Judicial Remedies
Award Scholar. Served as President of the
Tidewater Arthritis Foundation. Graduate
of Duke University, the Wharton School of
Business Real Estate Investment Analysis
Seminar, and the University of Richmond
School of Law.
</TABLE>
22
<PAGE>
ITEM 2. PROPERTIES
The Company leases and occupies a total of approximately 18,850 square feet of
laboratory and office space in two states. The corporate headquarters in
Philadelphia, Pennsylvania are located in a suite of offices of approximately
15,000 square feet. The pharmacy, packaging, quality assurance and quality
control laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850 square feet,
approximately 2,000 of which are dedicated to the packaging and quality control
product release functions. The Company believes that its Rockville facilities
will meet its production requirements, including sufficient quantities of
Ampligen for planned clinical trials and treatment protocols, through 1999, at
which time it may need to increase its manufacturing capacity either through
third parties or by building or acquiring commercial-scale facilities.
In addition, the Company has entered into the Bioclones Agreement, which
provides the Company with 24.9 % of the capital stock of Ribotech, Ltd to
develop and operate a new manufacturing facility which is financed by Bioclones.
Manufacturing at the pilot facility commenced in 1996. The Company expects that
Ribotech will start construction on a new commercial production facility in
1999, although no assurance can be given that this will occur. The Company has
no obligation to fund this construction.
ITEM 3. LEGAL PROCEEDINGS
On September 14, 1998, VMW, Inc. filed a complaint against the Company in the
United States District Court, Southern Division of New York, The complaint
alleges that the Company failed to fulfill its financial obligations to VMW,
Inc. with respect to a certain letter agreement pertaining to marketing services
rendered. VMW, Inc. claims damages of less than $100,000. The Company
counterclaimed alleging breach of contract by VMW and have demanded damages of
approximately $25,000. This case is in the discovery phase. The Company does
not believe that the complaint will have a material effect on its results of
operations or financial position.
23
<PAGE>
Ell & Co., and the Northern Trust Company, as Trustee of the AT&T Master Pension
Trust filed a complaint against the Company in the Court of Chancery of the
State of Delaware in and for New Castle County on September 23, 1998. This
complaint alleges that the Company breeched its contractual obligations as set
forth in the Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock. The Plaintiff seeks to enforce its rights to
convert 1,500 shares of Series E Preferred Stock into 750,000 shares of freely
traded common stock and to recover damages for its inability to convert the
preferred stock when it requested to do so. The Company does not believe that
the complaint will have a material effect on the results of operations or
financial position of the Company. Although the Company maintains that the
1,500 shares of Series E Preferred Stock had been properly redeemed and,
therefore, the plaintiff was not contractually able to effect a proper
conversion into common shares, the Company agreed in December, 1998 to convert
the plaintiffs preferred stock to common stock. Currently the claim is still in
litigation.
The Company filed a complaint against Manual P. Asensio, Asensio & Company, Inc.
and others in the United States District Court for the Eastern District of
Pennsylvania on September 30, 1998. The Company alleges the unlawful
manipulation and short selling by defendants of the Company's common stock on
the American Stock Exchange on or about September 15, 1998 through the present.
The Company alleges, among other things, that the defendants distributed
materially false information concerning Hemispherx to the public, thereby
damaging the Company and its shareholder equity. Certain defendants have
entered motions to dismiss all or part of the case. The discovery process has
been suspended pending disposition of the dismissal motions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In October, 1997, the Company's Common Stock and Class A Warrants commenced
trading on the American Stock Exchange under the symbols HEB and HEB/ws,
respectively. Simultaneously these securities were delisted from NASDAQ. The
securities had traded on NASDAQ since the IPO in November, 1995.
In July, 1998, the Company's common stock and Class A warrants were listed on
the Berlin Stock Exchange. The shares and warrants trade under the symbols HXB
and HXBA respectively.
The following table sets forth the high and low list prices for the Common Stock
and the Warrant for the periods indicated as reported by the NASDAQ. Such
prices may reflect inter-dealer prices, without retail markup, mark downs or
commissions and may not necessarily represent actual transactions. Beginning
October 1997, the table reflects the high and low trading prices as reported by
the American Stock Exchange.
<TABLE>
<CAPTION>
COMMON STOCK High Low
- ----------------------- ------- -------
<S> <C> <C>
Time Period:
January 1, 1997 through
March 31, 1997 3 9/16 1 25/32
April 1, 1997 through
June 30, 1997 4 5/32 2 15/32
July 1, 1997 through 5 1/8 2 1/2
September 30, 1997
October 1, 1997 through 5 1/2 3 9/16
December 31, 1997
January 1, 1998 through 4 5/16 3 1/8
March 31, 1998
April 1, 1998 through 4 9/16 2 5/8
June 30, 1998
July 1, 1998 through 13 3/16 4 1/16
September 30, 1998
25
<PAGE>
October 1, 1998 through 9 1/4 5 5/8
December 31, 1998
WARRANTS
Time Period:
January 1, 1997 through
March 31, 1997 1 1/8 1/2
April 1, 1997 through
June 30, 1997 1 7/16 13/16
July 1, 1997 through
September 30, 1997 2 29/32
October 1, 1997 through
December 31, 1997 2 5/16 1 1/16
January 1, 1998 through 1 13/16 1 1/8
March 31, 1998
April 1, 1998 through 1 5/8 15/16
June 30, 1998
July 1, 1998 through 8 1/4 1 1/2
September 30, 1998
October 1, 1998 through 5 7/8 2 1/4
December 31, 1998
</TABLE>
As of December 31, 1998 there were approximately 343 holders of record of the
Company's Common Stock. This number was determined from records maintained by
the Company's transfer agent and does not include beneficial owners of the
Company's securities whose securities are held in the names of various dealers
and/or clearing agencies.
As of December 31, 1998, the Company had approximately 5,648,810 Class A
Redeemable Warrants registered and outstanding at an exercise price of $4.00 per
share.
The Company has not recently 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.
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net revenues $ 175,758 $ 2,965,910 $ 32,044 $ 258,715 $ 400,708
Net loss (5,133,051) (1,839,849) (4,554,489) (6,106,860) (7,324,093)
Cash used in operating
activities (1,952,145) (1,939,219) (6,097,906) (4,641,611) (5,751,108)
Capital expenditures (40,000) (3,625) (86,480) (15,477) 150,520
Balance Sheet
Total Assets 1,651,441 12,699,518 6,999,384 11,542,633 16,327,212
Total Debt 8,470,910 4,920,000 - - _
Redeemable Preferred
Stock 3,238,334 - - - _
Common Stockholders
Equity (deficit) (14,629,687) 4,420,785 5,852,994 10,745,422 15,185,300
Net loss per share(1):
Basic (0.44) (0.18) (0.29) (0.35) (0.32)
Diluted (0.44) (0.18) (0.29) (0.35) (0.32)
Shares used in computing net loss per share(1):
Basic 11,536,276 10,341,163 15,718,136 17,275,994 22,724,913
------------- ------------ ------------ ------------ ------------
Diluted 11,536,276 10,341,163 15,718,136 17,275,994 22,724,913
<FN>
(1) See Note 2(g) of Notes to Consolidated Financial Statements
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, which are included herein.
27
<PAGE>
BACKGROUND
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.
Nucleic acid pharmaceuticals represent a new class of potential products that
are designed to act at the molecular level for the treatment of human disease.
One form of nucleic acids, termed ribonucleic acids "RNAs", are
naturally-occurring informational molecules which orchestrate a cell's behavior
and which regulate the action of groups of cells, such as immune cells.
Evidence from self-limited viral infections suggests that RNA plays a
significant role in the ability of a host to overcome viral infection more
rapidly and effectively.
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 four subsidiaries--BioPro Corp., BioAegean Corp. and Core
BioTech Corp., all of which were incorporated in Delaware in 1994. In 1998, the
Company incorporated Hemispherx Biopharma-Europe NV/SA in Belgium.
The Company has reported net income 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 consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its four wholly-owned subsidiaries, BioPro Corp.,
BioAegean Corp., Core BioTech Corp. and Hemispherx Biopharma-Europe NV/SA. The
U.S. subsidiaries were incorporated in September 1994 for the purpose of
developing technology for ultimate sale into certain nonpharmaceutical specialty
consumer markets. The European subsidiary was formed for the purpose of serving
the Company's needs with respect to pursuing clinical trials and regulatory
approval in the European Union. All significant intercompany balances and
transactions have been eliminated in consolidation.
28
<PAGE>
The Company expects to continue its research and clinical efforts for the next
several years with some benefit of certain revenues from cost recovery treatment
programs, notably in Belgium, Canada and the U.SBeginning in 1993, limited
revenues were initiated in Belgium from sales under the cost recovery provision
for conducting treatment clinical tests in ME/CFS; including the United States
these sales were $400,708 in 1998. The Company expects to continue incurring
losses over the next several years due to clinical costs which are only
partially offset by revenues and potential licensing fees. Such losses may
fluctuate from quarter to quarter as a result of differences in the timing of
significant expenses incurred and receipt of licensing fees and/or revenues.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 VS. 1997
The Company reported a loss of $7,324,093 in 1998 versus a loss of $6,106,860 in
1997. Several factors contributed to the increased loss of $1,217,233 in 1998.
Revenues increased by $141,993 in 1998 due to the increased enrollment of
patients
in the cost recovery treatment programs being conducted in Belgium, Canada and
the United States.
Research and development costs increased $1,386,860 in 1998 due primarily to
increased spending to start up the Phase III ME/CFS clinical trial in the United
States. In addition, the Company built up the inventory of Ampligen raw
materials and finished goods in anticipation of the drug needs to support the
Phase III clinical trial. All costs incurred were part of the Company's plan to
enhance the clinical data required to support the eventual full marketing
application in the United States and European Union.
General and administration expenses totaling $2,957,831 in 1998 increased
$762,886 over the prior year. Litigation issues that came up in 1998 caused an
increase in legal fees of approximately $300,000. Preparation and filing of the
European Union new drug application caused consultant and related expenses to
increase a total of $109,784, public relations/shareholder communications
29
<PAGE>
expense increased by approximately $200,000 as the Company responded to
unfounded charges brought forth by short sellers, and administrative expenses
supporting clinical trials increased $69,000.
Consulting stock compensation expense of $794,797 in 1998 relates to the stock
value of warrants granted to consultants engaged to assist the Company on
various financial, stock market and other matters.
Preferred stock conversion expense of $1,200,000 in 1997 primarily resulted from
the inducement to effect the early redemption of the Series D Preferred Stock.
The Company gave the Preferred Stockholder 200,000 shares of common stock with a
guaranteed sales price of $6 per share.
Interest income was $590,085 in 1998 versus $267,291 in 1997. While overall
short-term interest rates were lower than those experienced in 1997, the amount
of unused funds available for short-term investing was greater, causing the
increase in interest income.
YEARS ENDED DECEMBER 31, 1997 VS. 1996
The Company reported a loss of $6,106,860 in 1997 versus a loss of $4,554,489 in
1996. Several factors contributed to the increased loss of $1,552,371 in 1997,
primarily a non-operating preferred stock conversion expense (described below)
of $1,200,000.
Revenues increased by $226,671 in 1997 due to the increased enrollment of
patients in the cost recovery treatment, clinical programs being conducted in
Belgium, Canada and the United States.
Research and development costs increased $1,273,071 in 1997 due primarily to
increased efforts in conducting the pre-clinical toxicity studies, cost
associated with initiation of the Canadian, Belgium and U.S. clinical cost
recovery treatment programs and the HIV clinical trials being conducted in the
U.S. All costs were part of an overall plan in the pursuit of clinical data to
support an eventual full marketing application in the United States and European
Union.
30
<PAGE>
General and administrative expenses in 1997 decreased by $828,645. General and
administrative expenses in 1996 included a one time gain in the amount of
$318,757 resulting from the forgiveness of certain lease obligations in
connection with the restructuring of the Company's principal office lease.
Excluding this one time gain, general and administrative expenses in 1997
decreased by $1,147,402. This decrease is primarily due to lower legal and
consulting fees, and reduction of various other administrative expenses.
Preferred stock conversion expense of $1,200,000 primarily resulted from the
inducement to effect the early redemption of the Series D Preferred Stock. The
Company gave the Preferred Stockholder 200,000 shares of common stock with a
guaranteed sales price of $6 per share.
Interest Income decreased $72,093 in 1997 compared to 1996 due to lower cash and
cash equivalents available for short term investments during part of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents were $12,025,073 as of December 31, 1998. In
addition, the Company had $1,591,378 in short term investments as of December
31, 1998. Total funds available to the Company at year end 1998 increased
$3,649,327 from year end 1997. This increase reflects the effect of proceeds
realized from the private placement of equity and the exercise of stock warrants
less net cash used in operating and related activities.
New equity financing in 1998 include the private placement of common stock for
an aggregate of $2,250,000 in net proceeds. Certain warrantholders exercised
their stock warrants, which generated an additional $8,812,254 in equity
proceeds to the Company.
The proposed spin-off of the wholly owned subsidiary, Core Biotech Corp., may
require an investment by the Company in the amount of $5,000,000. These funds
would be used by Core Biotech to pursue the development of Ampligen for the
treatment of viral diseases.
31
<PAGE>
The remaining funds available as of December 31, 1998 plus the anticipated
interest income on short term investments, revenues from product sales in the
United States, Canada and Belgium cost recovery clinical trials and proceeds
from the exercise of shareholder warrants should meet the Company's cash needs
well into the year 2000. The Company expects to continue its research and
clinical efforts for the next several years and may seek to access the equity
market whenever conditions are favorable, even if the Company does not have an
immediate need for additional capital.
YEAR 2000 COMPLIANCE
The Company is dependent upon computers to operate the business and therefore is
exposed to Year 2000 problems. In the spring of 1998, management initiated a
Y2K compliance program with the following objectives:
(a) updating and/or replacing aging hardware;
(b) establishing a new platform for data bases; and
(c) assuring company-wide Y2K compliance.
With the assistance of outside consultants, the Company has identified that the
computer systems used for clinical and manufacturing purposes are not Y2K
compliant. In order to make these systems compliant, the Company elected to
replace the computer systems. Management expects to have all computers and
systems Y2K compliant by May 15, 1999 at costs estimated to be between $150,000
and $200,000.
The Company's contingency plans are not complete at this time. We are confident
that our new computers and software will be online by May 15, 1999. Some
thought is being given to outsourcing the computer tasks as a contingency plan.
The Company is looking into suppliers that could provide this service. This
approach, if necessary, would be expensive.
Risks
- -----
In a worst case scenario, the Company would experience delays in accessing data
on patients enrolled in clinical trials. These delays could slow down
regulatory compliance and commercial approval of Ampligen by the Food and Drug
32
<PAGE>
Administration. Our management of Ampligen production and inventories would be
slow and time consuming, which could delay shipments of Ampligen for clinical
trials. Our Y2K program is expected to significantly reduce our level of
uncertainty about the Y2K problem and, in particular, about the Y2K compliance
and readiness of our material external agents. We believe that, with the
implementation of new business systems and completion of our Y2K program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated balance sheets as of December 31, 1997 and 1998,
consolidated statements of operations, changes in stockholder's equity (deficit)
and comprehensive loss and cash flows for each of the years in the three year
period ended December 31, 1998, together with the report of KPMG LLP,
independent public accountants are included elsewhere herein. Reference is made
to the "Index to Financial statements and Financial Statement Schedule" on page
F-1 which follows page 28.
ITEM 9. CHANGES IN THE DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
information under the caption "Management" contained in the Company's definitive
Proxy Statement which will be filed with the Securities and Exchange Commission
on or before July 15, 1999 in connection with the solicitation of proxies for
the Company's 1999 Annual Meeting of Stockholders scheduled to be held on or
about July 15, 1999 (the "Proxy Statement").
33
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" contained in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information under the caption "Certain Transactions" contained in the Proxy
Statement.
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1)(2)Financial Statements and Schedules - See index to financial statements
on page 29 (F-1) of this Annual Report.
(a)(3) Exhibits - See exhibit index below.
(b) The Company has not filed any reports on Form 8K during the year ended
December 31, 1998.
(c) The following exhibits were filed with the Securities and Exchange
Commission as exhibits to the Company's Form S-1 Registration
Statement (No. 33-93314) or amendments thereto and are hereby
incorporated by reference. Exhibits marked with a star are filed
herewith:
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation of Registrant, as
amended, along with Certificates of Designations
* 3.1.1 Series E Preferred Stock
3.2 By-laws of Registrant, as amended
4.1 Specimen certificate representing Registrant's Common Stock
4.2 Form of Class A Redeemable Warrant Certificate
4.3 Form of Underwriter's Unit Option Purchase Agreement
4.4 Form of Class A Redeemable Warrant Agreement with Continental Stock
Transfer and Trust Company
10.1 1990 Stock Option Plan
10.2 1992 Stock Option Plan
10.3 1993 Employee Stock Purchase Plan
10.4 Form of Confidentiality, Invention and Non-Compete Agreement
10.5 Form of Clinical Research Agreement
10.6 Form of Collaboration Agreement
10.7 Amended and Restated Employment Agreement by and between the
Registrant and Dr. William A. Carter, dated as of July 1, 1993
10.8 Employment Agreement by and between the Registrant and Harris
Freedman, dated August 1, 1994
10.9 Employment Agreement by and between the Registrant and Sharon Will,
dated August 1, 1994
10.10 License Agreement by and between the Registrant and The Johns Hopkins
University, dated December 31, 1980
10.11 Technology Transfer, Patent License and Supply Agreement by and
between the Registrant, Pharmacia LKB Biotechnology Inc., Pharmacia
P-L Biochemicals Inc. and E.I. du Pont de Nemours and Company,
dated November 24, 1987
10.12 Pharmaceutical Use Agreement, by and between the Registrant and Temple
University, dated August 3, 1988
10.13 Assignment and Research Support Agreement by and between the
Registrant, Hahnemann University and Dr. David Strayer, Dr.
lsadore Brodsky and Dr. David Gillespie, dated June 30, 1989
10.14 Lease Agreement between the Registrant and Red Gate Limited
Partnership, dated November 1, 1989, relating to the Registrant's
Rockville, Maryland facility
35
<PAGE>
10.15 Agreement between the Registrant and Bioclones (Proprietary) Limited
10.16 Amendment, dated August 3, 1995, to Agreement between the Registrant
and Bioclones (Proprietary) Limited (contained in Exhibit (10.46)
21 Subsidiaries of the Registrant
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
By: /S/ William A. Carter, M.D.
-------------------------------
William A. Carter, M.D.
Chief Executive Officer
March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ William A. Carter Chairman of the Board, Chief Executive March 30,1999
- ----------------------------------
William A. Carter, M.D. Officer and Director
/S/ Richard Piani Director March 30, 1999
- ----------------------------------
Richard Piani
/S/ Robert E. Peterson Chief Financial Officer March 30, 1999
- ----------------------------------
Robert E. Peterson
/S/ Ransom Etheridge Secretary And Director March 30, 1999
- ----------------------------------
Ransom Etheridge
/S/ William Mitchell Director March 30, 1999
- ----------------------------------
William Mitchell, M.D., Ph.D.
/S/ Josephine Dolhancryk Assistant Secretary and Treasurer March 30, 1999
- ----------------------------------
Josephine Dolhancryk
</TABLE>
37
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report. . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1997 and 1998 . F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1998. . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) and Comprehensive Loss for each of the years
in the three-year period ended December 31, 1998. . . . . . F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998. . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Hemispherx Biopharma, Inc.:
We have audited the accompanying consolidated balance sheets of
Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, changes in stockholders'
equity and comprehensive loss and cash flows for each of the years in the
three-year period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
February 19, 1999
Philadelphia, Pennsylvania
F-2
<PAGE>
<TABLE>
<CAPTION>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
December 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . $ 8,965,714 $ 12,025,073
Short term investments (Note 3). . . . . . 1,001,410 1,591,378
Accounts receivable. . . . . . . . . . . . 32,408 56,500
Prepaid expenses and
other current assets . . . . . . . . . . 66,618 56,214
------------- -------------
Total current assets . . . . . . . . . . 10,066,150 13,729,165
Property and equipment, net . . . . . . . . 70,637 181,724
Patent and trademarks rights, net . . . . . 1,387,523 1,356,139
Investments in R.E.D. Laboratories (Note 2) - 1,038,000
Security deposits . . . . . . . . . . . . . 18,323 22,184
------------- -------------
Total assets . . . . . . . . . . . . . . $ 11,542,633 $ 16,327,212
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . $ 465,166 $ 802,538
Accrued expenses (Note 5). . . . . . . . . 332,045 339,374
------------- -------------
Total current liabilities. . . . . . . . 797,211 1,141,912
Commitments and contingencies
(Notes 6, 8, 10, 11 and 13)
Stockholders' equity
(Notes 6 and 7):
Preferred stock . . . . . . . . . . . . . 37 --
Common stock. . . . . . . . . . . . . . . 21,042 26,162
Additional paid-in capital. . . . . . . . 65,255,571 78,059,650
Deferred compensation . . . . . . . . . . (137,132) (1,184,830)
Accumulated other comprehensive
gain(loss) (Note 2j) . . . . . . . . . . (2,183) 324
Accumulated deficit . . . . . . . . . . . (54,391,913) (61,716,006)
------------- -------------
Total stockholders' equity . . . . . . . 10,745,422 15,185,300
------------- -------------
Total liabilities and
stockholders' equity. . . . . . . . . . $ 11,542,633 $ 16,327,212
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Research and development . . . . . . . $ 32,044 $ 258,715 400,708
------------ ------------ ------------
Total revenues . . . . . . . . . . 32,044 258,715 400,708
Costs and expenses:
Research and development . . . . . . . 1,902,327 3,175,398 4,562,258
General and
administrative (Note 11) . . . . . 3,023,590 2,194,945 2,957,831
Preferred stock conversion expense . . - 1,200,000 -
Consulting stock compensation expense. - 62,523 794,797
------------ ------------ ------------
Total cost and expenses. . . . . . 4,925,917 6,632,866 8,314,886
Interest and other income . . . . . . . 339,384 267,291 590,085
------------ ------------ ------------
Net loss . . . . . . . . . . . . . $(4,554,489) $(6,106,860) $(7,324,093)
============ ============ ============
Basic loss per share. . . . . . . . . . $ (.29) (.35) (.32)
============ ============ ============
Weighted average shares
outstanding. . . . . . . . . . . . 15,718,136 17,275,994 22,724,913
============ ============ ============
Diluted loss per share. . . . . . . . . $ (.29) (.35) (.32)
============ ============ ============
Weighted average common and dilutive
equivalent shares outstanding. . . 15,718,136 17,275,994 22,724,913
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity(Deficit) and Comprehensive Loss
For each of the years in the three-year period ended December 31, 1998
PREFERRED STOCK COMMON STOCK PREFERRED COMMON STOCK ADDITIONAL PAID-IN
SHARES SHARES STOCK .001 PAR VALUE CAPITAL
---------------- ------------ ----------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . . . . . . - 15,581,592 $ - $ 15,581 $ 47,949,530
Warrants Exercised . . . . . . . . . . . . . . - 202,083 - 202 100,839
Preferred Stock Issued . . . . . . . . . . . . 6,000 - 60 - 5,395,825
Preferred Stock Converted. . . . . . . . . . . (1,000) 376,530 (10) 377 (367)
Stock Option Compensation. . . . . . . . . . . - - - - 634,344
Total Comprehensive Loss . . . . . . . . . . . - - - - -
Preferred Dividends. . . . . . . . . . . . . . - - - - -
---------------- ------------ ----------- --------------- --------------------
BALANCE AT DECEMBER 31, 1996 . . . . . . . . . 5,000 16,160,205 50 16,160 54,080,171
Stock conversion costs . . . . . . . . . . . . - 200,000 - 200 1,199,800
Payout of stock guarantees . . . . . . . . . . - - - - (109,712)
Stock compensation, net. . . . . . . . . . . . - - - - 199,655
Debt conversion. . . . . . . . . . . . . . . . - - - - 55,000
Preferred stock redeemed . . . . . . . . . . . (5,000) - (50) - (4,999,950)
Issuance of preferred stock certificates . . . 5,000 - 50 - 4,834,873
Preferred dividends forgiven . . . . . . . . . - - - - 171,775
Preferred stock converted. . . . . . . . . . . (1,350) 675,000 (13) 675 (662)
Warrants and options exercised . . . . . . . . - 199,067 - 199 424,916
Issuance of common stock, net of issuance cost - 3,808,334 - 3,808 9,399,705
Total Comprehensive loss . . . . . . . . . . . - - - - -
Preferred Dividends. . . . . . . . . . . . . . - - - - -
---------------- ------------ ----------- --------------- --------------------
BALANCE AT DECEMBER 31, 1997 . . . . . . . . . 3,650 21,042,606 37 21,042 65,255,571
Common stock issued. . . . . . . . . . . . . . - 3,194,434 - 3,195 11,059,059
Preferred stock converted. . . . . . . . . . . (3,650) 1,825,000 (37) 1,825 (1,788)
Total Comprehensive loss . . . . . . . . . . . - - - - -
Issuance of Stock Guarantees . . . . . . . . . 100,000 100 (100)
Payout of stock guarantees . . . . . . . . . . - - - - (79,587)
Stock issue costs. . . . . . . . . . . . . . . - - - - (16,000)
Stock compensation . . . . . . . . . . . . . . - - - - 1,842,495
---------------- ------------ ----------- --------------- --------------------
BALANCE AT DECEMBER 31, 1998 . . . . . . . . . - 26,162,040 - $ 26,162 $ 78,059,650
================ ============ =========== =============== ====================
DEFERRED ACCUMULATED OTHER ACCUMULATED TOTAL STOCKHOLDERS
COMPENSATION COMPREHENSIVE INCOME DEFICIT EQUITY (DEFICIT)
-------------- ---------------------- ------------- --------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . . . . . . - - $(43,544,326) $ 4,420,785
Warrants Exercised . . . . . . . . . . . . . . - - - 101,041
Preferred Stock Issued . . . . . . . . . . . . - - - 5,395,885
Preferred Stock Converted. . . . . . . . . . . - - - -
Stock Option Compensation. . . . . . . . . . . - - - 634,344
Total Comprehensive Loss . . . . . . . . . . . - - (4,554,489) (4,554,489)
Preferred Dividends. . . . . . . . . . . . . . - - (144,572) (144,572)
-------------- ---------------------- ------------- --------------------
BALANCE AT DECEMBER 31, 1996 . . . . . . . . . - - (48,243,387) 5,852,994
Stock conversion costs . . . . . . . . . . . . - - - 1,200,000
Payout of stock guarantees . . . . . . . . . . - - - (109,712)
Stock compensation, net. . . . . . . . . . . . (137,132) - - 62,523
Debt conversion. . . . . . . . . . . . . . . . - - - 55,000
Preferred stock redeemed . . . . . . . . . . . - - - (5,000,000)
Issuance of preferred stock certificates . . . - - - 4,834,923
Preferred dividends forgiven . . . . . . . . . - - - 171,775
Preferred stock converted. . . . . . . . . . . - - - -
Warrants and options exercised . . . . . . . . - - - 425,115
Issuance of common stock, net of issuance cost - - - 9,403,513
Total Comprehensive loss . . . . . . . . . . . - (2,183) (6,106,860) (6,109,043)
Preferred Dividends. . . . . . . . . . . . . . - - (41,666) (41,666)
-------------- ---------------------- ------------- --------------------
BALANCE AT DECEMBER 31, 1997 . . . . . . . . . (137,132) (2,183) (54,391,913) 10,745,422
Common stock issued. . . . . . . . . . . . . . - - - 11,062,254
Preferred stock converted. . . . . . . . . . . - - - -
Total Comprehensive loss . . . . . . . . . . . - 2,507 (7,324,093) (7,321,586)
Issuance of Stock Guarantees
Payout of stock guarantees . . . . . . . . . . - - - (79,587)
Stock issue costs. . . . . . . . . . . . . . . - - - (16,000)
Stock compensation . . . . . . . . . . . . . . (1,047,698) - - 794,797
-------------- ---------------------- ------------- --------------------
BALANCE AT DECEMBER 31, 1998 . . . . . . . . . $ (1,184,830) $ 324 $(61,716,006) $ 15,185,300
============== ====================== ============= ====================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . (4,554,489) $(6,106,860) (7,324,093)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property
and equipment. . . . . . . . . . . . . 56,958 28,315 39,433
Amortization of patent rights . . . . . 132,091 424,065 309,704
Stock conversion costs. . . . . . . . . - 1,200,000 -
Consulting stock compensation expense . 634,344 62,523 794,797
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . - (32,408) (24,092)
Prepaid expenses
and other current assets . . . . . . (42,599) 38,723 10,404
Accounts payable . . . . . . . . . . . (497,559) (77,912) 337,372
Accrued expenses . . . . . . . . . . . (1,844,893) (78,345) 7,329
Security deposits. . . . . . . . . . . 18,241 10,000 (3,861)
------------ ------------ ------------
Net cash used in
operating activities . . . . . . . . (6,097,906) (4,531,899) (5,853,007)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment . . . (86,480) (15,477) (150,520)
Additions to patent rights . . . . . . . (389,815) (308,772) (278,320)
Maturity of short term investments . . . - - 1,003,593
Purchase of short term investments . . . - (1,003,593) (1,591,054)
Investment in R.E.D. Laboratories. . . . - - (1,038,000)
------------ ------------ ------------
Net cash used in investing
activities . . . . . . . . $ (476,295) $(1,327,842) $(2,054,301)
------------ ------------ ------------
</TABLE>
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
December 31,
---------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of
preferred stock. . . . . . . . $ 5,395,885 $ 4,834,923 $ -
Payments on stockholder notes . . . . . (4,920,000) - -
Preferred stock redeemed. . . . . . . . - (5,000,000) -
Proceeds from issuance of
common stock, net. . . . . . . - 9,395,699 2,234,000
Repayment of stock guarantee. . . . . . - (109,712) (79,587)
Proceeds from exercise of
stock warrants . . . . . . . . 101,040 425,116 8,812,254
Dividends paid on preferred stock . . . (14,462) - -
------------ ------------ ------------
Net cash provided by
financing activities . . . . . . . 562,463 9,546,026 10,966,667
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . (6,011,738) 3,686,285 3,059,359
Cash and cash equivalents at
beginning of year. . . . . . . 11,291,167 5,279,429 8,965,714
------------ ------------ ------------
Cash and cash equivalents
at end of year . . . . . . $ 5,279,429 $ 8,965,714 $12,025,073
------------ ------------ ------------
Supplemental disclosures of
cash flow information:
Cash paid during the year
for interest. . . . . . $ 3,999 $ 6,700 $ -
------------ ------------ ------------
Supplemental disclosure of
noncash investing activities:
Preferred stock to equity conversion. . $ 899,314 $ - $ -
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(1) BUSINESS
Hemispherx BioPharma, Inc. and subsidiaries (the Company) is a pharmaceutical
company using nucleic acid technologies to develop therapeutic products for the
treatment of viral diseases and certain cancers. The Company's drug technology
uses specially-configured ribonucleic acid (RNA). The Company's double-stranded
RNA drug product, trademarked Ampligen, is in human clinical development for
various therapeutic indications. The efficacy and safety of Ampligen is being
developed clinically for three anti-viral indications: myalgic
encephalomyelitis, also known as chronic fatigue syndrome (ME/CFS), human
immunodeficiency virus associated disorders, and chronic hepatitis B virus
infection. The Company also has clinical experience with Ampligen in patients
with certain cancers including renal cell carcinoma (kidney cancer) and
metastatic malignant melanoma.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September
1994, and Hemispherx Biopharma-Europe which was incorporated in August 1998.
All significant intercompany balances and transactions have been eliminated in
consolidation.
In November 7, 1995, the Company completed an initial public offering (IPO) of
5,312,900 units of Hemispherx BioPharma, Inc. resulting in net proceeds of
approximately $15.8 million. Each unit consists of one share of the Company's
Common Stock and one Class A Redeemable Warrant, exercisable for one share of
Common Stock at $4.00 per share. These Class A Redeemable Warrants are subject
to redemption by the Company beginning November 2, 1997 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
granted an option to purchase 462,000 units at $5.775 per unit.
On May 1, 1997, the Company received permission from the U.S. Food and Drug
Administration (FDA) to recover costs from Chronic Fatigue Syndrome (CFS)
patients in the Company's AMP-511 open-label treatment protocol. The cost of
Ampligen to the patient is $2,100 for the first eight weeks of treatment and
$2,400 for each additional eight-week period thereafter. Forty ME/CFS patients
were enrolled under this treatment protocol at various clinical centers in the
U.S.
In the second quarter of 1998, the Company initiated the recruitment of clinical
investigator and ME/CFS patients to participate in the confirmatory Phase III
placebo-controlled clinical study of Ampligen7 in the treatment of persons
suffering from ME/CFS. The Company has a target of eventually enrolling 230
patients with the severely debilitating form of ME/CFS. In August, 1998, the
Company started enrollment of patients into the pre-clinical or baseline phase
of the study.
In December 1998, the Board of Directors authorized the spin-off of Core
Biotech, Inc., a wholly owned subsidiary to its shareholders in a tax free
transaction. The timetable for this spin-off has not been determined. Core
Biotech Corp. would use genetic technologies to develop therapeutic products for
F-8
<PAGE>
the treatment of viral hepatitis diseases. The spin-off would allow
shareholders to realize value for an asset that the Company believes is not
currently being appropriately valued. No final determination has been made with
respect to capitalization, pro forma financial information, management or
intercompany transactions. The Company is considering the funding of this
spin-off for up to $5 million. The transfer of any other assets and liabilities
would not be significant. The results of operations for Core Biotech were not
significant for the year ended December 31, 1998. The timetable for the planned
spin-off is as soon as practical based on financing, staffing, certain market
conditions, and final approval by the Board of Directors.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and Cash Equivalents
Cash equivalents consist of money market certificates and overnight repurchase
agreements collateralized by money market securities with original maturities of
less than three months, with both a cost and fair value of $8,965,714 and
$12,025,073 at December 31, 1997 and 1998, respectively.
(b) Investments
The Company classifies investments with original maturities of three months or
less as cash equivalents. Investments with original maturities of more than
three months are considered available for sale. The investments classified as
available for sale are U.S. Treasury notes and are carried at estimated fair
value with unrealized gains and losses recorded as a component of shareholders'
equity.
In 1998, the Company acquired 3.3% of the issued and outstanding common stock of
R.E.D. Laboratories at a cost of $1,038,000. R.E.D. Laboratories is developing a
diagnostic test for the ME/CFS disease. Such investment is accounted for on the
cost basis of accounting. The Company and R.E.D. Laboratories are working
together in pursuing a more precise method to diagnose Chronic Fatigue Syndrome.
This collaboration includes working with physicians and patients in the United
States and Europe. The Company has no financial obligation for this effort.
(c) Property and Equipment
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Furniture, fixtures, and equipment $640,290 $767,271
Leasehold improvements 61,576 85,115
-------- --------
Total property and equipment 701,866 852,386
Less accumulated depreciation 631,229 670,662
-------- --------
Property and equipment, net $ 70,637 $181,724
======== ========
</TABLE>
F-9
<PAGE>
Property and equipment consist of furniture, fixtures, office equipment, and
leasehold improvements recorded at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
respective assets, ranging from five to seven years.
Recoverability of assets 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.
(d) Patent Rights
Patents are stated at cost (primarily legal fees) and are amortized using the
straight line method over the life of the assets, generally 10 years. The
Company reviews its patents and trademarks periodically to determine whether
they have continuing value. Such review includes an analysis of the patent and
trademark's ultimate revenue and profitability potential on an undiscounted cash
flow basis to support the realizability of its respective capitalized cost. In
addition, management's review addresses whether the patent continues to fit into
the Company's strategic business plans. During the years ended December 31, 1997
and 1998, the Company decided not to pursue the technology in certain countries
for strategic reasons and has recorded $300,253 and $120,459 respectively,
relating to the expense of writing off these patents as a charge to research and
development. Accumulated amortization as of December 31, 1997 and 1998 is
$1,116,726 and $1,305,971, respectively. In addition the Company wrote off
$240,743 of fully amortized patents and trademarks during 1996.
(e) Investment in Unconsolidated Affiliates
Investments in unconsolidated affiliates are accounted for utilizing the equity
method of accounting reflecting in the investment account any initial investment
plus the Company's share of earnings and losses from date of acquisition.
Ribotech, Ltd. has had net losses since inception and the Company does not share
in those losses in accordance with the licensing agreement defined in Note 11.
The net investment in Ribotech is zero as of December 31, 1997 and 1998. Any
losses incurred by Ribotech are not recorded by the Company as the basis is zero
and the Company is not obligated to fund such losses.
(f) Revenue
Revenue is recognized immediately for nonrefundable license fees when agreement
terms require no additional performance with respect to such on the part of the
Company. Revenue from the sale of Ampligen under cost recovery clinical
treatment protocols approved by the FDA are recognized when such product is
invoiced to the patient. Revenue related to the sale of Ampligen were $32,044,
$258,715 and $400,708 for 1996, 1997 and 1998 respectively.
(g) Net Loss Per Share
Basic net loss per share is computed using the weighted average number of shares
F-10
<PAGE>
of common stock outstanding during the period. Diluted net loss per share is
computed using the weighted average number of shares of common and diluted
potential shares outstanding during the period. Potential common shares consist
of stock options and warrants using the treasury stock method and are excluded
if their effect is antidilutive.
(h) Accounting for Income taxes
Deferred income tax assets and liabilities are determined based on differences
between the financial statement reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The measurement of
deferred income tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits which are not expected to be realized. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in the period that such tax rate changes are enacted.
(i) Sales of Subsidiary Stock
The Company intends to account for any sales of its subsidiaries' stock as
capital transactions. However, as of December 31, 1997 and 1998, the Company
owned 100% of each subsidiaries stock. Any sales of subsidiary stock to a third
party would represent a minority ownership in the specific subsidiary.
(j) Comprehensive Loss
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of the
Company's comprehensive loss and its components in a full set of financial
statements. Comprehensive loss consists of net loss and net unrealized gains
(losses) on securities and is presented in the consolidated statements of
changes in stockholder's equity and comprehensive loss. The Statement requires
only additional disclosures in the consolidated financial statements; it does
not affect the Company's financial position or results of operations. Prior
year financial statements have been reclassified to conform to the requirements
of SFAS No. 130.
Comprehensive loss is summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $(4,554,489) $(6,106,860) $(7,324,093)
Net unrealized gain - (2,183) 2,507
------------ ------------ ------------
(loss) in investment
securities
Total comprehensive loss $(4,554,489) $(6,109,043) $(7,321,586)
============ ============ ============
</TABLE>
(k) Use of estimates
The preparation of financial statements in conformity with generally accepted
F-11
<PAGE>
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(3) INVESTMENTS
Securities classified as available for sale are summarized below.
1998
-----------------------
Unrealized
Adjusted ----------------------- Carrying
Cost Gains (Losses) Value
---------- ----------- ---------- ----------
U.S. Treasury note $ 499,831 $ 324 $ -- $ 500,155
Federal National Mortgage Notes 1,091,223 -- -- 1,091,223
---------- ----------- ---------- ----------
$1,591,054 $ 324 $ -- $1,591,378
========== =========== ========== ==========
1997
-----------------------
Unrealized
Adjusted ----------------------- Carrying
Cost Gains (Losses) Value
---------- ----------- ---------- ----------
U.S. Treasury note $1,003,593 -- $ (2,183) $1,001,410
========== =========== ========== ==========
(4) STOCK-BASED COMPENSATION
In 1997, the Company granted 64,597 stock purchase options to employees with at
least one year of service in recognition of services performed and services to
be performed. For purposes of proforma disclosure required by Statement of
Financial Accounting Standards No. 123 (SFAS 123") Accounting for Stock-Based
Compensation, the per share weighted average fair value of the stock purchase
warrants granted during 1997 was determined using the Black-Scholes option
pricing model with the following weighted average assumptions: expected dividend
yield of zero, risk free interest rate of 6.14%, volatility 112.25%, and an
expected life of 5 years. In 1998, the Company granted 1,113,000 warrants to
employees in recognition of services performed and services to be performed.
For purposes of Proforma Disclosure for FAS 123 the fair value of the stock
purchase warrants granted during 1998 was also determined using the
Black-Scholes option pricing model with the rate of 6.14% volatility of
45.67%-73.31%, and expected lives of 2-5 years.
The Company applies APB Opinion No. 25 in accounting for stock-based
compensation of its employees and, accordingly, no compensation cost has been
recognized for stock purchase warrants issued to employees in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock-based compensation of its employees the
Company's net loss would have been increased to the pro forma amount indicated
below:
F-12
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss As reported $(4,554,489) $(6,106,860) $(7,324,093)
Pro forma $(4,782,722) (6,203,259) (8,199,994)
</TABLE>
For 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 vesting period of
the warrant.
The exercise price of all warrants granted was equal to the fair market value as
defined by APB 25 on the date of the grant.
(5) ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Accrued payroll and benefits. . . . $ 9,031 $ 5,981
Accrued stock price guarantee costs 101,899 -
Accrued polymer purchases . . . . . - 66,197
Accrued fees for HIV studies. . . . 41,936 41,936
Accrued taxes . . . . . . . . . . . 86,734 85,159
Accrued professional fees . . . . . 31,095 35,500
Accrued directors fees. . . . . . . 11,350 41,350
Accrued other . . . . . . . . . . . 50,000 63,251
-------- --------
$332,045 $339,374
======== ========
</TABLE>
(6) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. As of December 31, 1997 and 1998, 21,042,606 and 26,162,040 shares were
issued and outstanding, respectively.
(b) New Equity Financing
New equity financing in 1998 included the private placement of common stock for
an aggregate of $2,250,000 in net proceeds. Certain warrantholders exercised
their stock warrants, which generated an additional $8,812,254 in equity
proceeds to the Company.
F-13
<PAGE>
(c) Common Stock Options and Warrants
(i) Stock Options
The 1990 Stock Option Plan provides for the grant of options to purchase up to
460,798 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisors, and other persons whose
contributions are important to the success of the Company. The recipients of
options granted under the 1990 Stock Option Plan, the number of shares to be
converted by each option, and the exercise price, vesting terms, if any,
duration and other terms of each option shall be determined by the Company's
board of directors or, if delegated by the board, its Compensation Committee. No
option is exercisable more than 10 years and one month from the date as of which
an option agreement is executed. These shares become vested through various
periods not to exceed four years from the date of grant. The option price
represents the fair market value of each underlying share of Common Stock at the
date of grant, based upon the public trading price.
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
<TABLE>
<CAPTION>
1996 1997 1998
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Option Price Shares Price Shares Price Shares Price
------------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $ 1.06-4.34 232,830 $ 3.20 234,953 $ 3.23 291,256 $ 3.35
Granted $ 3.50-6.00 2,123 $ 3.50 64,597 $ 3.50 20,000 $ 6.00
Cancelled $ 3.50 - - - - (4,482) $ 3.50
Exercisable $ 1.06-3.50 - - (8,294) $ 1.06 (12,165) $ 2.93
------------- -------- -------- --------
Outstanding,
end of year $ 1.06-6.00 234,953 $ 3.23 291,256 $ 3.35 294,609 $ 3.56
============= ======== ======== ========
Exercisable 215,161 $ 3.23 206,867 $ 3.62 229,523 $ 3.48
======== ======== ========
Exercised in
current and
prior years (10,576) (18,870) (31,035)
======== ======== ========
Available for
future grants 215,269 150,672 135,154
======== ======== ========
</TABLE>
In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to purchase
up to 92,160 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisers, and other persons whose
contributions are important to the success of the Company. The recipients of the
options granted under the 1992 Stock Option Plan, the number of shares to be
covered by each option, and the exercise price, vesting terms, if any, duration
and other terms of each option shall be determined by the Company's board of
directors. No option is exercisable more than 10 years and one month from the
F-14
<PAGE>
date as of which an option agreement is executed. To date, no options have been
granted under the 1992 Stock Option Plan.
The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was
approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees.
The 1993 Purchase Plan is administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees are eligible
to participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price for such shares is
equal to the lower of 85% of the fair market value of such shares on the date of
grant or 85% of its fair market value of such shares on the date such right is
exercised. There have been no offerings under the 1993 Purchase Plan to date and
no shares of Common Stock have been issued thereunder.
(ii) Warrants
The warrants outstanding at December 31, 1998, related to the issuance of former
notes payable and stockholder notes payable which are exercisable into Common
Stock, are subject to adjustments for stock splits and stock dividends.
<TABLE>
<CAPTION>
Common Stock
--------------------
Exercise Number of
Price Shares Expiration
--------- --------- ----------
<S> <C> <C> <C>
Notes payable:
Former noteholders. $ 10.85 119,807 Nov. 2005
Former noteholders. $ 2.00 30,000 Nov. 2005
Stockholders notes:
Stockholders. . . . $ 3.50 252,160 Oct. 2004
Stockholders. . . . $ 3.50 200,000 Oct. 1999
---------
Subtotal: . . 601,967
=========
</TABLE>
In 1998, warrant holders in this group exercised 335,000 warrants to purchase
common stock which produced $867,500 in gross proceeds.
(iii) Other Warrants
In addition, the Company has other issued warrants outstanding - totaling
14,333,043 which consists of the following:
In November, 1994, the Company granted Rule 701 Warrants to purchase an
aggregate of 2,080,000 shares of Common Stock to certain officers and directors.
These Warrants are exercisable at $3.50 per share and, if not exercised, were
to expire in September, 1999. On February 19, 1999 the Board of Directors
extended the expiration date for three more years.
F-15
<PAGE>
From February through April 1995, 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 and were paid on the closing 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 issuance 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 $.50 for a period of five
years. Each bridge option consists of one share of common stock and one class A
redeemable warrant to purchase common stock at $4.00 per share. 797,917 units
were exercised in 1995 and 202,083 were exercised in 1996 at $.50 per unit.
In May, 1995, the Company and certain officers, directors and shareholders
entered into a standby finance agreement pursuant to which the parties agreed to
provide an aggregate of $5,500,000 in financing to the Company during 1995 in
the event that existing and additional financing was insufficient to cover the
cash needs of the Company through December 31, 1996. In exchange, the Company
issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at
$1.75 per share to the parties. In 1998, 592,000 of these warrants were
exercised, leaving a balance of these warrants is 2,158,000.
In 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. In May, 1997, additional warrants to purchase 250,000
shares of common stock were issued at an exercise price of $3.50, as part of the
engagement contract.
In connection with the IPO completed on November 7, 1995, 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. Warrant holders exercised
100 shares at the exercise price during 1997 and 664,090 during 1998.
Also, as part of the underwriting agreement, the underwriter received warrants
to purchase 462,000 shares of common stock at $5.775 per share, these warrants
were exercised in 1998. The underwriter also received 462,000 Class A
Redeemable Warrants to purchase common stock at $6.60 per share. These warrants
expire five years from the date of the IPO.
In connection with the stock issued in September, 1997, the company issued
385,067 warrants to several entities to purchase common stock at $4 per share,
149,034 of these warrants were exercised in 1998. The remaining 236,033 warrants
will expire December 31. 2000.
In 1998, the Company issued 350,000 warrants to investment banking firms for
services performed on behalf of the Company. These warrants have various
vesting dates and exercise prices ranging from $4.00 to $10.00 per share.
F-16
<PAGE>
2,898,100 warrants have been granted to other parties, stockholders and
employees for services performed. These warrants are exercisable at rates of
$2.50 to $10.00 per share of common stock and the exercise price was equal to
the fair market value of the stock on the date of grant. 1,113,000 of the
2,898,100 warrants outstanding were granted to employees with a weighted average
exercise price of $4.38 per share and have been included in the pro-forma loss
calculation in footnote 4.
(iv) Subsidiary Warrants
In May 1995, the officers and directors of BioAegean Corp. were elected and
approved. The board of directors approved the issuance of 6,000,000 shares of
Common Stock, of which 1,000,000 shares are to be offered 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 an exercise price of $1.00.
In consideration for licensing certain patents, the board authorized 1,000,000
shares of common stock to be issued to Hemispherx Biopharma, Inc., options for
an additional 1,000,000 shares of common stock at the lesser 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, 1996 and 1997.
(7) CONVERTIBLE PREFERRED STOCK
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 ("the Warrants") to purchase 100,000 shares
of Common Stock at the strike price of $4.00 per share.
The Preferred Stock earned dividends at the rate of $50 per annum per share as
declared by the Board of Directors of the Corporation. The dividends were
cumulative and payable quarterly commencing October 1, 1996 in cash or common
stock at the election of the Company. In October, 1996, the Preferred
Shareholder converted 1,000 shares of Series D Convertible Preferred stock into
376,530 shares of common stock.
On September 16, 1996 the Company's registration statement registering the
common stock underlying the Preferred Stock and the Warrants was declared
effective by the SEC.
In March, 1997, the Company used the services of an investment banking firm to
privately place $5 million of Series E Convertible Preferred Stock. The proceeds
from this placement were used to retire the balance of Series D Convertible
Stock issued in July of 1996. As an inducement to effect the early redemption of
the Series D Preferred Stock, the Company gave the Preferred Stockholder 200,000
shares of common stock with a guaranteed sales price of $6 per share. Any
shortfall in the selling price from $6 per share could be settled by cash
payments or additional shares of common stock at the election of the Company.
As a result of this inducement in 1997, the Company incurred a $1.2 million
stock conversion cost, which had no effect on the net equity of the company as
it was offset by an increase in additional paid-in capital. This agreement was
F-17
<PAGE>
settled by a cash payment of $109,712 in December 1997, a cash payment of
$79,587 in January 1998, and the issuance of 100,000 additional shares of common
stock in January 1998.
The holders of Series E Convertible Preferred Stock shall receive cumulative
dividends when and if declared by the board of directors at the rate of $60 per
share. Holders of Series E Convertible Preferred Stock upon surrender of the
certificates shall have the right to convert the Series E preferred into fully
paid and non-assessable share of Common Stock.
On April 18, 1997, the Company's registration statement registering the common
stock underlying the preferred stock and warrants was declared effective by the
SEC. As of December 31, 1998, all holders of Series E convertible preferred
stock had converted their holding into 2,500,000 shares of common stock.
(8) SEGMENT AND RELATED INFORMATION
In June 1997, the FASB also issued Statement of Financial Standard No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 supersedes Statement of Financial Standards No. 14,
Financial Reporting for Segments of a Business Enterprise, and establishes new
standards for reporting information about operation segments in annual financial
statements and requires selected information about operating segments in interim
financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Statement 131 is effective for periods beginning after December 15, 1997. This
Statement affects reporting in financial statements only and has no impact on
the Company's results of operations, financial condition or liquidity.
As the Company has one management team in one location performing research and
development activities for Ampligen, no additional segment disclosure beyond
what is reported in the consolidated financials is necessary under SFAS No. 131.
The following table presents revenues by country based on the location of the
use of the product services.
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
United States $ - $117,975 $194,815
Belgium 32,044 104,004 179,120
Other - 36,736 26,773
------- -------- --------
$32,044 $258,715 $400,708
======= ======== ========
</TABLE>
(9) RESEARCH, CONSULTING AND SUPPLY AGREEMENTS
The Company has entered into various clinical research agreements for the
purpose of undertaking clinical evaluations of the safety and efficacy of
Ampligen. The Company's obligation under these agreements is primarily dependent
on the number of actual patients enrolled in the study and may be terminated
F-18
<PAGE>
without penalty at any time. During the years ending December 31, 1996, 1997 and
1998, the Company incurred approximately $179,000 of research fees under this
agreement with Hahnemann Medical University in Philadelphia. Such costs are
expensed as incurred.
In August, 1988, the Company entered into a pharmaceutical use license agreement
with Temple University (the Temple Agreement). In July, 1994, Temple terminated
the Temple Agreement. In November, 1994, the Company filed suit against Temple
in the Superior Court of the State of Delaware seeking a declaratory judgement
that the agreement was unlawfully terminated by Temple and therefore remained in
full force and effect. Temple filed a separate suit against the Company seeking
a declaratory judgement that its agreement with the Company was properly
terminated. These legal actions have now been settled. Under the settlement, the
parties have entered into a new pharmaceutical use license agreement (New Temple
Agreement) that is equivalent in duration and scope to the previous license.
Under the terms of the New Temple Agreement, Temple granted the Company an
exclusive world-wide license for the term of the agreement for the commercial
sale of Oragen products using patents and related technology held by Temple,
which license is exclusive except to the extent Temple is required to grant a
license to any governmental agency or non-profit organization as a condition of
funding for research and development of the patents and technology licensed to
the Company.
The Company has entered into agreements for consulting services which are
performed at medical research institutions and by medical and clinical research
individuals. The Company's obligation to fund these agreements can be terminated
after the initial funding period, which generally ranges from one to three years
or on an as-needed monthly basis. During the years ending December 31, 1996,
1997 and 1998, the Company incurred approximately $188,000, $124,000 and
$269,000, respectively, of consulting service fees under these agreements.
These costs are expenses as incurred.
(10) 401(K) PLAN
The Company has a defined contribution plan, entitled the Hemispherx BioPharma
Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). All full time
employees of the Company are eligible to participate in the 401(K) Plan
following one year of employment. Subject to certain limitations imposed by
federal tax laws, participants are eligible to contribute up to 15% of their
salary (including bonuses and/or commissions) per annum. Participants'
contributions to the 401(K) Plan may be matched by the Company at a rate
determined annually by the Board of Directors.
Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 1996, 1997, and 1998,
the Company provided matching contributions to each employee for up to 6% of
annual pay of $31,580, $30,598, and $36,958 respectively.
(11) ROYALTIES, LICENSE, AND EMPLOYMENT AGREEMENTS
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen, and to obtain exclusive
F-19
<PAGE>
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen not to
exceed an aggregate amount of $6 million per year through 2005.
As described in Note 9, the Company has agreed to pay royalties under the Temple
Agreement and to its supplier of raw materials.
The Company has contractual agreements with three of its officers. The aggregate
annual base compensation under these contractual agreements for 1996, 1997, 1998
is $589,552, $611,678 and $622,952 respectively. In addition, certain of these
officers are entitled to receive performance bonuses of up to 25% of the annual
base salary (in addition to the bonuses described below). In 1998, a performance
bonus of $90,397 was granted. In 1997 no performance bonuses were granted.
Pursuant to the employment agreements, certain officers were granted 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 2,080,000 shares of Common Stock at $3.50 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 codevelopment of various RNA
drugs, including Ampligen, for a period ending three years from the expiration
of the last licensed patents. The licensing agreement provides SAB/Bioclones
with an exclusive manufacturing and marketing license for certain southern
hemisphere countries (including certain countries in South America, Africa and
Australia) as well as the United Kingdom and Ireland (the licensed territory).
In exchange for these marketing and manufacturing rights, the licensing
agreement provides for: (a) a $3 million cash payment to the Company, all of
which was recorded during the year ended December 31, 1995; (b) the formation
and issuance to the Company of 24.9% of the capital stock of Ribotech, a company
which develops and operates a new manufacturing facility by SAB/Bioclones, and
(c) royalties of 6% to 8% of net sales of the licensed products in the licensed
territories as defined, after the first $50 million of sales. SAB/Bioclones
will be granted a right of first refusal to manufacture and supply to the
Company licensed products for not less than one third of its world-wide sales of
Ampligen, excluding SAB/Bioclones related sales. In addition, SAB/Bioclones will
have the right of first refusal for oral vaccines in the licensed territory. In
1996, 1997, and 1998, the Company paid Ribotech a total of $425,962 for the
purchase and delivery of polymers.
In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB licensing agreement, a fee of .75% of gross proceeds
in the event that SAB makes a tender offer for all or substantially all of the
Company's assets, including a merger, acquisition or related transaction, and a
fee of 1% on all products manufactured by SAB. The Company may prepay in full
its obligation to provide commissions within a ten year period.
In December, 1995, the Company retained the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin-Gump) to provide general legal counsel, advise and
representation with respect to various United States regulatory agencies,
F-20
<PAGE>
primarily the Food and Drug Administration (FDA). This agreement expired in
August, 1997. In September, 1997, the Company acknowledged a contingent
liability of $147,000 to Akin-Gump for certain fees billed and not covered by
the agreement. These fees are due Akin-Gump if and only if the Company achieves
regulatory approval of Ampligen in the future.
(12) LEASES
The Company has several noncancelable operating leases for the space in which
its principal offices are located and certain office equipment.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
Year ending Operating
December 31, leases
- --------------------------------- ----------
<S> <C>
1999. . . . . . . . . . . . . . . $ 310,434
2000. . . . . . . . . . . . . . . 107,395
2001. . . . . . . . . . . . . . . 6,720
2002. . . . . . . . . . . . . . . 6,720
2003. . . . . . . . . . . . . . . 2,240
----------
Total minimum lease payments $ 433,509
==========
</TABLE>
Rent expense charged to operations for the years ended December 31, 1996, 1997
and 1998 amounted to approximately $286,000, $292,000, and $308,000
respectively.
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 rent 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. As result of this
settlement and the amended lease the Company recorded a $318,757 credit
adjustment in earnings in 1996 due to the reduction in accrued and deferred rent
liabilities. The credit is reflected as a reduction of general and
administrative expenses.
(13) INCOME TAXES
As of December 31, 1998, the Company has approximately $56,065,000 of federal
net operating loss carryforwards (expiring in the years 1999 through 2018)
available to offset future federal taxable income. The Company also has
approximately $14,690,000 of state net operating loss carryforwards (expiring in
the years 1999 through 2001) available to offset future state taxable income.
In addition, the utilization of the state net operating loss carryforward is
subject to a $1,000,000 annual limitation.
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
F-21
<PAGE>
date of the ownership change by the federal long-term tax exempt rate. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the carrying amounts used for income tax purposes. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
temporary differences representing net future deductible amounts become
deductible. Due to the uncertainty of the Company's ability to realize the
benefit of the deferred tax asset, the deferred tax assets are fully offset by a
valuation allowance at December 31, 1997 and 1998.
The components of the net deferred tax asset of December 31, 1997 and 1998
consists of the following:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1998
------------- -------------
<S> <C> <C>
Net Operating Losses $ 17,561,397 $ 20,526,592
Accrued Expenses and Other 19,617 19,617
------------- -------------
17,581,014 20,546,209
Valuation Allowance (17,039,849) (20,039,868)
------------- -------------
$ 541,165 $ 506,341
Deferred tax liabilities:
Amortization and Other (541,165) (506,341)
------------- -------------
$ - $ -
============= =============
</TABLE>
(14) CONTINGENCIES
On September 14, 1998, VMW, Inc. filed a complaint against the Company in the
United States District Court, Southern Division of New York, The complaint
alleges that the Company failed to fulfill its financial obligations to VMW,
Inc. with respect to a certain letter agreement pertaining to marketing services
rendered. VMW, Inc. claims damages of less than $100,000. The Company
counterclaimed alleging breach of contract by VMW and have demanded damages of
approximately $25,000. This case is currently in the discovery phase. The
Company does not believe that the complaint will have a material effect on
results of operations or its financial position.
Ell & Co., and the Northern Trust Company, as Trustee of the AT&T Master Pension
Trust filed a complaint against the Company in the Court of Chancery of the
State of Delaware in and for New Castle County on September 23, 1998. This
complaint alleges that the Company breeched its contractual obligations as set
F-22
<PAGE>
forth in the Certificate of Powers, Designations, Preferences and Rights of the
Series E Convertible Stock. The Plaintiff seeks to enforce its rights to
convert 1,500 shares of Series E Preferred Stock into 750,000 shares of freely
traded common stock and to recover damages for its inability to convert the
preferred stock when it requested to do so. The Company does not believe that
the complaint will have a material effect on the results of operations or its
financial position.
The Company maintains that the 1,500 shares of Series E Preferred Stock had been
properly redeemed and, therefore, the plaintiff was not contractually able to
effect a proper conversion into common shares, the Company agreed in December,
1998 to convert the plaintiffs preferred stock to common stock. Currently the
claim is still in litigation.
The Company filed a complaint against Manual P. Asensio, Asensio & Company, Inc.
and others in the United States District Court for the Eastern District of
Pennsylvania on September 30, 1998. The Company alleges the unlawful
manipulation and short selling by defendants of the Company's common stock on
the American Stock Exchange on or about September 15, 1998 through the present.
The Company alleges, among other things, that the defendants distributed
materially false information concerning Hemispherx to the public, thereby
damaging the Company and its shareholder equity. Certain defendants have
entered motions to dismiss all or part of the case. The discovery process has
been suspended pending disposition of the dismissal motions.
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 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 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 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 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, with respect to these claims and legal actions will not have a material
effect on the financial position or results of operations of the Company.
F-23
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(15) STOCK REPURCHASE
On February 19, 1999, the Board of Directors authorized the repurchase of up to
200,000 shares of the Company's common stock on the open market or through
private transactions through April 1, 1999. The repurchased shares will
eventually be used for acquisitions or other purposes.
F-24
