FORM 10-K/A1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1997
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
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Phila., Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
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
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, 1997 was $70,090,178. For purposes of this calculation, it was assumed that
all Common Stock is valued at the closing price of the stock as of February 27,
1998.
The number of shares of the registrant's Common Stock outstanding as of
December 31, 1997 was 21,042,606.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement which will be filed on or before June
30, 1998 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
Hemispherx Biopharma, Inc. (the "Company") is working to develop the
Ampligen(R) family of RNA drugs for the treatment of viral diseases and certain
cancers. Ampligen, a parental drug product, is in advanced human clinical
development for various therapeutic indications. Based on the results of
pre-clinical studies and clinical trials, the Company believes that Ampligen may
have anti-viral and anti-cancer activities. It has been clinically evaluated as
an investigational drug in over 350 patients for different therapeutic
indications to determine its most promising therapeutic roles. The clinical
profile that is emerging from these studies is that the drug has broad-spectrum
antiviral and immune modulating activity and is generally well tolerated.
The Company's policy is to file or license patent applications on a
worldwide basis to protect technology, inventories and improvements that are
considered important to the development of its business. Over the years,
Hemispherx has secured a significant patent estate consisting of 24 issued U.S.
patents and over 300 derivative international filings. Fourteen U.S. patent
filings are pending along with their international counterparts. These patents
primarily cover the company's technology platform that involves modified nucleic
acid polymers that have specifically configured base pairs.
Ampligen is being developed clinically for use in treating three
anti-viral indications: chronic hepatitis B virus ("HBV") infection, human
immunodeficiency virus ("HIV") associated disorders and myalgic
encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS"). Also, the
Company has clinical experience with treating patients with certain cancers. The
Company's 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
Oragen(TM) compounds, which the Company believes offers the potential for broad
spectrum antiviral activity by oral administration.
The Company was incorporated in Maryland in 1966 under the name HEM
Research, Inc. and originally served as a supplier of research support products.
The Company's business was redirected in the early 1980's to the development of
nucleic acid pharmaceutical technology and the commercialization of RNA drugs.
The Company was reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp. in 1991 and to Hemispherx Biopharma, Inc. in June 1995.
The Company has three subsidiaries - BioPro Corp., BioAegean Corp. and Core
BioTech Corp., all of which were incorporated in Delaware in 1994. The Company
has reported net profit only from 1985 through 1987. Since 1987, the Company has
incurred substantial operating losses. Prior to completing an Initial Public
Offering ("IPO") in November 1995, the Company financed operations primarily
through the private placement of equity and debt securities, equipment lease
financing, interest income and revenues from licensing and royalty agreements.
The 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.
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In 1994 and 1995, the Company primarily focused on (i) the execution of an
agreement with Bioclones, Ltd ("Bioclones"), a subsidiary of South African
Breweries, Ltd., with respect to the co-development of various RNA drugs,
including Ampligen(R) ("Bioclones Agreement"). Pursuant to the Bioclones
Agreement, Ribotech, Ltd. ("Ribotech"), was formed in 1994 to produce the raw
materials for Ampligen. Ribotech is jointly owned by Bioclones (75.1%) and the
Company (24.9%); (ii) exploring other potential partnerships to pursue
additional clinical trials with special emphasis on the ME/CFS and HBV disease
indications; (iii) restructuring and retiring certain outstanding debt; and (iv)
conducting a bridge financing and completing its IPO.
In 1996, the Company worked with Bioclones in the establishment of a pilot
plant to produce the raw materials needed in the production of Ampligen.
Development of this plant establishes a second source of raw materials. In
addition, the Company explored and established production sources and processes
to complement the existing lyophilization, release testing and pharmacy
services. In terms of research and clinical efforts, the Company established
with the FDA a comprehensive roadmap of research and clinical studies. These
studies include animal toxicity and clinical studies in HIV and ME/CFS. The
comprehensive animal toxicity studies were started in 1996 and the in-life
component was completed by year end 1997 in time to support various other
regulatory initiatives of the Company in North America and Europe.
Significant events and achievements by the Company in 1997 include:
o Start of a Phase II clinical trial in Texas treating HIV patients
with Ampligen.
o FDA approval to recover costs from Chronic Fatigue (ME/CFS) patients
enrolling in the Company's CFS treatment protocol (the "CFS
Treatment" protocol).
o Completion of the in-life component of the animal toxicity studies
requested by the FDA.
o Received, accepted and processed raw materials produced by the
Company's South African Affiliate (Ribotech, Ltd.).
o Worked with Ribotech to complete and file the Drug Master File (DMF)
with the FDA.
o Initiated a new liquid formulation process for Ampligen at Cook
Imaging. The liquid process is more efficient and allows for greater
volume production needed to meet projected requirements.
o Completed private placements of equity to retire certain outstanding
preferred stock and to provide working capital.
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
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.
As part of its research and development activities, the Company has
entered into various collaborative and sponsored research agreements with
researchers, universities and government agencies. The Company believes that
these agreements provide the Company with access to physicians and scientists
with expertise in the fields of clinical medicine, virology, molecular biology,
biochemistry, immunology and cellular biology.
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Viral/Cancer Diseases
The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, liver cancer, or some other consequence of their infection. In the
U.S. alone, there are an estimated 1.25 million carriers. HBV is one of several
viruses that cause human hepatitis, or inflammation of the liver. The Company
conducted a Phase I/II clinical trial of Ampligen in the U.S. for the treatment
of chronic HBV infection at Stanford University and the University of
Pennsylvania. A significant reduction in viral components and improvement in
liver function was noted during the course of the Phase I/II clinical trial and
the drug has been generally well tolerated. At present, interferon-alpha is the
only approved product for the treatment of this disease; however, 60% to 75% of
patients with chronic HBV ultimately fail to respond to interferon-alpha. The
global sales of interferon are presently estimated at more than $1 billion,
largely for its use in liver infections.
The Centers for Disease Control ("CDC") has estimated that approximately
one million people in the U.S. are infected with HIV, excluding patients who
have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwide by the year 2000. The Company
is currently conducting a Phase II clinical trial of Ampligen in the U.S. for
the treatment of HIV infection. Ampligen(R) is designed to enhance the patient's
own immune system, thereby fighting the invasive viral agent more effectively
and resulting in more durable long term benefits.
ME/CFS is a condition recently recognized by the CDC and characterized
by unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 500,000 cases. Today, ME/CFS accounts for a significant
portion of people entering chronic disability status, especially in the western
U.S. Thus, this presently untreatable illness constitutes a significant impact
on the overall cost of health care. Accordingly, the estimated U.S. market for
an effective treatment of ME/CFS is in excess of $1 billion annually.
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company estimates that approximately 25,000 new cases of renal cell
carcinoma were diagnosed in the U.S. in 1996. Based on estimates prepared by the
American Cancer Society, the Company believes that approximately 34,000 new
cases of malignant melanoma were diagnosed in the U.S. in 1996. Data from the
American Cancer Society and the World Health Organization indicate that both the
incidence and mortality from malignant melanoma are rising steadily among white
populations throughout the world. In the past decade, the incidence of melanoma
has increased faster than that of any other cancer except lung cancer in women.
The Products
The Company believes that nucleic acid compounds represent a potential new
class of pharmaceutical products that are designed to act at the molecular level
for the treatment of human disease. There are two forms of nucleic acid:
deoxyribonucleic acid ("DNA") and ribonucleic acid ("RNA"). DNA is a group of
naturally occurring molecules found in chromosomes, the cell's genetic
machinery. RNA is a group of naturally occurring informational molecules which
orchestrate a cell's behavior and which regulate the action of groups of cells,
including the cells which comprise the body's immune system. RNA directs the
production of proteins and regulates certain cell activities including the
activation of
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otherwise dormant cellular defenses against viruses and tumors. To date, the
Company has focused its efforts on developing two classes of RNA
pharmaceuticals; Ampligen, a high molecular weight double-stranded intravenous
drug, and Oragen, low molecular weight single-stranded drugs intended for oral
administration.
Although there are many competitive approaches to anti-viral and
anti-cancer therapies, the Company has taken an approach which it believes
appears to hold a great deal of promise. By activating the human body's immune
system through naturally occurring immune pathways, the Company's lead drug
compound Ampligen is designed to avoid many of the pitfalls of other anti-viral
drugs. Moreover, the Company believes that the broad-spectrum action of Ampligen
greatly increases the probability of success. The Company has chosen markets
which are not only sizeable and growing, but in disease areas for which there
are presently no known cures.
The Company is also developing a second generation RNA drug technology,
termed Oragen compounds, which the Company believes offers the potential for
broad spectrum antiviral activity by oral administration. In addition the
Company has commenced development of certain clinical laboratory diagnostic
products known as Diagen products. In December, 1996, the Company announced
receipt of Diagen Patents in ten (10) European countries. Recently, the Company
entered a research collaboration to seek improvements with respect to the ease
and accuracy of diagnosing the ME/CFS disorder.
Ampligen
Ampligen is a high molecular weight RNA drug which is administered
intravenously. Based on the results of clinical trials to date, the Company
believes that Ampligen may have the potential to address significant medical
needs where current treatment methods are inadequate or non-existent.
The preliminary results of the Company's animal and human tests indicate
that Ampligen may have both broad-spectrum anti-viral and anti-cancer
activities. To date, Ampligen has been given to over 300 patients in the
clinical trials authorized by the U.S. Food and Drug Administration at over 20
clinical trial sites in the United States under effective Investigational New
Drug (IND) applications. In addition, clinical trials are currently ongoing in
Belgium and the United States. Ampligen clinical trials have also been approved
in Ireland and Canada.
Oragen Drugs
Oragen drugs are low molecular weight RNA compounds which the Company
believes, by virtue of their small size and molecular stability, have the
potential for becoming the first oral, broad-spectrum nucleic acid treatments
for various viral diseases such as HIV infection and chronic HBV infection. The
technology for these nucleic acid products is licensed to the Company for
commercial use on an exclusive basis from Temple University, subject to certain
limited exceptions. To date, a number of compounds have been developed.
Initial studies indicated that these drugs may withstand enzymatic
destruction, an important factor in order for compounds to enter the blood
stream in an intact form. Results from in vitro studies conducted in
collaboration with the National Institute of Allergy and Infectious Diseases
indicate that Oragen products may inhibit HBV infection, and in vitro studies
conducted in collaboration with the National Cancer Institute and the University
of Mainz, Germany, indicate that Oragen products may inhibit HIV infections. One
compound, Oragen 0004, has shown inhibition of HBV multiplication in vitro and
another, Oragen 0044, has demonstrated activity against HIV in vitro studies
performed by Temple University. These two Oragen compounds have been produced in
quantities which the Company believes are sufficient to perform initial animal
toxicology testing. Experiments with mice at the University of Toronto indicate
that Oragen
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drugs may protect against mouse hepatitis virus. There has been no human
clinical testing of Oragen products to date. There can be no assurance that
human clinical testing, if initiated, will yield results consistent with those
achieved in vitro or animal testing.
The Company believes that Oragen drugs may exert anti-viral activity
through two intracellular mechanisms. First, they may activate the intracellular
"latent" RNase-L to degrade viral RNA. Second, they inhibit the HIV replication
enzyme, reverse transcriptase, by binding to a different site on the enzyme from
that bound by conventional anti-HIV compounds such as AZT. The Company's belief
in the potential effects of these compounds is based, in part, on the
collaborative in vitro experiments performed with the National Cancer Institute
referred to above. Certain in vitro experiments performed at Vanderbilt
University indicate that certain human immune cells can be protected from cell
death caused by HIV infection by treatment with Oragen drugs. Under sponsorship
of the National Institutes for Allergy and Infectious Diseases, in vitro studies
at Georgetown University also demonstrated that Oragen drugs may inhibit the
replication of human HBV. In each of the in vitro studies, no substantial cell
toxicity was observed at concentrations which inhibit the applicable virus.
The Company believes Oragen drugs work at a different stage of the
anti-viral and anti-cancer response chain than Ampligen and therefore may be
effective in disorders where the activity of Ampligen is limited. The Company
also believes that Oragen drugs can potentially be engineered to trigger
specific responses in immune cells based on in vitro tests. Significant
additional testing will be required in order to determine whether the Company's
beliefs regarding Oragen drugs can be transformed into viable human therapeutic
products.
Diagnostic Diagen Products
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's products, if and when such products are available for commercial
sale. While these tests are at an early stage of commercial development, the
Company believes that they may ultimately provide an opportunity for
diversification of the Company's products and revenues and may help to identify
patients who could benefit from the Company's drug treatment. The Diagen
products would have to go through a regulatory process for diagnostic product
clearance prior to commercial sale.
Ampligen for Viral Diseases
Chronic Hepatitis B (HBV)
Chronic infection with hepatitis viruses is a global health problem of
epidemic proportions, especially in Asia and Africa. Approximately 200 million
individuals worldwide are estimated to be chronically infected with just one of
the hepatitis viruses, Hepatitis B virus (HBV). In addition to the debilitating
effects of the disease itself, patients with chronic hepatitis B are at serious
long term risk of cirrhosis of the liver and hepatocellular carcinoma (HCC),
which kill more than one million people worldwide each year.
Currently, the only approved treatment for Hepatitis is recombinant
interferon (Asian sales presently in excess of $1 billion). Interferon
apparently has a dramatically reduced effectiveness in Asian patients and a
significant side-effect profile which often curtails the treatment program
prematurely, resulting in disease relapse in many cases. The interferon
associated side-effects also include high fever and nausea.
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In the early 1990's, Ampligen or its sister dsRNA, Polyadenur were tested
in three separate Phase I/II trials. The Ampligen(R) study was conducted at
Stanford University and the University of Pennsylvania, and the data indicate a
combined response rate of approximately 60% with equal activity in both Western
and Oriental patients. Results of the three trials combined demonstrate that HBV
DNA was decreased below the level of detection in 42% of all patients treated,
HBeAg was cleared from serum in 36% of patients, antibodies to the E antigen
were detected in 34% of patients, and levels of ALT (a liver enzyme marker of
hepatitis) were normalized in 42% of patients.
Bioclones is to undertake a clinical trial treating hepatitis patients
with Ampligen in South Africa. This study will focus on the treatment of
patients with Hepatitis C (HBC) as it has become one of South Africa's major
health problems.
Also, the Company is exploring research collaboration and distribution
relationships for the European and U.S. markets, and signed a letter of intent
regarding a novel treatment regimen for hepatitis B infection with a
French-based multinational pharmaceutical company, Beaufour Ipsen ("Beaufour").
Beaufour conducted the studies using polyadenur referenced above. If
consummated, the agreement would provide the Company a broad technology platform
for use in the treatment of Hepatitis conditions. The Company retained in
November, 1997, regulatory consultants to assist in preparing regulatory and
marketing applications for the European Union.
HIV Infection
Five earlier HIV clinical studies have been carried out with Ampligen.
Three were open label studies that showed stabilization of CD4 cell count, and
return of delayed hypersensitivity. The fourth study was a Phase II
double-blind, multi-center study carried out in combination with zidovudine
(AZT). The fifth was a crossover study where placebo patients from the fourth
study were given Ampligen. The latter two studies showed decreased progression
to AIDS, as well as CD4 cell count stabilization and return of delayed
hypersensitivity. The Company believes that the data may justify a potential
indication for combination treatment of adult HIV patients who show clinical or
immunologic deterioration.
In January 1997, the Company began a Phase II clinical trial in Texas
treating HIV infected patients with Ampligen. The trial , approved by the FDA,
is studying the effect of Ampligen on viral load, or burden, in HIV patients
with CD4 levels over 400 cells/mm who are not being treated with other HIV
medications. The principal investigator in the trial, Dr. Patricia Salvato,
specializes in the treatment of individuals with HIV infection. Dr. Salvato is a
Clinical Associate Professor at the University of Texas Health Science Center,
and has participated in prior clinical trials of Ampligen for various chronic
viral diseases including HIV and ME/CFS.
ME/CFS
CFS, which is also known as chronic fatigue and immune dysfunctional
syndrome (CFIDS) or myalgic encephalomyelitis (ME), is a complex illness
characterized by disabling fatigue, flu-like symptoms, joint and muscle pain,
cognitive problems, and sleep disorders. Its cause is unknown. However, herpes
virus type 6 (HHV-6) has been associated with the disease process. The Center
for Disease Control and Prevention (CDC) assigned ME/CFS to its priority list of
"new and reemerging infectious diseases" in the United States. Estimates of
annual incidences given by the company are 0.5 to 2.0 million people in the
United States and about 100,000 in Canada. There are no known specific
treatments for ME/CFS.
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After an encouraging small open label trial with Ampligen(R), Hemispherx
carried out a pivotal 92 patient randomized, placebo controlled, and double
blind multi-center trial. The results after a 24-week treatment protocol showed
statistically significant physical improvement for the treated group, reduced
cognitive deficit, enhanced capacity to perform activities of daily living, and
improved performance on the treadmill tests. Significantly, the observed median
increase in physical performance by the end of treatment was consistent with a
change from a patient needing considerable assistance with daily activities such
as dressing, bathing and meal preparation to a patient needing only occasional
assistance. An additional finding was a reduction in the need for other
medications. Overall, Ampligen(R) was generally well tolerated and no safety
issues were noted.
In 1997, the FDA approved a ME/CFS treatment protocol with cost recovery
at five clinical sites across the U.S. (Philadelphia, PA; Washington, DC;
Charlotte, NC; Houston, TX and Incline Village, NV). Additional sites will be
considered for approval in the future. This treatment protocol allows the
Company to charge each patient for the cost of the Ampligen(R) used. Ampligen
costs the patient $2100 for the first eight weeks of treatment and $2400 for
each additional eight weeks of treatment. Other costs to the patient are
associated with drug infusion and medical oversight. The initial goal is to
enroll only the most seriously ill patients and to carry out a comprehensive
medical evaluation and reassessment after a 24-week treatment period.
A similar clinical program was set up in Canada at three sites (Montreal,
Vancouver and Edmonton) and in Brussels, Belgium under the direction of
Professor Kenny De Meirleir. More than fifty patients have been treated at the
Belgium site.
In connection with the ME/CFS Cost Recovery Protocol, the Company agreed
to conduct a confirmatory randomized, double-blind, placebo-controlled clinical
trial with an enrollment of up to 230 patients. The cost of this trial will be
borne by the Company. The Company expects to start enrolling patients by mid
1998.
Ampligen for Cancer
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Renal Cell Carcinoma occurs in 15,000 to 20,000 patients per
year in the United States. Patient prognosis is usually poor. Five year survival
rates of patients with metastatic disease are 2% to 18%. Some 30% of patients
have metastatic disease at the time of diagnosis.
Chemotherapy does not have much impact on survival for metastatic disease
patients with Renal Cell Carcinoma. High (200-500mg) and low dose (10-120mg)
Ampligen(R) treatments were investigated in 20 patient and 11 patient groups,
respectively. The high dose group showed a median survival of 20.4 months,
whereas the median survival of the low dose group was only 3.7 months. Analysis
versus historical controls that were stratified according to risk groups showed
that high dose Ampligen(R) treatment overall increased medial survival about 3-
fold. The increased median survival is substantially greater than that reported
with either interferon or interleukin-2, which are alternative immune-based
therapies.
A ten patient study with metastatic malignant melanoma patients has been
completed. Two of nine patients treated with high dose Ampligen(R) (=> 200 mg)
had complete tumor responses. One patient has been in complete remission for
more than five years. Part of this study was conducted at the cancer research
unit of Yale University.
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Ampligen(R) has shown promise in clinical trials for the treatment of both
Renal Cell Carcinoma (Kidney Cancer) and Malignant Melanoma (Skin Cancer). For
the time being, however, the Company has chosen to focus on the antiviral
indications of Ampligen(R).
Patents/Proprietary Rights
The Company has filed more than 380 patent applications involving
chemistry, processes, biological insights and specific target-oriented
compositions of matter worldwide covering its RNA technology, including 30
filings with the U.S. Patent Trademark Office and more than 350 corresponding
foreign patent applications in other countries, such as members of the European
Patent Convention, Japan, South Korea, Australia. There can be no assurance that
the Company's patent applications will result in the issuance of patents. The
Company's policy is to file patent applications on a worldwide basis to protect
technology, inventions, and improvements that are considered important to the
development of its business. The Company has, as a matter of policy, sought
patent protection in each of the three major geographic markets: the United
States, Europe, and the Pacific Rim. The Company also relies upon trade secrets,
know-how, continuing technological innovation and licensing opportunities to
develop and maintain its competitive position. Of the patent applications filed
worldwide, over 300 have been issued (including 24 in the United States).
With the patents issued or accepted for issuance in the United States,
seven include claims which afford patent protection for RNA treatment in HIV
disease; one affords patent protection for RNA treatment of ME/CFS and two
afford patent protection for RNA treatment/diagnosis of hepatitis infection.
The Company believes its treatment use patents for Ampligen, if granted
and upheld, will be a critical element to the Company's success. The overall
patent estate constitutes a technology platform to provide proprietary
protection across a substantial range of treating major viral disorders.
The Company has filed patent applications for diagnostic applications
resulting from insights and discoveries made by its employees and consultants
relating to RNA nucleic acid structure and 2-5A biochemistry, which the Company
believes may be applicable to the development and commercialization of various
drugs that may operate by augmentation of cellular antiviral defenses.
The exclusive license agreement with Temple University covering the Oragen
Compounds presently includes 10 issued U.S. patents and 30 issued foreign
patents as well as over 30 patent applications in process.
The patent positions of biopharmaceutical and biotechnology firms,
including the Company, are generally believed to be uncertain and involve
complex legal and factual questions. Consequently, even though the Company is
currently prosecuting many patent applications with the U.S. and foreign patent
offices, the Company does not know how many of its applications will result in
the issuance of any patents or, of patents which are issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until patents issue, and since publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries by several
months, the Company cannot be absolutely certain that it was the first creator
of all inventions covered by pending patent applications or that it was the
first to file patent applications for all such inventions. Accordingly, there
can be no assurance that the Company's patent applications will result in
patents being issued or that if issued the patents will afford protection
against competitors with similar technology; nor can there be any assurance that
others will not circumvent the existing patents or will obtain patents that the
Company would need to license.
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Manufacturing/Marketing/Distribution
All Ampligen production is supervised and directed at the Company's
manufacturing facility located in Rockville, Maryland. In 1997, production
agreements for raw materials were in place with two (2) pharmaceutical
suppliers. One supplier is located in the United States and one is located in
South Africa. These critical contract relationships are covered by long term
non-compete provisions as well as customary non-public disclosure terms. In each
case the product received is tested by the Company to determine drug product
compliance with a set of technical specifications. Upon meeting these
specifications, the raw materials are transferred to the Company's cold storage
unit for future use in producing doses.
The Company has had a long term relationship with one raw material
producer (Pharmacia), which has a minor equity interest in the Company. The
other raw material producer is Ribotech, Ltd. ("Ribotech"), located in South
Africa. The Company owns a 24.9% interest and Bioclones, Ltd. (a subsidiary of
South African Breweries, Ltd) owns 75.1% of Ribotech. Ribotech was formed in
1994 as part of the Company's licensing/distribution agreement with Bioclones.
During 1997, Ribotech worked to perfect their production of the raw materials,
Poly I and Poly C12U, needed to formulate Ampligen (the final product). During
the last quarter of 1997 the Company received two significantly sized shipments
of Poly I and C12U which met all product specifications and will be processed to
increase the inventory of Ampligen(R).
In addition, the Company worked with Ribotech to facilitate the filing of
a Drug Master File (DMF) with the FDA for Ribotech. This represented not only a
tremendous amount of work and effort by both companies, but also emphasizes the
Company's statement that Ribotech has demonstrated to be an acceptable source
for the most important raw material components of our drug Ampligen(R). This
provides Hemispherx with a key source for critical supplies. Ribotech can
immediately increase the amount of these unique raw materials that can be
available to the Company and substantially reduce the cost of these materials.
In 1997, the Company made a move to an alternate liquid Ampligen(R)
formulation process at Cook Imaging at Indianapolis, Indiana. This formulation
process represents a major increase in production capability. The present
lyophilized product is somewhat limited with respect to batch processing size.
The Company is conducting liquid pilot runs in small production batches. Cook
and the Company plan to start full scale production runs in June, 1998 with the
objective of producing thousands of doses per run.
With the increase in the size of a production run comes the decrease in
percent lost of product per run and a decrease in release testing costs. The
liquid product will be easier and cheaper to process. The pharmacy formulation
of the present lyophilized vials and its associated costs, will be eliminated.
With respect to the raw materials provided by Ribotech (the Company's
second source), the Company initiated and nears completion of stability studies
of the lyophilized Ampligen. At this point, these detailed analytical and
biological studies demonstrate the good quality of the Ribotech material and a
satisfactory shelf life of the final product.
The Company initiated a comprehensive stability study on the alternative
liquid Ampligen formulation and several months of data have been accumulated and
are being analyzed. Results to date are good and the stability studies should be
finalized in 1998.
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
10
<PAGE>
will be used in three medical arenas: physicians' offices or clinics, the
hospital and the home 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
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(R) 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
of governmental 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. No assurances can be given that any such
arrangement will be entered into on terms acceptable to the Company. The
relative prevalence of people suffering from target indications for 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. The
Company does not currently anticipate devoting significant resources to the
establishment of an in-house sales force in the near term. In countries in South
America, the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand,
and certain other countries and territories, the Company contemplates marketing
its product through its relationship with Bioclones pursuant to the Bioclones
Agreement.
Financing
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 $6.1 million for research and
development, of which $3.2 million was expended in the year ended December 31,
1997.
Based on its current operating plan, the Company anticipates that the net
cash and cash equivalents on hand of $9.9 million, together with the anticipated
receipt of limited revenues from the cost recovery protocols, will be sufficient
to meet the Company's capital requirements through 1998. However, this may not
be sufficient to enable the Company to complete the necessary clinical trials or
regulatory approval process for Ampligen for any indication or, if any such
approval were obtained, to begin manufacturing or marketing Ampligen on a
commercial basis. The amount of additional funding required will depend on the
timing of regulatory approval and commercialization of Ampligen(R).
Accordingly, the Company may need to raise substantial additional funds
through additional equity or debt financing, collaborative arrangements with
corporate partners, off balance sheet financing or from other sources in order
to complete the necessary clinical trials and the regulatory approval processes
and begin commercializing its products. If adequate funds are not available from
operations and if the Company is not able to secure additional sources of
financing on acceptable terms, the Company's business will be materially
adversely affected.
11
<PAGE>
In October 1997, the Company raised an aggregate of $10,005,000 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.
In October 1997, the Company's Common Stock and Class A Warrants commenced
trading on the American Stock Exchange and simultaneously were delisted from
NASDAQ Smallcap Market. The securities had traded on NASDAQ since the IPO in
November, 1995.
In March, 1997, The Company sold 5,000 shares of Series E Convertible
Preferred Stock at $1,000 per share in a private offering pursuant to Regulation
D of the Securities Act of 1933, as amended, and Rule 506 promulgated
thereunder. The proceeds of this placement were used to retire all outstanding
shares of Series D Convertible Preferred Stock. The Series D Preferred Stock had
been issued pursuant to a Regulation D filing with the SEC in 1996. As a result
of this transaction in 1997, the Company incurred a $1.2 million charge which
had no effect on total stockholders' equity as it was offset by an increase in
additional paid-in capital. As of December 31, 1997, five holders of 1,350
shares of series E preferred stock have elected to convert their shares into
675,000 shares of common stock.
Research and Development/Collaborative Agreements
As an emerging pharmaceutical company, Hemispherx depends heavily on
accessing external resources for manufacturing, distribution, and R&D. Current
alliances include relationships with Bioclones, Pharmacia-Upjohn, Hahnemann
University (now a branch of Allegheny University of the Health Sciences), Temple
University and Olsten Health Care. A new alliance is being negotiated with
Beaufour Ipsen. R&D sponsorships or collaborations already exist with many
academic institutions.
The Bioclones Agreement, made in October 1994, involves the international
co-development of Ampligen(R) and related RNA therapeutics. Hemispherx has given
Bioclones an exclusive manufacturing and marketing license for Africa, South
America, the United Kingdom, Ireland, Australia, Tasmania, New Zealand and
Southern Asian countries. In return, Bioclones has provided Hemispherx with a $3
million cash payment, 24.9% ownership in Ribotech, Ltd., a company set up by
Bioclones to develop and manufacture RNA drugs, and royalties (8%) of Bioclones
RNA drug sales in the licensed territories. Bioclones will pursue regulatory
approval in the licensed territories and will specifically carry out, at its own
expense, a phase III hepatitis clinical trial in South Africa and Australia.
Bioclones has the first right of refusal (subject to appropriate pricing) to
manufacture at least one-third of the worldwide sales requirement of Ampligen
and other RNA drugs. The arrangement with Bioclones thus gives Hemispherx access
to worldwide markets and commercial-scale manufacturing resources.
Significantly, Bioclones has the financial backing from South African Breweries,
the largest company in the Southern Hemisphere, with multi-billion dollar sales.
The Company has had an R&D agreement since 1989 with the Hahnemann
University Hospital, now known as the Allegheny University Hospitals-Hahnemann
Division and has access to a scientist group for ongoing R&D on RNA drugs. Dr.
David Strayer, the current Medical Director at Hemispherx, is a member of this
group. Hemispherx provides the salary of Dr. Strayer and corresponding stipends
for other scientist group members as needed. Hemispherx also retains exclusive
proprietary and regulatory rights to all existing and future RNA drug technology
developed by the scientist group. Hemispherx is obligated to pay Hahnemann a 2%
royalty on net Ampligen(R) sales up to $6 million/year until 2005.
12
<PAGE>
A similar relationship exists between Hemispherx and Temple University
focused on the development of oral drugs that directly activate RNase L (Oragen
Products). Hemispherx has an exclusive worldwide license from Temple University
for the Oragen Products. Hemispherx is obligated to pay 2 to 4% royalties on
sales of Oragen Products depending on the need to access non-Temple University
proprietary technology for the sale of the product. Minimum royalties of
$30,000/year commenced in 1995. Research support may also be provided by Dr.
Robert J. Suhadolnik, a Temple University medical scientist, who is a
co-inventor of the Oragen technology. In July 1994, Temple University declared
that the agreement was terminated because of breach of contract by Hemispherx.
This led to litigation between the parties that was settled in December 1996
with Hemispherx retaining all license rights on an exclusive basis.
Hemispherx has set up research sponsorships and collaborations with many
academic scientists. A research sponsorship involves a specific R&D project or
clinical activity for which Hemispherx provides financial support.
Collaborations involve external clinical studies where Hemispherx provides drug
materials free of charge. No additional financial support is provided.
Hemispherx retains all proprietary rights for both research sponsorships and
collaborations. More than 15 such arrangements have been made with prestigious
institutions such as Harvard University, Stanford University, the National
Cancer Institute, Yale University Medical School and a variety of international
groups. Hemispherx will continue to depend on such relationships to secure R&D
support.
The Company signed a letter of intent with Beaufour to form a strategic
alliance focused on the treatment of chronic active hepatitis B and other
hepatitis disorders. The terms of the prospective Beaufour alliance may give
Beaufour primary responsibility for the European market. Hemispherx will retain
the corresponding responsibility for the North American market, and Bioclones
will continue to focus on the Southern Hemisphere including the southern Pacific
rim countries. The cash flow from each geographic area may be split with the
dominant portion going to the responsible partner and a minority portion going
to the other partner. The responsible partner may assume marketing and
manufacturing costs. In addition, Beaufour may be expected to invest in the
Company by providing medical staff support and/or purchasing drug supplies from
the Company.
Beaufour has a Polyadenur manufacturing facility in France that has the
annual capacity to provide 60-100 kilograms of product. This will supply enough
material for about 5,000 patients, should the same dosage level and regimen used
for ME/CFS be assumed. The chronic active HBV patient population in the U.S. has
been estimated at 375,000 and greater than 500,000 in Europe based on
demographics. The infection rate in Asia is much higher, and more patients are
resistant to Intron(R) A. Consequently, the need for additional capacity will be
substantial should Polyadenur perform as predicted from clinical trials
completed to date and the Compound receives regulatory approval. The Ribotech
facility may be the first major site to expand production to support this
compound.
Any strategic alliance with Beaufour would be expected to conduct
additional pivotal trials in Europe and North America to support European
regulatory filing and possible drug combination approvals. An approval for a
drug combination that may raise the cure rate above 50% could have major
financial consequences. Intron(R) A generates revenues of more than $500
million, even though the cure rate from Intron(R) A is 40% at best.
The Company has recently entered an agreement with Olsten Health Care
("Olsten") to provide marketing and distribution services of Ampligen(R) to
ME/CFS patients. Olsten will formulate and administer the Ampligen(R)
intravenous infusion product used for the ongoing treatment cost recovery
protocol. Basically, the Company will supply Ampligen and Olsten will formulate
and administer the intravenous product using its own facilities and personnel.
In addition, the agreement provides for additional functions by Olsten with
respect
13
<PAGE>
to clinical monitoring of patients, physical/patient training and financial
support of ongoing ME/CFS clinical testing. Olsten is one of the largest
national firms providing infusion, clinic and related health care services. It
had almost $4 billion revenues in 1996, and was responsible for delivery of
certain components of overall health care to approximately 2.2 million
individuals.
Competition
Competition in the development and marketing of therapeutic drugs for
human diseases is intense. Many different approaches are being developed for
management of the diseases targeted by the Company. In addition to drug therapy,
companies are promoting biological and hormonal therapies, prophylactic and
therapeutic vaccines and surgery. These approaches, however, may have limited
utility and some are often associated with toxicity, including life-threatening
side-effects.
Most FDA-approved anti-viral drugs appear to directly inhibit the viruses
by interfering with their replication (so-called reverse transcriptase or
protease inhibitors). Their mechanisms of action do not seem to stimulate the
production of immune cells to attack or scavenge the disease-causing agents.
Interferon therapy does act by an immune mechanism and has been approved by the
FDA for the treatment of chronic HBV; durable effects, however, are seen in only
a minority of treated subjects and the side-effects are substantial. Interferon
has thus far not been demonstrated to be efficacious in HIV, ME/CFS and the
primary tumors (other than melanoma) and indications targeted by the Company.
The newer anti-HIV drugs may reduce the level of HIV in the plasma by
approximately 99%; however, the dramatic effects may often be transitory.
Below is a list of certain compounds which appear directly competitive
with the Company's products:
HIV Infection. The principal treatments for HIV are AZT, DDI, DDC, D4T and
3TC. A group of newer compounds, termed protease inhibitors, share the problems
of rapid viral mutation, multi-drug resistance, etc., but may cause a more
dramatic transient drop in amount of HIV present in the blood stream. No immune
based drugs have been approved to date, and there is a paucity of clinical
developmental research on vaccines due to the problem of rapid viral mutations.
HBV. Treatments include interferon-alpha, thymosin, ribavirin and 3TC.
Only interferon alpha has proven effective in rigorous clinical tests, and less
than 20% of patients have a durable response. Also, interferon's side effects
are substantial and may curtail patient use and physician acceptability,
particularly in the major Asian markets.
ME/CFS. The FDA has not approved any drugs specifically for this disorder
and the Company's product is the only drug to date with an FDA approved
treatment protocol and phase III clinical status. Physicians typically prescribe
analgesics, psychotropic, and anti-inflammatory drugs to combat and palliate the
symptoms without addressing the underlying immunologic damage or the herpes
virus proliferation.
Renal Cell Carcinoma. Interleukin 2 may be an extremely toxic product
often requiring immediate access to a critical care unit if used according to
manufacturer's recommendations.
Malignant Melanoma. Interferon alpha was recently approved by the FDA;
however, the percentage of responses is small, and a significant percentage of
relapses are expected. Treatment costs with interferon often exceed $10,000 per
year.
14
<PAGE>
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 product candidates.
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. In July, 1995, ISIS 2922 was
in Phase III clinical trials to treat CMV-induces retinitis in AIDS patients,
ISIS 2105 was in Phase II trials to treat genital warts, and Phase II trials
were planned for ISIS 2302 for treatment of a variety of inflammatory diseases.
The Company anticipates that it 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 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.
Subsidiary Companies
In September 1994, the Company incorporated three wholly-owned
subsidiaries--BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"), and
BioAegean Corp. ("BioAegean")--in the State of Delaware.
The purpose of BioPro is to commercialize tobacco-related products. BioPro
intends to develop methods to utilize RNA technology in conjunction with certain
tobacco and cigarette filter products to provide cleaner tobacco products. The
technology is based in part on recently published experiments in laboratory
animals conducted at the University of California, Davis, which suggest that the
Company's RNA drugs may prevent certain aspects of lung fibrosis under certain
experimental conditions. In September, 1994, the Company granted an exclusive
worldwide license and/or sub-license to certain of its patents and assigned
certain other patents to BioPro (the "BioPro License ") for a term of 15 years
in the event that BioPro provides evidence that it has commercialized one or
more of the patents. BioPro has agreed that it will not develop any product or
technology which may be deemed a human therapeutic and has granted a right of
first refusal to the Company with respect to any technology which it may develop
or acquire. BioPro has the right to grant sublicenses subject to the requirement
that its sublicensees agree to non-competition arrangements with the Company.
The Company has agreed that it will not develop any technology related to the
business of BioPro and has granted BioPro a right of first refusal with respect
to any technology it may develop with respect to the business of BioPro.
The purpose of Core BioTech is to commercialize the Company's diagnostic
oriented patents which provide RNA technology to detect certain difficult to
diagnose viral diseases such as ME/CFS and other immuno-dysfunctional conditions
15
<PAGE>
through strategically located central reference laboratories. In September,
1994, the Company granted an exclusive worldwide license and/or sub-license to
certain of its patents and assigned certain other patents to Core BioTech (the
"Core BioTech License") for a term of 15 years in the event that Core BioTech
provides evidence that it has commercialized one or more of the patents. Core
BioTech has agreed that it will not develop any product or technology which may
be deemed therapeutic and has granted a right of first refusal to the Company
with respect to any technology which it may develop or acquire. Core BioTech has
the right to grant sublicenses subject to the requirement that its sublicensees
agree to non-competition arrangements with the Company. The Company has agreed
that it will not develop any technology related to the business of Core BioTech
and has granted Core BioTech a right of first refusal with respect to any
technology it may develop with respect to the business of Core BioTech.
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
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.
Employees
As of February 28, 1998 the Company had 17 full-time employees. Of these
employees 12 are engaged in the Company's research, development, manufacturing,
regulatory affairs or pre-clinical testing, and 5 employees performed general
management and administrative functions including financial matters and investor
relations. In addition, on an as needed basis eight individuals employed at
academic institutions serve as consultants or independent contractors to the
Company. Such persons are paid pursuant to licensing agreements with two
universities. There are 29 additional individuals who serve or have served as
part-time consultants or independent contractors to the Company on a per diem or
monthly basis. The Company believes that this employee and consultant structure
and arrangement provides the most efficient economic approach to drug
development. The Company has been successful in attracting skilled and
experienced scientific personnel; however, competition for such personnel is
intense and there can be no assurance that the Company will be able to attract
and retain necessary qualified employees and/or consultants in the future. None
of the Company's employees are covered by collective bargaining agreements.
16
<PAGE>
Recent Developments
In February 1998, the Company entered into a distribution/specialty
agreement with Kimberly Home Health Care, Inc. a/k/a Olsten Health Services.
This agreement appoints Olsten as distributor of Ampligen to U.S. patients
enrolled in the ME/CFS cost recovery treatment protocol termed AMP 511. Olsten
agrees to purchase Ampligen for treating the AMP 511 patients. In addition,
Olsten agrees to provide financial support for certain clinical trials. The
Company agrees to compensate Olsten for providing certain services in connection
with clinical trials.
As of December 31, 1997, Ribotech, Ltd. located in the Republic of South
Africa and jointly owned by the Company (24.1%) and by our affiliate Bioclones
(75.1%), continued production of raw materials, Poly I and Poly C12U, needed to
formulate Ampligen (the final product). During the fourth quarter, the Company
received two significantly sized shipments of Poly I and C12U which met all
product specifications and will be processed for use in conducting certain
production runs utilizing the liquid product process. The initial liquid product
runs will be utilized in various in vitro tests for stability and product
bioperformance. Based on the results of these tests, the liquid product may be
evaluated in clinical settings.
17
<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.
President Co-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 60 Chief Financial Vice President of Omni Group,
Officer Inc. (business consulting).
Formerly VP and CFO of several
major Pepsico Divisions.
David R. Strayer, M.D. 52 Medical Director, Professor of Medicine at
Regulatory Affairs Allegheny University of the
Health Sciences. Formerly
Research Associate at NIH.
Carol A. Smith, Ph.D. 46 Director, Virotech International, Inc.,
Manufacturing and '89-91, Scientist/Quality
Process Assurance Officer.
Development
Josephine M. Dolhancryk 35 Treasurer, Medical/Business Enterprises,
Assistant '89-90, President
Secretary
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 Facilite
de Droit, Paris Sorbonne.
Administration degree from Ecols
des Hautes Etudes Commerciales,
Paris.
Harris Freedman 64 Vice President for Business consultant for emerging
Strategic technology companies and private
Alliances venture capitalist.
Sharon Will 39 Vice President, Registered sales representative,
Corporate Worldwide Marketing Inc. (a
Communications manufacturer's representative),
private venture capitalist.
Ransom Etheridge 58 Director Corporate Counsel (In-house)
</TABLE>
18
<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 1998, 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 late
1998, although no assurance can be given that this will occur. The Company has
no obligation to fund this construction.
ITEM 3. Legal Proceedings
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
On November 2, 1995 the Company's Units (Consisting of one share of Common
Stock and one Class A Redeemable Warrant) commenced trading on the National
Association of Securities Dealers Automated Quotation Smallcap Market ("NASDAQ")
under the symbol "HEMXU." In July, 1996, the Company unbundled its public Unit
allowing the Common Stock (HEMX) the Class A Warrant (HEMXW) and the Unit
(HEMXU) to trade separately. In August 1996 the Company authorized NASDAQ to
delist the Unit (HEMXU) and cease trading it.
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.
19
<PAGE>
The following table sets forth the high and low list prices for the Unit,
the Common Stock and the Warrant for the periods indicated as reported by
NASDAQ. Such prices reflect inter-dealer prices, without retail markup,
mark-down 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.
High Low
-------- --------
COMMON STOCK
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
September 30, 1997 5 1/8 2 1/2
October 1, 1997 through
December 31, 1997 5 1/2 3 9/16
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
As of December 31, 1997 there were approximately 329 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, 1997, the Company had approximately 6,775,000 Class A
Redeemable Warrants registered and outstanding.
The Company has never paid any dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
20
<PAGE>
ITEM 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net revenues $ 48,000 $ 175,758 $ 2,965,910 $ 32,044 $ 258,715
Net loss (7,702,050) (5,133,051) (1,839,849) (4,554,489) (6,106,860)
Cash used in operating
activities (5,170,638) (1,952,145) (1,939,219) (6,097,906) (4,641,611)
Capital expenditures (40,000) (3,625) (86,480) (15,477)
Balance Sheet
Total Assets 1,915,681 1,651,441 12,699,518 6,999,384 11,542,633
Total Debt 7,700,000 8,470,910 4,920,000 -- --
Redeemable Preferred
Stock 2,865,782 3,238,334 -- -- --
Common Stockholders
Equity (deficit) (11,579,156) (14,629,687) 4,420,785 5,852,994 10,745,422
Net loss per share(1):
Basic -- (0.44) (0.18) (0.29) (0.35)
Diluted -- (0.44) (0.18) (0.29) (0.35)
Shares used in computing net
loss per share(1):
Basic 6,998,072 11,536,276 10,341,163 15,718,136 17,275,994
Diluted 6,998,072 11,536,276 10,341,163 15,718,136 17,275,994
(1) See Note 2g of Notes to Consolidated Financial Statement(s)
</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.
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.
The Company was reincorporated in Delaware and changed its name to HEM
Pharmaceuticals Corp. in 1991 and to Hemispherx BioPharma, Inc. in June 1995.
The Company has three subsidiaries--BioPro Corp., BioAegean Corp. and Core
BioTech Corp., all of which were incorporated in Delaware in 1994. The Company
has reported net 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.
21
<PAGE>
The IPO completed in November 1995 produced net proceeds of approximately
$16,000,000. These funds plus the conversion of $3,447,000 in Redeemable
Preferred Stock to equity improved stockholders equity by some $19,000,000. The
cash proceeds from the IPO was used to retire debt and other liabilities and
establish a fund for future operations.
The development of the Company's products has required and will continue
to require the commitment of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials necessary to bring
pharmaceutical products to market and establish commercial production and
marketing capabilities. Accordingly, the Company 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 consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale into
certain nonpharmaceutical specialty consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.
During fiscal 1994 and 1995, the Company focused on negotiating and
executing the Bioclones Agreement, exploring potential partnerships to pursue
additional clinical trials with special emphasis on the HBV disease indication,
restructuring certain of its outstanding debt, conducting bridge financing and
completing its IPO. In 1996, the Company reviewed and restructured the Ampligen
manufacturing process. Second sources were established to procure raw materials,
lyophilization services and release testing. In the areas of research and
clinical efforts, the Company established with the FDA a roadmap of research and
clinical studies to be completed . These studies include animal toxicity and
clinical studies in HIV and ME/CFS. One HIV clinical study was approved by the
FDA and started in late 1996. Certain animal toxicity studies began. In
addition, the Company shipped the initial inventory of Ampligen to Canada to use
in its cost recovery program there.
In 1997, the Company added preclinical data to support product
registration and improved its position with respect to having more than one
supplier of raw materials. Clinical programs in ME/CFS were implemented and
expanded with encouraging results. Major inroads with respect to product
diversification and distribution arrangements were made for serving the U.S.
clinical market.
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.S.. Beginning 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 $258,715 in 1997. 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, 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.
22
<PAGE>
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. These costs were part of an overall plan to enhance the clinical data bases
to support an eventual full marketing application in the United States and
European Union.
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 issuance of Series E Convertible Preferred Stock in March, 1997.
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.
Years Ended December 31, 1996 vs. 1995
The Company reported a net loss of $4,554,489 in 1996 versus a loss of
$1,839,840 in 1995. Several factors contributed to the increased loss of
$2,714,649.
Revenues were down $2,933,866 for 1996 as 1995 included $2,900,000 of
licensing fees recorded in connection with SAB/Bioclones agreement. Research and
development costs increased $873,665 in 1996 due primarily to increased efforts
on the Canadian and Belgium clinical programs. General and administrative
expenses of $3,023,590 in 1996 reflect the benefit of 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 1996
exceeded related expenses in 1995 by $461,904. This increase can mostly be
attributed to stock compensation expense of $634,344 and certain consulting
fees.
Debt conversion costs of $149,384 and interest expense of $843,148
incurred in 1995 did not recur in 1996 due the fact that all the associated debt
was converted or repaid in 1995. Interest income increased by $243,497 due to
the earnings on the remaining IPO funds and funds from the issuance of preferred
stock.
Liquidity and Capital Resources
Cash and Cash Equivalents were $8,965,174 as of December 31, 1997. In
addition, the Company had $1,001,410 in short term investments as of December
31, 1997. All in all, funds available to the Company increased $4,687,695 from
year end 1996. 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 1997 include the private placement of Series E
Preferred Stock for net proceeds of $4,834,923 and two (2) private placements of
common stock for an aggregate of $9,395,699 in net proceeds. Certain
warrantholders exercised their stock warrants, which produced an additional
$425,115 in proceeds to the Company.
The $9,967,124 of funds available as of December 31, 1997 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
licensing fees should meet
23
<PAGE>
the Company's cash needs in 1998. 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 recognizes the need to ensure that its operations will not be
adversely impacted by the Year 2000 hardware and software issues. The Company
intends to confirm its compliance regarding Year 2000 issues for both internal
and external information systems by the end of 1998. This process will entail
communicating with significant suppliers, financial institutions, insurance
companies and other parties that provide significant services to the Company.
Expenditures required to make the Company Year 2000 compliant will be expensed
as incurred and are not expected to be material to the Company's consolidated
financial position or results of operations.
ITEM 8. Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1996 and
1997, consolidated statements of operations, stockholder's equity(deficit) and
cash flows for each of the years in the three year period ended December 31,
1997, together with the report of KPMG Peat Marwick LLP, independent public
accountants are included elsewhere herein. Reference is made to the "Index to
Financial statements and Financial Statement Schedule" on page 27 (F-1).
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 June 10, 1998 in connection with the solicitation of
proxies for the Company's 1998 Annual Meeting of Stockholders scheduled to be
held on or about July 10, 1998 (the "Proxy Statement").
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.
24
<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 27 (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, 1997.
(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
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
25
<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
-------------------------------------
William A. Carter, M.D.
Chief Executive Officer
February 2, 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.
/S/ William A. Carter Chairman of the Board, Chief February 2, 1999
- --------------------------- Executive Officer and Director
William A. Carter
/S/ Richard Piani Director February 2, 1999
- ---------------------------
Richard Piani
/S/ Robert E. Peterson Chief Financial Officer February 2, 1999
- ---------------------------
Robert E. Peterson
/S/ Ransom Etheridge Secretary and Director February 2, 1999
- ---------------------------
Ransom Etheridge
/S/ Josephine Dolhancryk Assistant Secretary and Treasurer February 2, 1999
- ---------------------------
Josephine Dolhancryk
26
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report ............................................. F-2
Consolidated Balance Sheets at December 31, 1996 and 1997 ................ F-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1997 ......................... F-4
Consolidated Statements of Stockholders' Equity(Deficit)
for each of the years in the three-year period ended
December 31, 1997 ........................................................ F-5
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1997 ......................... 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, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
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, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
February 20, 1998
Philadelphia, Pennsylvania
F-2
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1997
December 31,
------------------------------
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ................. $ 5,279,429 $ 8,965,714
Short term investments (Note 3) .......... -- 1,001,410
Prepaid expenses and
other current assets .................... 105,341 99,026
------------ ------------
Total current assets .................... 5,384,770 10,066,150
rroperty and equipment, net ................ 83,475 70,637
Patent and trademarks rights, net .......... 1,502,816 1,387,523
Security deposits .......................... 28,323 18,323
------------ ------------
Total assets ............................ $ 6,999,384 $ 11,542,633
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................... $ 598,078 $ 465,166
Accrued expenses (Note 5) ................ 548,312 332,045
------------ ------------
Total current liabilities .............. 1,146,390 797,211
Commitments and contingencies
(Notes 6, 8, 10, 11 and 13)
Stockholders' equity (Notes 6 and 7):
Preferred stock .......................... 50 37
Common stock ............................. 16,160 21,042
Additional paid-in capital ............... 54,080,171 65,255,571
Deferred compensation .................... -- (137,132)
Unrealized loss on securities
available for sale ..................... -- (2,183)
Accumulated deficit ...................... (48,243,387) (54,391,913)
------------ ------------
Total stockholders' equity ............. 5,852,994 10,745,422
------------ ------------
Total liabilities and
stockholders' equity .................. $ 6,999,384 $ 11,542,633
============ ============
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations For each of the years
in the three-year period ended December 31, 1997
December 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
Revenues:
Research and development ....... $ 65,910 $ 32,044 $ 258,715
License fees ................... 2,900,000 -- --
------------ ------------ ------------
Total revenues ............... 2,965,910 32,044 258,715
Costs and expenses:
Research and development ....... 1,028,662 1,902,327 3,175,398
General and
administrative (Note 11) ..... 2,880,443 3,023,590 2,194,945
Preferred stock conversion
expense ...................... -- -- 1,262,523
------------ ------------ ------------
Total cost and expenses ...... 3,909,105 4,925,917 6,632,866
Debt conversion expense ......... (149,384) -- --
Interest income ................. 95,887 339,384 267,291
Interest expense (Note 13) ..... (843,148) -- --
------------ ------------ ------------
Net loss ..................... $ (1,839,840) $ (4,554,489) $ (6,106,860)
============ ============ ============
Basic loss per share ............ $ (.18) $ (.29) (.35)
============ ============ ============
Weighted average shares
outstanding .................. 10,341,163 15,718,136 17,275,994
============ ============ ============
Diluted loss per share .......... $ (.18) $ (.29) (.35)
============ ============ ============
Weighted average common
and dilutive equivalent
shares outstanding ........... 10,341,163 15,718,136 17,275,994
============ ============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit) For
each of the years in the three-year period ended December 31, 1997
<TABLE>
<CAPTION>
Preferred Common
Stock Stock Preferred Common Preferred Common
subscribed subscribed stock stock Stock Stock Preferred
shares shares shares shares subscribed subscribed stock
------ ------ ------ ------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ..... 651,112 2,082,952 810,029 5,136,756 4,772,233 1,061,331 $ 7,200,017
Redeemable preferred stock
dividend ........................ -- -- -- -- -- -- --
Debt to preferred stock dividend .. -- -- 172,414 -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges ................ -- -- -- -- -- -- --
Preferred stock subscribed ........ 10,000 -- -- -- 50,000 -- --
Debt to common stock conversion ... -- 100,000 -- -- -- 50,000 --
Issuance of common stock
certificate ..................... -- (2,182,952) -- 2,182,952 -- (1,111,331) --
Issuance of preferred stock
certificates .................... (626,112) -- 626,112 -- (4,472,233) -- 4,472,233
Convert redeemable to common ...... -- -- -- 343,879 -- -- --
Convert preferred to common ....... (35,000) -- (1,608,555) 1,807,088 (350,000) -- (12,421,633)
Issuance of common stock, net of
issuance cost ................... -- -- -- 5,313,000 -- -- --
Warrants Exercised ................ -- -- -- 797,917 -- -- --
Net loss .......................... -- -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- ---------- ------------
Balance at December 31, 1995 ..... -- -- -- 15,581,592 -- -- --
Warrants Exercised ................ -- -- -- 202,083 -- -- --
Preferred Stock Issued ............ -- -- 6,000 -- -- -- 60
Preferred Stock Converted ......... -- -- (1,000) 376,530 -- -- (10)
Stock Option Compensation ......... -- -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- --
Preferred Dividends ............... -- -- -- -- -- -- --
-------- ---------- ---------- ---------- ---------- ---------- ------------
Balance at December 31, 1996 ...... -- -- 5,000 16,160,205 -- -- 50
Stock conversion costs ............ -- -- -- 200,000 -- -- --
Repayment of lock-up .............. -- -- -- -- -- -- --
Stock compensation, net ........... -- -- -- -- -- -- --
Debt conversion ................... -- -- -- -- -- -- --
Preferred stock redeemed .......... -- -- (5,000) -- -- -- (50)
Issuance of preferred stock
certificates .................... -- -- 5,000 -- -- -- 50
Preferred dividends forgiven ...... -- -- -- -- -- -- --
Preferred stock converted ......... -- -- (1,350) 675,000 -- -- (13)
Warrants and options exercised .... -- -- -- 199,067 -- -- --
Issuance of common stock, net of
issuance cost ................... -- -- -- 3,808,334 -- -- --
Unrealized loss on securities
available for sale .............. -- -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- -- --
Preferred Dividends ............... -- -- -- -- -- -- --
Balance at December 31, 1997 ...... -- -- 3,650 21,042,606 -- -- --
======== ========== ========== ========== ========== ========== ============
<CAPTION>
Common Unrealized
Stock loss on
.001 Additional securities Total
Par paid-in Deferred available Accumulated stockholders
Value capital compensation for sale deficit equity(deficit)
----- ------- ------------ -------- ------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ..... $ 5,136 $ 14,036,082 -- -- $(41,704,486) $(14,629,687)
Redeemable preferred stock
dividend ........................ -- (314,873) -- -- -- (314,873)
Debt to preferred stock dividend .. -- -- -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges ................ -- 572,681 -- -- -- 572,681
Preferred stock subscribed ........ -- -- -- -- -- 50,000
Debt to common stock conversion ... -- -- -- -- -- 50,000
Issuance of common stock
certificate ..................... 2,183 1,109,148 -- -- -- --
Issuance of preferred stock
certificates .................... -- -- -- -- -- --
Convert redeemable to common ...... 344 3,552,863 -- -- -- 3,553,207
Convert preferred to common ....... 1,807 12,769,826 -- -- -- --
Issuance of common stock, net of
issuance cost ................... 5,313 15,825,644 -- -- -- 15,830,957
Warrants Exercised ................ 798 398,159 -- -- -- 398,957
Net loss .......................... -- -- -- -- (1,839,840) (1,839,840)
------- ------------ --------- ------- ------------ ------------
Balance at December 31, 1995 ..... 15,581 47,949,530 -- -- (43,544,326) 4,420,785
Warrants Exercised ................ 202 100,839 -- -- -- 101,041
Preferred Stock Issued ............ -- 5,395,825 -- -- -- 5,395,885
Preferred Stock Converted ......... 377 (367) -- -- -- --
Stock Option Compensation ......... -- 634,344 -- -- -- 634,344
Net loss .......................... -- -- -- -- (4,554,489) (4,554,489)
Preferred Dividends ............... -- -- -- -- (144,572) (144,572)
------- ------------ --------- ------- ------------ ------------
Balance at December 31, 1996 ...... 16,160 54,080,171 -- -- (48,243,387) 5,852,994
Stock conversion costs ............ 200 1,199,800 -- -- -- 1,200,000
Repayment of lock-up .............. -- (109,712) -- -- -- (109,712)
Stock compensation, net ........... -- 199,655 (137,132) -- -- 62,523
Debt conversion ................... -- 55,000 -- -- -- 55,000
Preferred stock redeemed .......... -- (4,999,950) -- -- -- (5,000,000)
Issuance of preferred stock
certificates .................... -- 4,834,873 -- -- -- 4,834,923
Preferred dividends forgiven ...... -- 171,775 -- -- -- 171,775
Preferred stock converted ......... 675 (662) -- -- -- --
Warrants and options exercised .... 199 424,916 -- -- -- 425,115
Issuance of common stock, net of
issuance cost ................... 3,808 9,399,705 -- -- -- 9,403,513
Unrealized loss on securities
available for sale .............. -- -- -- (2,183) -- (2,183)
Net loss .......................... -- -- -- -- (6,106,860) (6,106,860)
Preferred Dividends ............... -- -- -- -- (41,666) (41,666)
------- ------------ --------- ------- ------------ ------------
Balance at December 31, 1997 ...... $21,042 $ 65,255,571 $(137,132) $(2,183) $(54,391,913) $ 10,745,422
======= ============ ========= ======= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for each of the years in the three-year period ended December 31, 1997
Increase (Decrease) in Cash and Cash Equivalents
December 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
Cash flows from operating
activities:
Net loss ........................ $(1,839,840) $(4,554,489) $(6,106,860)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation of property
and equipment ................. 54,000 56,958 28,315
Amortization of patent rights ... 222,000 90,935 123,812
Imputed interest charges ........ 41,360 -- --
Debt conversion expense ......... 149,384 -- --
Write-off of patent rights ...... 100,017 41,156 300,253
Stock conversion costs .......... -- -- 1,200,000
Stock option compensation
expense ....................... -- 634,344 62,523
Changes in assets and
liabilities:
Prepaid expenses
and other current assets .... (59,985) (42,599) 6,315
Accounts payable ................ (1,156,084) (497,559) (77,912)
Accrued expenses ................ 547,561 (1,844,893) (188,057)
Security deposits ............... 2,368 18,241 10,000
----------- ----------- -----------
Net cash used in
operating activities ........ (1,939,219) (6,097,906) (4,641,611)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property
and equipment ................. (3,625) (86,480) (15,477)
Additions to patent rights ...... (132,689) (389,815) (308,772)
Purchase of short term
investments ................... -- -- (1003,593)
----------- ----------- -----------
Net cash used in investing
activities ................ $ (136,314) $ (476,295) $(1,327,842)
----------- ----------- -----------
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
December 31,
--------------------------------------------
1995 1996 1997
------------- ------------- ------------
Cash flows from financing
activities:
Proceeds from issuance of
preferred stock .............. $ -- $ 5,395,885 $ 4,834,923
Proceeds from shareholder
loans ........................ 35,000 -- --
Proceeds from notes payable .... 1,762,000 -- --
Payments on notes payable ...... (1,837,000) -- --
Payments on stockholder
notes ........................ (2,860,911) (4,920,000) --
Principal payments under
capital lease obligation ..... (23,308) -- --
Preferred stock redeemed ....... -- -- (5,000,000)
Proceeds from issuance of
common stock ................. 18,595,000 -- 9,403,513
Stock issuance costs ........... (2,764,043) -- (7,814)
Proceeds from exercise of
stock warrants ............... 398,957 101,040 425,116
Dividends paid on preferred
stock ........................ -- (14,462) --
------------ ------------ -----------
Net cash provided by
financing activities ....... 13,305,695 562,463 9,655,738
------------ ------------ -----------
Net increase (decrease)
in cash and cash
equivalents ................ 11,230,162 (6,011,738) 3,686,285
Cash and cash equivalents at
beginning of year .............. 61,005 11,291,167 5,279,429
------------ ------------ -----------
Cash and cash equivalents
at end of year ................. $ 11,291,167 $ 5,279,429 $ 8,965,714
============ ============ ===========
Supplemental disclosures
of cash flow information:
Cash paid during the year
for interest ................. $ 186,503 $ 3,999 $ 6,700
============ ============ ===========
Supplemental disclosure of
noncash investing activities:
Debt to equity conversion ...... $ 799,383 $ -- $ --
Accounts payable and accrued
expenses to equity
conversion ................... 50,000 -- 55,000
Forgiveness of interest ........ 572,681 -- --
Preferred stock to equity
conversion ................... 3,238,334 899,314 --
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(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) (Phase II)
clinical trial completed and Phase II/III clinical trial authorized); human
immunodeficiency virus associated disorders (Phase II clinical trial); and
chronic hepatitis B virus infection (Phase I/II clinical trial in process). 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 three wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September 1994
for the purpose of developing technology for ultimate sale into certain
non-pharmaceutical specialty consumer markets. 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. In June, 1997,
five (5) clinical sites across the United States had been approved to
Participate in this 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. This treatment protocol has begun to enroll CFS patients at
these centers in the U.S. The Company is discussing the design of a controlled
CFS clinical trial (AMP-516) with the FDA.
F-8
<PAGE>
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market, bank certificates of deposit, and
overnight repurchase agreements collateralized by money market securities with
original maturities of less than three months, with both a cost and fair value
of $5,279,429 and $8,965,714 at December 31, 1996 and 1997, 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.
(c) Property and Equipment
1996 1997
-------- --------
Furniture, fixtures, and equipment $624,813 $640,290
Leasehold improvements 61,576 61,576
-------- --------
Total property and equipment 686,389 701,866
Less accumulated depreciation 602,914 631,229
-------- --------
Property and equipment, net $ 83,475 $ 70,637
======== ========
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
F-9
<PAGE>
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 and Trademark Rights
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over ten 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 and trademark continues to fit
into the Company's strategic business plans. During the years ended December 31,
1996 and 1997, the Company decided not to pursue the technology in certain
countries for strategic reasons and has recorded $41,156 and $300,253
respectively, relating to the expense of writing off these patents as a charge
to research and development. Accumulated amortization as of December 31, 1996
and 1997 is $795,117 and $1,116,726, 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. 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 10.
(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 $65,910,
$32,044, and $258,715 for 1995, 1996 and 1997 respectively.
(g) Net Loss Per Share
Basic net loss per share is computed using the weighted average number of shares
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.
F-10
<PAGE>
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") Earnings per Share ("EPS"). SFAS 128
establishes and simplifies the standards for computing earnings per share
previously found in Accounting Principles Board Opinion No. 15, Earnings Per
Share ("APB 15") and makes them comparable to international EPS standards.
Pursuant to the adoption of SFAS 128 and Securities and Exchange Commission
Staff Accounting Bulletin No. 98, the Company has restated its net loss per
share for all previously issued periods. Accordingly, all net loss per share
calculations reflect a historical approach methodology rather than the
methodology required by the superceded guidance of APB 15 and Staff Accounting
Bulletin No. 83 under which amounts were previously presented.
(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, 1996 and 1997, 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) New Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Standards No. 130,
Reporting Comprehensive Income ("Statement 130"). This Statement requires that
all items are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. The Company plans
to adopt this accounting standard as required. The adoption of this standard
will have no impact on the Company's earnings, financial condition or liquidity,
but will require the Company to classify items of other comprehensive income in
a financial statement and display the accumulated balance of other comprehensive
income separately in the equity section of the balance sheet.
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 will have no impact
on the Company's results of operations, financial condition or liquidity.
(k) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
F-11
<PAGE>
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
(3) Investments
At December 31, 1997, securities classified as available for sale are summarized
below.
Unrealized
Adjusted -------------- Carrying
Cost Gains (Losses) Value
---------- ----- ------- ----------
U.S. Treasury note $1,003,593 -- $(2,183) $1,001,410
========== ===== ======= ==========
There were no marketable securities at December 31, 1996.
(4) Stock-Based Compensation
In 1996, the Company granted 350,000 warrants to purchase common stock at $3.50,
the fair value on the date of grant, to certain key employees in recognition of
services performed and services to be performed. The per share weighted average
fair value of the stock purchase warrants granted during 1996 was determined
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected dividend yield of zero, risk free interest rate of 6.02%,
volatility 39.71%, and an expected life of two years.
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. 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.
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:
1996 1997
---- ----
Net loss As reported $(4,554,489) $(6,106,860)
Pro forma (4,782,722) (6,203,259)
There was no stock-based compensation for employees in 1995.
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.
F-12
<PAGE>
(5) Accrued Expenses
Accrued expenses at December 31, 1996 and 1997 consists of the following:
December 31,
----------------------
1996 1997
-------- --------
Accrued payroll and benefits ............. $126,296 $ 9,031
Accrued stock conversion costs ........... -- 101,899
Accrued dividends ........................ 130,109 --
Accrued fees for HIV studies ............. -- 41,936
Accrued taxes ............................ 76,884 86,734
Accrued professional fees (Note 13) ..... 162,719 31,095
Accrued other ............................ 52,304 61,350
-------- --------
$548,312 $332,045
======== ========
(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, 1996 and 1997, 16,160,205 and 21,042,606 shares were
issued and outstanding, respectively.
(b) 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:
December 31
Option ------------------------
price 1995 1996 1997
------- ------- -------
Outstanding, beginning of year..... $1.06-4.34 285,620 232,830 234,953
Granted............................ 3.50-4.34 -- 2,123 64,597
Cancelledv......................... .11-4.34 (52,790) -- --
Exercised.......................... .11 -- -- (8,294)
---------- ------- ------- -------
Outstanding, end of year........... $1.06-4.34 232,830 234,953 291,256
========== ======= ======= =======
Exercisable.................................... 165,244 215,161 206,867
======= ======= =======
Exercised in current and prior years........... (10,576) (10,576) (18,870)
======= ======= =======
Available for future grants.................... 217,392 215,269 150,672
======= ======= =======
F-13
<PAGE>
In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to purchase
up to 92,160 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisers, and other persons whose
contributions are important to the success of the Company. The recipients of the
options granted under the 1992 Stock Option Plan, the number of shares to be
covered by each option, and the exercise price, vesting terms, if any, duration
and other terms of each option shall be determined by the Company's board of
directors. No option is exercisable more than 10 years and one month from the
date as of which an option agreement is executed. To date, no options have been
granted under the 1992 Stock Option Plan.
The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was
approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees.
The 1993 Purchase Plan is administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees are eligible
to participate in semi-annual plan offerings in which payroll deductions may be
used to purchase shares of Common Stock. The purchase price for such shares is
equal to the lower of 85% of the fair market value of such shares on the date of
grant or 85% of its fair market value of such shares on the date such right is
exercised. There have been no offerings under the 1993 Purchase Plan to date and
no shares of Common Stock have been issued thereunder.
(ii) Warrants
The warrants outstanding at December 31, 1997, related to the issuance of former
notes payable and stockholder notes payable (Note 13) which are exercisable into
Common Stock, are subject to antidilution adjustments.
Common Stock
--------------------
Exercise Number of
Price Shares Expiration
-------- --------- ----------
Notes payable:
Former noteholders (see Note 13).. $10.85 119,807 November, 2005
" " " .. $1.84 140,000 " "
Stockholders notes:
Stockholders...................... $3.50 292,160 Oct. 1999
Stockholder....................... $3.50 300,000 Oct. 1999
Stockholder....................... $1.75 75,000 Mar. 2000
Stockholder....................... $3.50 10,000 Mar. 1999
-------
Subtotal: 936,967
=======
In 1997, warrant holders in this group exercised 198,294 warrants to purchase
common stock which produced $445,341 in gross proceeds, of which $21,517 was
received in 1998.
(iii) Other Warrants
In addition, the Company has issued other warrants outstanding - totalling
14,693,967 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, expire
in
F-14
<PAGE>
September, 1999.
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, 1995. In exchange, the Company
issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at
$1.75 per share to the parties. In September, 1995, the parties to this standby
agreement agreed to extend their obligations through December 31, 1996.
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 150,000
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
5,312,900 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.
Also, as part of the underwriting agreement, the underwriter received warrants
to purchase 462,000 shares of common stock at $5.775 per share as well as
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.
As part of the placement of the $5 million of Series E Convertible Preferred
Stock in March, 1997, 150,000 warrants were issued to an investment banking firm
to purchase common stock at $3 per share. The warrants will expire March 31,
2000.
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.
The warrants will expire December 31. 2000.
1,702,000 warrants have been granted to other parties, stockholders and
employees for services performed. These warrants are exercisable at rates of
$2.50 to $4.00 per warrant.
F-15
<PAGE>
(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. 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.
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, 1997, five holders of Series E convertible preferred
stock had converted their holding into 675,000 shares of common stock.
(8) 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
without penalty
F-16
<PAGE>
at any time. During the years ending December 31, 1995, 1996 and 1997, 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. (Note 13).
The Company has entered into agreements for consulting services which are
performed at certain institutions and by certain individuals. The Company's
obligation to fund these agreements can generally be terminated after the
initial funding period, which generally ranges from one to three years or on an
as-needed monthly basis. During the years ending December 31, 1995, 1996 and
1997, the Company incurred approximately $87,000, $188,000 and $124,000,
respectively, of consulting fees under these agreements.
In September 1995, the Company entered into an agreement with Rivex Pharma Inc.,
("Rivex"), pursuant to which Rivex will provide various services in connection
with the marketing and exclusive distribution of Ampligen in Canada on an
emergency drug release basis. Under the terms of this agreement, the Company
will supply and Rivex will purchase as much Ampligen as necessary to satisfy
Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain
the exclusive right to market and distribute Ampligen in Canada. This agreement
was terminated by the Company in 1997.
(9) 401(K) Plan
In December 1995, the Company established a defined contribution plan, effective
January 1, 1995, 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 1995 the Company
provided matching contributions to each employee for up to 6% of annual pay or
$25,500. The Company also absorbed the cost of employee contributions of
$25,500. In 1996 and 1997, the Company provided matching contributions to each
employee for up to 6% of annual pay of $31,580, and $30,598 respectively.
(10) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
F-17
<PAGE>
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen, and to obtain exclusive
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen not to
exceed an aggregate amount of $6 million per year through 2005.
As described in Note 8, 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 1995, 1996, 1997
is $540,000, $589,552 and $611,678 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 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 and 1997, the Company paid Ribotech a total of $143,549 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,
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.
F-18
<PAGE>
(11) 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:
Year ending Operating
December 31, leases
----------- --------
1998....................................... $280,413
1999....................................... 292,146
2000....................................... 91,517
--------
Total minimum lease payments............ $664,076
========
Rent expense charged to operations for the years ended December 31, 1995, 1996
and 1997 amounted to approximately $289,000, $286,000 and $292,000 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.
(12) Income Taxes
At December 31, 1997, the Company had available net operating loss carryforwards
of approximately $50 million for Federal income tax purposes which expire over
various years through 2013. In addition, for Federal income tax purposes, the
Company has approximately $6,900 of unused investment and job tax credits
available to offset future taxes, if any, expiring 1998 and 1999.
The expiration dates of the net operating loss carryforwards are as follows:
Tax loss
Expiration carryforwards
date (000)'S
---- ------------
1999....................................... $ 131
2003....................................... 1,774
2004....................................... 5,403
2005....................................... 3,534
2006....................................... 8,749
Thereafter................................. 30,429
---------
$ 50,020
=========
If certain substantial changes in ownership should occur there would be an
annual limitation on the amount of tax attribute carryforwards which can be
utilized in the future.
The Company has provided a full valuation allowance against all of its deferred
tax assets.
F-19
<PAGE>
(13) Contingencies
The Company was a defendant in a lawsuit instituted in 1991 by participants in a
double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS.
The plaintiffs alleged that the Company or its alleged agents promised them that
they would receive Ampligen after the placebo-controlled study at no cost for
periods ranging from "until marketable" to "for life." Plaintiffs sought
compensatory and punitive damages. The court granted the Company's motions for
summary judgment upon all claims alleged by the plaintiffs in this case. The
plaintiffs have appealed these orders before the United States Court of Appeals
for the Ninth Circuit. In January 1996, the Court of Appeals denied their appeal
and sustained the Company's position. On the basis of the Court of Appeals
favorable decision, the Company believes the lawsuit will not have a material
effect on the Company.
In August 1988, the Company entered into a pharmaceutical use license agreement
with Temple University. Under the terms of the agreement, Temple granted the
Company an exclusive world-wide license for the commercial sale of Oragen
products using patents and related technology held by Temple until the last to
expire of any related patents then or thereafter issued. In July 1994, Temple
terminated the 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. In December, 1996, these legal actions were terminated.
Under the settlement, the parties have entered into a new pharmaceutical use
license agreement that is equivalent to the original agreement in duration and
scope.
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-20
<PAGE>
(14) Subsequent Events
On February 9, 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
CFS cost recovery protocol (AMP-511). Olsten agreed to purchase Ampligen for
treating these patients. In addition, Olsten agreed to provide up to $500,000 of
support for other clinical trial efforts. The Company agreed to compensate
Olsten for certain services in connection with conducting clinical trials.
F-21
